Trading, like life, is simply making decisions and living with them. Making decisions is easy. Making the decision to marry the most beautiful woman that I ever met was pretty darn easy. Don’t worry, I’m not stupid enough to make the living with her is not joke. I just built a chicken coop. It's really nice but I don't want to sleep in it.
Anyway, we all have a pulse. And, with that pulse comes emotions. It’s part of what makes us tick. It’s been proven that without emotions we cannot make a decision, any decision. (Damasio, Shull) So, we have to embrace, not try to eliminate our emotions when it comes to making a decision.
With emotions comes stress. Therefore, each decision not only has emotions but also stress attached to it.
The living with the decision part has a consequence. And, the uncertain consequence is what creates the stress and emotions in the first place. Yogi was right: “Predictions are tough, especially about the future.”
Rush once said (the aging band on their 401k tour, not the fat angry white man) “If you choose not to decide you still have made a choice.” Amen! Indecision is still a decision nonetheless. Let’s say you decide that you’re going to enter XYZ if it his an entry of $6. The next day, the stock triggers but you choose not to act. This indecision now leaves you with more choices: If the price continues higher, you now have to decide if you’re going to “chase the stock.” If it is lower, then you begin to wonder if were lucky and missed a potential loser or if you should get in at a “bargain” and beat the system. And, if the price is the same, you wonder if since it’s not moving, would it just be so called “dead money?” As you can see, this “mental masturbation” can create a negative feedback loop and it only grows from there.
Let’s say you do take the trade and enter exactly as planned. So far, so good. You made a decision. Congratulations! Now you have to live with it. If you don’t continue to follow the rest of the plan then you have now produced a plethora of new decisions. I get emails all the time saying, “Dave, you said take partial profits at $8, the stock hit $8 yesterday and I didn’t take profits. It’s dropping in early trading, what should I do now?” Or, worse, “Dave I didn’t honor my stop in ABC 6 months ago and now I’m down 50%. What should I do now?”
Let’s say you that you fully intended on following the original plan but stock triggers and just sits there or worse, begins to go against you. What do you do? Nothing. If not stopped out then stay the course. We’ve had huge winners that have gone against us at some point and/or gone flat. And, without these winners the year would be mediocre at best.
Okay Big Dave, we get it. You’ve identified a major problem. Now, how do we fix it? Well, obviously, as my wife tells me when faced with an “easy fix” plumbing problem, “All you have to do is…” Hours later, soaked, frustrated, and finally giving up and using my “phone a friend” option or simply throwing some cash at it, the problem is solved. Well, trading is one of those “all you have to do is” things. It looks a lot easier on the surface than it really is. However, when you boil it down, “all you have to do is:” plan your trade and trade your plan. So, how do you do that?
You have to truly believe in what you’re doing. If you truly believe in your methodology and more importantly, have embraced both the good and the bad, then it will be much easier to execute. Winning salesman get a lot more rejections than the losing salesman who quits after a few rejections. The greatest hitters in baseball have far more strikeouts than homeruns.
So, how do you believe? Well, experience helps. Do your homework. As mentioned often, I’ve looked at over 10 million charts so far in my career. This helps me to recognize patterns of what works and what doesn’t. That's sounds like a lot but it's only a few thousand a day.
Way back when the earth was still cooling and I was programming computers, we used to say "garbage in, garbage out." The same applies to stocks. You must pick the best and leave the rest. If you’re picking the best stocks to begin with, then you’ll have more winners hence more confidence in the system. You’ll also be making fewer decisions. You’ll know that, some days, as I often preach, the best new action might be no new action.
Once the confidence builds and the inevitable losing trades do come along, you’ll be willing to toss them out knowing that they’re stinking up your portfolio. You realize that these stocks aren’t your children. You don’t give them second (and third, and forth) chances. They’re your little workers. You simply say: “YOUR FIRED!” and “make your portfolio great again.”
