Morning Market Thoughts
Good morning. We’re looking at a slightly lower open, which is par for the course these days. Open lower, close higher. Open higher, close lower. A very very tight range persists. I mentioned in last night’s Strategy Session that the recent Fed minutes revealed a considerable split between members. Inflation is a worry, and the economy is subject to interpretation. Some think it’s improving; others think it’s stagnant. But the upshot is that they’re not going to hike rates in the foreseeable future. James Bullard thinks that just one little rate hike is all that’s going to be required, and there’s no sense fretting over timing. They can do it any old time.But from a practical standpoint, the only possible time for the Fed to hike rates this year would be in December, after the presidential election. So meanwhile, we should see some stability regarding the fed funds rate.
Just a couple of thoughts about trading this morning. Last night I hosted a webinar wherein I discussed some of the mistakes that traders make. I think it’s important to keep some of the stumbling blocks on the path to success in mind as you make your trading decisions. Because emotion is such a big part of trading for many people, you need to be mindful of how your emotions can impact your actions. And let’s face it, if your trading results are poor, it’s likely because your trading decisions are poor.
Here are a couple of related mistakes that haunt many traders, and some methods of avoiding them.
1. Ticker-Centric Trading: When you make a lot of money on one stock, you start to love that stock. You see it as a generous friend who is nice enough to give you money, with no expectation of repayment. (Man, I need a friend like that!). So, you continue to go back to that stock again and again, even after the stock has changed character. The time period doesn’t matter — it’s still a problem. If you have a typical holding period for several weeks, or just a day or two, a stock that pays you off for making the trade is a stock that you may gravitate to rather than looking for other opportunities when your generous ticker becomes a bit stingy. Ultimately, you’ll give back all of your profits…and then some. The way around this mistake is to have some very basic criteria for considering a trade. One of the criteria that is absent from your list is the ticker. Who cares what the ticker is? It’s the chart that matters. A downtrending stock is not a stock that you want to own, even if you made some money on it recently. Stocks go up and down all the time. To put it simply, find the stock that’s going up in a recognizable pattern and trade that one. Ignore the stock that used to be going up, but is now going down. A great example is Tesla (TSLA), which we’ll look at in a sec. This stock had one great run back in 2013, from $35 up to around $180. Since then, it has sustained declines at various times of approximately 40%, 35%, 35%, 30%, 50% and 30%. Yes, there have been times between late-2013 and the present where TSLA has been in uptrends, like mid-2014 and early 2016. But for the most part, this has been one choppy stock that has been swinging sideways and is now down about 25% from its all time high in September 2014. If you have been holding the stock all that time, mesmerized by Elon Musks’s unkept promises and grandiose visions of going to Mars, you’ve been disappointed. But if you had instead ditched Elon at the high and switched to Jeff Bezos’ company, Amazon (AMZN) would have doubled your money, while Elon would have sucked you dry. This is, of course, theoretical. Nobody sells right at the high, and then immediately switches to a double bagger (If you can do that consistently, please contact me immediately). But I’m sure you get the point. Focus on the direction of price, not the rhetoric of the CEO of the company. So that, and you’ll make better trades (and you’ll probably ditch TSLA and buy AMZN).
2. Revenge Trading: So you didn’t make a lot of money on a stock. Instead, you lost your shirt. Some traders have an ability to take the loss and move on. Others just can’t bring themselves to do that. Instead, they refuse to sell the stock because they “can’t afford to take the loss.” They are blind to the fact that they already have taken the loss; they just haven’t figured it out yet. They haven’t admitted it to themselves. They think they are still in the fight. Don’t be that guy. Instead, if a stock moves against you and does not appear to be rebounding, then just sell the stock and put your remaining money into a chart that doesn’t have so much resistance overhead. If a stock takes a dive, it’s going to have a tough time rebounding because of all the regret that is baked into the stock. Lots of folks are sitting on losses, and they’ll be selling into any strength. So bounces will typically (though not always) be muted. Meanwhile, you’re holding this dog and hoping to be made whole. You want to show the stock who’s boss, and you are fixated on that stock. I’ve fallen into this trap during my early years in this business, and it’s never worked out. Now, if I take a loss on a stock, I’ll tend to look at it a bit more carefully before wading back into the fray. I’ll give it additional consideration to ensure that my emotions are not driving the decision. I’m not suggesting that you completely avoid any stock that you lose money on. I’m just suggesting that you consider whether any additional trade stands on its own merits, rather than being a “get back to even” trade that has suspicious rationale.
In sum, just focus on making money. Not one of the stocks you trade cares about you. They don’t even know you. (And if they did, they wouldn’t like you because they’d see you as a fickle friend who bails at the first sign of trouble. You buy when times are good, and then you exchange the stock for money when times go bad. Not exactly a good friend.) Just focus on the chart that represents the trading activity. That chart is the picture of what other traders are doing. They are competing against you, not the stock. They want you to sell low, and buy high. Everyone is looking for the same thing, but few find it consistently. And why? Because the ticker gets in the way.
It’s not personal; it’s trading.
See you in the forum.
–Dan
Market Update