Wednesday, July 19, 2006

Getting to know your Friends

Without a doubt one activity that many professional traders share is that they get to know their friends. Stock friends, that is. One of the most valuable things that we have learned over the years is how important it is to become familiar with the behaviour of your stocks. For example, you have been watching stock HCPG for a break of 50 for over a week, 50 representing new highs. For days you have followed the stock approach 50 from different angles, with different volumes, at different times of the day, only for it to be rejected near the buy point. The next day HCPG is sitting at 49.5 in a flattish market. Then, however, you notice the way she starts to climb up towards 50 this time is somehow different -- this time you know that most likely it will successful. How do you know? Because you have become familiar with your friend and you note a behavior change. At some levels it has to be sub-conscious; if a buddy sitting beside you asks what exactly was different, often it's difficult to pin down. But from our own experience, we have no doubt how well it works.

This is the reason that we also place stocks whose patterns are not completely formed or are too far away, in the "secondary list" of our newsletter; so that subscribers can start watching them days before and familiarize themselves with the stock's behavior. It is also the reason we like to stick to a core group of stocks, around 200 of them, instead of scanning each night through a 1500 stocks looking for patterns. As a rule we never trade a stock that we are not familiar with. If there is a new stock that is gaining attention from momentum traders, we immediately add it to our core group of stocks so that it too can become our friend.

Sunday, July 16, 2006

Loyalty and Stocks

We have often spoken about BIDU to our subscribers in our newsletter. It has held remarkably well for this market. Let's take a look at the Nasdaq and BIDU over the last 3 months to illustrate this point.

This is the reason why we say that BIDU should be on your lists every day. Every year there are a new crop of winners --for example in the last two years there was great action in stocks such as TASR TZOO GOOG AAPL SNDK. All these stocks, with possibly the exception of GOOG, are completely broken now (even though TZOO has found some renewed momentum these last few weeks). Often great winners of last year who could do no wrong, like AAPL SNDK, now could not possibly act any worse. The torch has been passed this year to the new crop of momentum winners, stocks like BIDU GRMN HANS; even though we cannot forget this is bear market action in which we find ourselves, and thus upside momentum has been somewhat absent recently.

Always watch the winners and have a place for them on your list every day. Watch how they act relative to the market. And never get married to previous winners. We are great believers in loyalty -- loyalty to our families, friends, and to our nations; but this great quality in life has absolutely no place in trading. By next year we will have new winner stocks to watch every day and most likely have short positions on this year's winners. The only loyalty we have in trading are to chart patterns and to our own rules of engagement. Everything else is just a ticker -- 4 letters that can represent a profit or a loss.