Stock market commentary, analysis, insight and opinion of the RightLine Editors is available every Tuesday/Thursday evening & Saturday
afternoon. The following is excerpted from the:
February 23, 2017 - The RightLine Report
Notes From The Editor
In this previously published article, Analyst Kent Barton prescribes several helpful remedies for common trading ailments. I hope you enjoy Kent's light-hearted medical metaphors as much as I did!
~Thomas Sutton, Editor
It happens every year with sickening regularity. Cold and flu season is a boon for the makers of Kleenex and NyQuil, and a major nuisance for nearly everyone else. Without a definite way to avoid the sneezing and watery eyes afflicting many folks, maybe it's time to stock up on Vitamin C!
As traders, we're prone to a few unique ailments that hamper our profitability. Left untreated, they'll lead to high blood pressure, profuse sweating, insomnia, and a bleeding account. Let's take a look at some of the most common conditions, and how they can be dealt with:
Analysis Paralysis - We've all been hit with this affliction at one time or another. A good setup presents itself, but the trader's hand hovers hesitantly over the mouse. Second-guessing and self-doubt creep in as contrary signals suddenly make the trade less appealing. To make matters worse, stock analysts might be on TV touting contrary opinions. Frozen by indecision, the trader misses the setup and watches in frustration as the stock behaves just as they initially expected.
Too much information can be a bad thing. Imagine a stock chart overlaid with multiple retracements, moving averages, and oscillators. While all of these indicators are valuable tools, we need to be careful to not add too much noise to the equation. A "keep-it-simple" approach using a few reliable indicators or techniques eliminates this problem and encourages a focus on what really counts: price action.
As for those talking heads in the media, remind yourself that those analysts are often dead wrong! Many of them are the same "experts" who were hyping Internet stocks at the height of the tech bubble or calling for a long-term Bear market a few years ago. There's nothing wrong with listening to others' opinions - just remember to weigh their advice against your own observations.
Mad Bull Disease - A highly contagious condition that causes a loss of reason and rationality. It can sweep across the entire market, specific sectors, or even certain equities. Once in awhile you'll run across a stock chart that's going vertical. Day after day, it rockets higher without any regard to the law of gravity. This is one of the hallmarks of "MBD."
There's an old trading axiom: "In a Bull market, everyone's a genius." Drunk with success, investors throw caution - and good risk management - to the wind. Their blind devotion to a buy-side bias works out fine for a while... until the bottom inevitably drops out. Investors who jumped in near the top are left holding the bag as massive profit- taking begins. To make matters worse, losses can mount as dip-buying entries repeatedly fail.
Flexibility is one of the traits of a good trader; the ability to adapt to changing market conditions is a major factor in successful trading. There's nothing wrong with playing stocks that are rocketing higher. In fact, it can be a highly profitable strategy.
Aggressive traders target breakouts, while those with a more conservative approach target pullbacks to trendlines or moving average support. But in either case, risk management and position sizing should always be used to protect against large losses. Complacency can lead to disaster if the stock loses its momentum.
Post-Trade Stress Disorder - Fear is the source of this condition. After a string of losses, traders sometimes become convinced that any position they take is destined to fail. The natural reaction is to stop trading altogether. Like many biological immune responses, this is a good safety mechanism. Consecutive losses can be a sign that your strategy needs some modifications. On the other hand, you may have simply run into a streak of bad luck where your stocks just didn't cooperate. This happens with even the most successful traders.
How can you tell the difference? The best method is to step back and spend some time paper-trading. Oftentimes you'll find that your strategy is perfectly fine - those consecutive losses were just an aberration. If losses continue, it might be time to make some changes. Apply set-ups to different stocks in different sectors. Take notes of broader market trends. Breakdown entries, for instance, tend to be less effective when the major indices are trending lower. These observations can help fine-tune your approach.
Once your paper trades show a pattern of profitability, it's time to go "live" and use real money again. Armed with a fine-tuned strategy, you'll have the confidence to take positions when entries present themselves.
Itchy Trigger-Finger - A hyperactive disorder where nearly every potential trade is jumped at with blind enthusiasm. This often stems from a fear of missing the next "big move." Frustration can mount in rising markets where it seems like everyone else is scoring profits. But trades taken haphazardly aren't as likely to succeed. Even with tight stop-losses, accounts can be nickel-and-dimed to death by overtrading.
The cure is a healthy dose of relaxation. While few things are certain when it comes to stocks, you can count on new trading opportunities every day. Investing guru Warren Buffet summed it up best: "In this game, the market has to keep pitching, but you don't have to swing. You can stand there with the bat on your shoulder...until you get a fat pitch." Don't fret if a good trade passes you buy. With new opportunities coming along every day, you can afford to be selective!
It's human nature to suffer from these ailments from time to time; nobody's immune to the effects of greed, fear, and hope. The major trouble arises when the emotional forces trigger a brutal cycle: traders attempt to make up for losses by over-trading and over- leveraging. The end result is a shrinking trading account.
Fortunately, a solid game plan helps to keep emotions in check. A game plan includes pre-determined conditions that have to be met before a trade is activated. With position size and stop-losses also calculated in advance, you'll know exactly how much you stand to lose if the trade goes sour. Fear of the unknown subsides, confidence is boosted, and the road to success before much smoother.
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