Trading Lesson of the Week

• January 16, 2023

In This Week’s Issue:

• Market Outlook – Is Crypto Leading a Retail Resurgence?
• This Week’s Market Minutes video – STOCK TRADING BASICS: THE ANALYSIS YOU MUST DO
• Bonus video – Stock and Trading Questions Answered
• What’s Working Now – Go Small, Go Crazy
• Trader Training – How to Beat Your Trading Enemy

Market Outlook – Is Crypto Leading a Retail Resurgence?

One of the strongest areas in the market last week was Bitcoin, moving up 26%. We also saw strength in Precious Metal Miners and Biotech, all sectors that tend to attract retail traders. With lots of volatility and crowds of retail traders chasing a few hot stocks, the short term trading action was noticeably better than it has been in recent weeks.

This Week’s Market Minutes video – STOCK TRADING BASICS: THE ANALYSIS YOU MUST DO

There are many ways to do analysis for your stock trades and investments but none are more important than the method I discuss this week. Markets moved up well this week, what do the gains mean for the future of stocks, commodities, currencies, and interest rates? I discuss that and the day trade of the week on NEGG.

Click here to watch

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BONUS VIDEO – Stock and Trading Questions Answered

I invited questions on trading and individual stocks in a recent video and this week I provide the answers. Great way to learn how to read chart patterns.

Click here to watch

What’s Working Now

Day and swing trading Alpha stocks and we are starting to see good position trading in a few sectors that are leading the turnaround. Focus on Alpha stocks for short term trading and be fussy with longer term trades, favoring stocks in strong sectors like mining and small cap.

Trader Training – How to Beat Your Trading Enemy

Emotion is the enemy of every trader.

Our emotional attachment to money is what causes us to lose our discipline, to take big losses, to not let our strong and profitable trades run higher. It causes us to own too many stocks in one sector or fall in love with a stock that will only hurt us. Letting emotion into our trading decisions is a fast way to insomnia.

The perception is that the stock market is too risky, many investors don't like the potential for a sharp selloff that can destroy their portfolio in a very short time period. The collapse of the stock market in 2008 has given many a form of post-traumatic stress disorder, leaving them on the sidelines when it has not made sense to do so.

The stock market may be volatile at times but that is not what determines risk. Risk is how you respond to the volatility, how you manage the potential size of your losses. The stock market is not risky, the people that play it are. It is how you deal with price volatility that determines risk.

If you want to sleep well while invested in stocks, you need to have a plan for managing risk. The notion that you can buy some "good" companies and forget about them is outdated and reckless.

Here are my essentials to being invested in the stocks and sleeping well:

Plan to lose. When you buy a stock, know the price level where the stock market will have proven you wrong. Learn how to determine where a stock's support price is and if the stock closes below that level, realize that the market is telling you that something is probably wrong at the company. Get out.

Know your tolerance for risk. How much are you willing to lose on any one stock trade? If you risk more than this amount, you will get emotional. Take the difference between the entry price and the stop loss price and divide that into your risk tolerance to determine how many shares to buy. If you are buying a stock at $10 with a stop loss point at $9 and you are willing to lose $500 on any one trade then you should buy 500 shares.

Don't obsess. You don't need to watch your stocks constantly, if you are position trading then only look at the once a day or even once a week. You only need to check to see if your stock has given an exit signal, obsessing over every gyration will make you emotional and lead you to make mistakes.

Have a written plan. You must write down your trading rules. When will you buy, when will you sell, how will you manage risk and how will you review your positions. Keep the plan simple but concise enough that there is no room for interpretation.

Stick to your plan. Your plan should be based on strategies that you have tested and believe in. Deviating from the plan means you are going into areas that have not been tested and that puts you closer to being a gambler. Gambling traders may win in the short term but in the long term they lose.

Remember that trading stocks is as risky as you make it. Not having a plan with rules for limiting the size of your losses leaves you exposed to big losses if the market corrects sharply. With loss limits and discipline, you should never be the victim of a major market correction.