Saturday, September 16, 2006

What does your trading look like?

Here is an excerpt of our newsletter for Monday:

As soon as we saw the market gap-up Friday morning, we were relieved that we did not have any stocks on any of our trading lists for our subscribers. Why? Because this exhausted market needed a gap-up as much as Larry King needs new suspenders. A gap-up in an extended market near resistance almost always only invites selling. It's a perfect scenario if you are already in positions and want an exit, but very much a must-avoid situation if you are a break-out trader looking for new positions. Not all gap-ups are negative though: for example, a gap-up in a market that has recently bottomed can become a very powerful trend day.

What this market now desperately needs is a shallow pull-back or some horizontal basing. As we mentioned last week, the more extended the market, the higher the chance of break-outs failing.

When novice traders talk about trading they talk about the excitement and thrill of the job. However they soon realize that the professional traders who are consistently profitable year over year are not thrill-seekers, but disciplined traders who have conquered the desire to always be in a trade. The reality of trading is that it requires an inordinate amount of discipline and patience. A lot of what we do is simply just sitting and waiting (which actually is one of the reasons we started this service-- it gave us something constructive to do while we were sitting around!)

There are times in the market when the best thing is to just sit aside. Then there are other times when you are so busy that you realize by the closing bell that your stomach feels hollow as you haven't eaten anything all day, that your eyes are burning from staring at your screens all day, and that your back is killing you from sitting tensely in one position all day. Take your cue from the market. Do not force trades -- if the set-ups emerge, take them as they come -- be that 10 trades in one day. If they do not emerge, then sit back and just watch --be that 1 trade in ten days. This is the exact same reason why some days we have 10 stocks on our lists and other times we have none. You cannot conjure up set-ups-- the opportunity has to arise or else you will do nothing but chop up your account.

Print out this sign and put it on your wall: Every Trade is a Business Transaction. What does that mean? It means that there should be a reason for every single trade -- why you enter and why you exit. Every single trade is an important business transaction that has to be thought out and given great importance. The hungry beast that devours accounts of new traders, without a doubt, is the demon called over-trading. When your trading resembles less a person playing a video game and more a person playing chess, is when you will start to be on your way to becoming a profitable professional trader.