Trading Lesson of the Week

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Being Normal Hurts Profitability

Commentary

In This Week’s Issue:

  • Market Outlook – Buyers Getting Stronger
  • This Week’s Market Minutes video – Crash Over? Opportunities!
  • What’s Working Now – Follow the Alpha
  • Trader Training – Does Doing the Opposite Make You Money?

 

Market Outlook – Buyers Getting Stronger

The markets started 2023 with some optimism after strong tax loss selling into the end of 2022. A noteworthy move on Friday shows investors are starting to believe that the cycle of rising interest rates may slow down as the economy and inflation seem to be moderating. While most market sectors are still in a downward trend, we are seeing conditions improving which could lead to a break of the downward trend soon.

 

This Week’s Market Minutes video – STOCK MARKET CRASH OVER? BUYING OPPORTUNITIES!

There was an important move in the stock market last week that may set up for stability in the stock market. This week, I show some sectors that are improving and then provide my analysis of the stock, commodity, interest rate and currency markets. Finally, a look at the day trade of the week on MEGL.

Click here to watch

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What’s Working Now

An improving Biotech and Commodity sectors are bringing an improvement to trading conditions for short term traders. I am finding that a focus on Alpha stocks, those that are trading with abnormal volume and price activity, is working well for day and swing trading. Longer term position trading is still not a great approach but will start to be if the long-term downward trend is broken or for sectors that are in an upward trend. Be fussy but open to opportunity.

 

Trader Training – Does Doing the Opposite Make You Money?

Many failing traders, after a lengthy streak of losers, will proclaim, “if I just do the opposite in the market, I would be rich!” In other words, sell short the stocks that they buy and buy the stocks that they sell.

Sadly, doing this probably won’t lead to any more success.

Most traders are hyper focused on the entry decision. Buy the right stock at the right time using the right indicators and the best strategy. Yes, those are important steps but overlooking one very important factor will ensure that even great stock pickers fail to beat the market.

What do great traders do that most do not? They avoid falling into the trap of being a normal human being.

Normal people don’t like to take losses so they don’t sell their stocks when the market has proven them wrong. This leads them to let small losses grow into big losses.

Normal people add to their losers, hoping that buying more of a loser will lower their average cost to the point that they can get out profitably when the stock bounces back. This leads to even bigger losses.

Normal people worry that their winning trades will turn into losing trades so they sell when there is any sign of weakness.

Normal people do not add to their winners, since their logic tells them that the stock has gone up so much that it cannot go up anymore.

Normal people take more risk than they are comfortable with, causing them to act emotionally because of their emotional attachment to money.

Normal people let emotion affect their decision making, doing what feels good instead of what the facts tell them to do. They avoid pain and pursue pleasure.

Normal people listen to what people say to do in the market, instead of looking at what people are doing with their money.

Normal people buy stocks like they shop for other goods, looking to buy bargains in stocks that have fallen in price. Stocks that have fallen in price do so because there is something wrong.

Normal people avoid buying stocks that have gone up a lot, with the belief that higher prices mean the stock is overvalued.

Normal people try to be smart instead of trusting that the stock market is smarter than them as it represents the opinion of millions of investors.

Normal people work hard when times are tough instead of working hard when the market is easy. Work harder when the trend is up.

If you want to beat the market, you must stop thinking like a normal person. Human beings are programmed to fail in the stock market. To succeed, you have to write a new program for yourself.

When making a trading decision, ask yourself whether your trade is motivated by fear, greed or facts. Only take trades based on fact. Exit when the facts tell you to, not when your emotions do.

This does require some skill and practice. Knowing how to read the market’s opinion through the price and volume chart is not too complex but it does take time to learn. However, the mistake many investors and traders make is to only focus on their analytical skill and fail to work on themselves.

To succeed, you have to overcome being human.

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