Watching every tick doesn’t help the trade. If it did, you’d never see my fat ass again (i.e. guilty as charged-but I’m getting better). Seriously, you’re creating an emotional rollercoaster by living and dying by the tick. So, how do you resist the Siren call of micromanaging? That’s easy. Turn off your screen(s). Make decisions passive ones and not active ones. Place your orders and get on with your life. Use a stop order to enter a trade and use a stop order to take you out. You can also use a limit order to take partial profits.
Wait Big Dave, don’t you preach using a little discretion? Yes, I do, but you have to get to the point where you’re not micromanaging and obsessing over every tick before you can even think about applying a little discretion.
My “just on the next trade” column struck a chord with you. I’ve gotten emails promising me that just on the one next trade you will plan the trade and more importantly, follow that plan. You make me proud. Rather than re-invent the wheel, read the column here.
If you’re still having problems, reduce your share size down to a size that’s nearly meaningless. It’ll be much easier to follow the plan if the trade only “monazites” into a nice meal or a round of golf.
If you’re still having trouble then, again, go back to the books. It amazes me how many people throw thousands of dollars at the market on mediocre stocks. I know this because they ask me for my 2 cents after the fact. Yes, it’s self-serving, but I truly believe that the money would be much better spent on a course to get educated to pick better stocks to begin with. I know that I’m being redundant here but I think if you do the above and “rinse and repeat,” eventually you’ll become successful.
I watched the stock selection course again last weekend. It's amazing how it seems so "basic" the first time I watched it long ago but now after looking at lots and lots of charts and re-watching the course several times I see the genius of the methods. Great course!!
Short-term, the Ps (S&P 500) are in a range. They’re pretty much were they were several weeks ago, give or take a tick. Yes, they’ve had a good run from the February lows but in markets you have to think like Janet, “What have you done for me lately?” Longer-term the Ps are bumping up against quite a bit of overhead supply. And, much longer-term, they’re trading where they were way back in the fall of 2014. So, as a trend guy, yes, the intermediate-term arrow points higher but the short-term and really long-term arrows are pointing sideways. This longer-term sideways action is yet another testament for why you want to pick the best and leave the rest—you don’t have the luxury of having the rising tide lift all boats. The Quack (Nasdaq) is pretty much a Cntrl-A, Cntrl-C, and Cntrl-P of the above.
The Rusty (Russell 2000) looks the worst. So far, it remains in a longer-term downtrend and has only pulled back into a mountain of overhead supply. Really longer-term, it hasn’t made any progress on a net net basis since the fall of 2013.
In the sectors, some such as Retail are suffering from the “V” shaped recovery issue at high levels. Rather than bore you with the details (too late?), just watch the 03/31/16 version of Dave Landry’s The Week In Charts and you’ll know as much as me. Others that have recently broken out such as the Foods are now having their first pullback. It’ll be important for them to stay above their recent breakout levels.
Banks appear to resuming their longer-term downtrends.
A bottom appears to remain in place in the Energies and Metals & Mining but lately they have been consolidating their gains—i.e. trading sideways. Gold within the Metals is waking up once again.
Well, at the risk of being redundant, pick your spots carefully. This is especially true when the longer-term trend is sideways at best. I’m still a bull on the commodities but other than Gold, again, they have been somewhat sideways shorter-term. There are some speculative issues such as lower priced stocks and IPOs trending and bottoming. They’re not held completely hostage by the overall market but obviously, they do come with considerable risk. Again, for the most part, now is the time to be patient. Be selective and make fewer decisions. Do this and make your portfolio great again.
May the trend be with you!
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Dave Landry has been actively trading the markets since the early 90s. He is managing member of Sentive Trading, LLC (est 1995) and author of 3 books of trading including The Layman’s Guide to Trading Stocks. He has made several television appearances, written articles for numerous magazines, He has spoken at trading conferences throughout the world (including Russia, Hong Kong, Australia, Germany, Italy, and others). He has been publishing daily web based commentary on technical trading since 1997. He has a B.S. in Computer Science and an MBA. He was registered Commodity Trading Advisor (CTA) from 1995 to 2009. He is a board member of the American Association of Professional Technical Analysts. Dave can be reached at www.davelandry.com