Trading Lesson of the Week

Check back weekly for another free trading lesson:

Keep Your Standards Up

In This Week’s Issue:

  • Stockscores’ Market Minutes Video – Trading with Fear and Recklessness
  • Stockscores Trader Training – Keep Your Standards Up
  • Stock Features of the Week – Canadian Weekly Breakouts

 

Stockscores Market Minutes – Trading with Fear and Recklessness

It is important to trade without fear but don’t try so hard to be fearless that you end up trading recklesslessly. This week, I discuss what this means, provide my regular weekly market analysis and add a new feature on Stocks to Watch. Plus, my trade of the week on INTC. Click here to watch on YouTube https://youtu.be/kPeY5hHrx0Y

To get instant updates when I upload a new video, subscribe to the  Stockscores YouTube Channel

 

Commentary of the Week – Keep Your Standards Up

It's better to miss a good trade than to take a bad one. Missing a good trade doesn't deplete your capital-it only fails to add to it. A bad trade will not only reduce the size of your trading account, it will eat up emotional capital and your confidence. 

A losing trade is not a bad trade. Bad trades are simply taking the trade that doesn't meet your requirements. Bad trades come from working hard to see something that's not there, guided by your need to trade rather than the market offering a good opportunity.

I have read very few books about the stock market, but one that I've read more than once and that I think is a must-read for every investor is Reminiscences of a Stock Operator by Edwin Lefevre. Here is a wonderful quote from that book that captures the essence of what this chapter is about:

"What beat me was not having brains enough to stick to my own game-that is, to play the market only when I was satisfied that precedents favored my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily-or sufficient knowledge to make his play an intelligent play." 
-Reminiscences of a Stock Operator

I advise all my students that they will make more money by trading less, at least so long as trading less is the result of having a high standard for what they trade. If you tell yourself you're limited to only making 20 trades a year, you're probably going to be very fussy about what trades you take. With less than two trades to be made each month, only the very best opportunities will pass your analysis. All of the "maybes" or "pretty goods" will get thrown out.

We take the pretty good trades because we're afraid of missing out. It's painful to watch a stock you considered buying but passed on go up. You remember this pain and the next time you see something that looks pretty good, you take it with little regard for the expected value of trading pretty good opportunities.

Pretty good means the trade will make money some of the time and lose some of the time, and the average over a large number of trades may be close to breaking even. The fact that one pretty good trade did well is reasonable and expected. In the context of expected value, taking those pretty good trades many times will lead to less than stellar results when the losers offset the winners.

You shouldn't judge your trading success one trade at a time. You must look at your results over a large number of trades. To maximize overall profitability requires you to have a high standard for what trades you make. Maintaining that standard will be easier if you take the trades that stand out as an ideal fit to your strategy, not by taking those that are marginal and require a lot of hard work to uncover.

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