Trading Lesson of the Week

Check back weekly for another free trading lesson:

Fear or Analysis?

In This Week’s Issue:

  • Stockscores’ Market Minutes Video – When to Change Teams
  • Stockscores Trader Training – Fear or Analysis?
  • Stock Features of the Week – Weekly Breakouts

 

Stockscores Market Minutes – When to Change Teams

Trading with the trend is an important component to consistent profitability in the market. This means that some times you have to switch your trading focus, exiting trades and moving in to trades that benefit from a trend reversal. This week, I discuss this, provide my market analysis, some stocks to consider and the trade of the week on CP.

https://youtu.be/vmt4eAgh9-0

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Commentary of the Week – Fear or Analysis?

Are your trades motivated by fear or analysis? This is a question you must ask yourself before you make every trade. It is so easy to make fear-based trades but being successful requires you make trades based on sound analysis.

What is a fear-based trade? Have you ever exited a winning trade because you were worried that it might turn in to a loser? Have you ever taken a trade because the thought of it running away without you entered your mind? The first is the fear of losing and the second is the fear of missing out. Both are destructive.

Analysis based trades are those that meet the rules of a well-tested and proven trading strategy. There should be a check list of rules that, once confirmed, determine the entry and exit decision.

To make it really simple, you might have a strategy that says go long the S&P500 when the 13-minute candle closes below the 2 standard deviation Bollinger Band and then has a 13-minute candle that closes above its open.

There is no room for interpretation in this strategy. There are two requirements and once those two are satisfied, the trade is triggered.

A fear-based decision with this strategy might go as follows. The first rule, a close below the 2nd Bollinger Band, is satisfied. The next candle is above its open but there are 6 minutes until that candle closes. It is easy to take the trade early because you have a fear of missing out. You think that the price will be higher by the time the candle closes and buying now will increase your total profit.

However, the second rule has not been satisfied yet! You are anticipating it being satisfied and taking the trade early because of a fear. 6 minutes later and the candle closes below its open, not satisfying the second rule and leaving you in an invalid trade.

In today’s trading session, I went through both situations. Before the market opened, my analysis indicated it was best to short stocks on the open but to be ready to exit those shorts early because the indexes were falling in to support where they were likely to bounce.

Bounce is exactly what they did and I covered my shorts early for a nice profit. A perfect trade based on analysis.

However, later in the morning I shorted a few stocks again. Why? I saw some weakness coming in again and thought that my analysis for a bounce may have been wrong. My thought was that I did not want to miss out on another big leg down which have been very profitable recently. I was afraid of missing out on trades that were not based on analysis. Fear drove my decision on those subsequent shorts and I ultimately lost on them which reduced my overall profits for the day. My analysis was correct, my emotions were not.

So, before you make another trade, do the following.

Go through your rule checklist and make sure all rules are satisfied. Give a lot of thought to whether your interpretation of the rules is based solely on logic or is there a subjective element that could be affected by your emotions? Fear will rarely lead to good trades.

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