Friday, September 29, 2006

The Fine Line

We mentioned in our last blog that we felt that we made a mistake this month in being too conservative. Unfortunately, this is a consequence of choppy markets. On one hand, you should become more selective since the failure rate in such market environments are higher than usual. However, one has to walk a fine line between being smart and selective, and not becoming too scared and gun-shy, since in the long-run becoming too fearful of the markets can be just as damaging as being overly aggressive. We've often said that there's nothing easy in this profession, and finding this fine line of being selective and yet involved, is something that can be difficult to capture.

This is how we do it: as our readers know, we only trade from a predefined list from the night before. Therefore, when a stock hits our alert, we already know that it has a solid daily. In benign markets we sometimes take a trade with a solid daily but a questionable intraday pattern, or with mediocre volume. In these types of markets we don't do that -- we wait for the ducks to line up. The daily we already know is solid, now we wait for the intraday and the volume to confirm. If there is any element lacking -- i.e. the volume is mediocre, or the intraday is too much of a chase, then we pass.

This means we sometimes miss good moves, but it also means that we stay away from a signficant amount of failures. This is not only good for one's account, but very important for one's confidence. Stay involved, don't get scared, take your cue from the market and when things just aren't working, then know it's ok to pass. But jump back in the game the next day and start fresh. And whatever you do, don't freeze like a scared monkey.