Monday, March 31, 2008

State of the Market - 3/31/08

After three straight down days, the bulls finally put up a little bit of a stand today, as the markets rose steadily throughout the day and finished with medium-sized gains. There was some selling around 2:00, but the market closed fairly strong. Some credit for the gains were given to the new plan presented by the Treasury to overhaul oversight on Wall Street. I don’t want to start ranting on this, but the idea of giving more power to the same group (the Fed) that caused so many of the problems we are having right now is beyond stupid. However, it does seem to fit right in with the overall level of intelligence shown in decision-making over the past few months. Anyway, the only problem with today’s action is that once again, volume was low and without a strong, high-volume up day, I am still hesitant to do a lot on the long side of the market. I don’t know what the end of the month and quarter had to do with today’s action – it might have played a part. I am interested to see if things speed up starting tomorrow with the start of a new quarter.

I didn’t see a whole lot of major movement in individual stocks today other than the agriculture stocks, which were getting destroyed once again midday and continue to look like death. There have been major technical problems in these stocks for months (big volume down days, low volume up days, choppy trading with many reversals, etc.) but they have yet to crack completely. Maybe they will here, but they finished off their lows. After losing money earlier this year trying to short these, I don’t think I have the guts to try again.

As we end the first three months of the year, one thing I wanted to do for my own personal growth as a trader was to examine my trading so far this year and what I need to do to be better. Obviously this has been a very difficult environment to trade in, even for bears, since the middle of January. I have been bearish throughout the year, but that bearishness has not always paid off as well as I had hoped. I am still up overall for the year, but not nearly as much as I was after January 22. Some lessons hopefully learned so far include:

  • Overtrading is a recipe for disaster – I have definitely been guilty of this so far this year. I had nice positions that I closed early because I couldn’t sit still, and I took bad positions because I couldn’t sit still. I go back to what I saw in a Dan Zanger interview when he said the market presents about three or four money-making opportunities per year that allow you to make tremendous returns, and the rest of the time is just choppy trading that cause most traders to lose a significant amount of money. January 1 to January 22 was one of those nice opportunities to make money if you were short, and I don’t think we’ve had one since. Perhaps this just takes time to learn and as I progress, I will be able to recognize these profitable times and also show the discipline to sit on my hands if there is no real edge to be found.
  • Emotional trading is a recipe for disaster – Looking at my gains and losses for the year, I have noticed that many of my losses came from trades that were taken during the middle of the day or from trades in which I changed my original plan after the trade was taken. I am really focusing on making trades only at the end of the day and also not watching the intraday action too heavily, especially in a volatile environment like February. I also need to do a better of job of setting stops and sticking to them, rather than adjusting them after the trade has been made, which usually just led to bigger losses.
  • Avoid trading right before or right after decisions by the Fed – for some reason, I thought it would be smart to make a lot of trades around January 30-31. I closed a total of nine trades those days, and only two were winners. Several were stocks I was stopped out of the same day. These days of course correspond with the first Fed decision about interest rates, which led to an extremely volatile trade that I would have been much better off staying completely away from. I plan on doing this from now – I will not be making any new trades during the few days after Fed decisions, at least not in the current environment.

Basically, I feel I am putting in the necessary work to be a successful trader, and I feel my chart-reading abilities are fairly strong, although I can still improve in both areas. I still need to tighten my overall system and trust some of the indicators I use more. For me, it is still some of the psychological difficulties that I am having, and I know those are issues for many traders. You can’t become a master trader until you’ve mastered trading psychology, trading discipline, and your own personal emotions. These are the hardest skills to develop and master, but I will keep working on them and hopefully improve as we enter this second quarter.

I am putting some flooring down in my house, but I will try to be back tonight with a few charts if I find anything interesting in my scans. Things have been pretty slow and boring the past five or so days, so I am interested to see what the new quarter brings – I still think we could go either way here. I am still leaning a little more bearish but am willing to be a bull with some convincing market action. Good luck.


Patrick said...

I appreciate your thoughts about the market and the effort you put in for finding stocks. Thank you!

Mac said...

Thanks for the kind words. Glad to hear you enjoy the blog.

bmbull said...

Great comments on the trading 'lessons' learned. Along the same lines as the Fed news, I might add earnings reports too - I'm not a big fan of buying stocks right before their earning reports, because it's a total crap shoot as to which way the stock will go. I will also consider lightening up on an existing position ahead of earnings.

As far as trusting your indicators, I think you can add a layer of discretion on top of any 'system', and that involves taking into account overall market conditions - like the current tough, choppy conditions, for example - and not trading as much during those times, choosing to be more aggressive during the more strongly trending periods. As Dave Landry says, every 'system' has its "sweet spot", when it will perform very well, and it will have times when it doesn't perform well. Knowing which is which can be quite valuable.

Obviously, those are just my opinions, and I am a FAR cry from a master trader.

Mac said...

Bmbull, I agree with your comments. I usually do try to avoid holding through earnings reports unless I am sitting on a big gain and can weather a bad report without taking a major loss. I always check before putting on a position how close the earnings date are as well.

There are very few master traders out there, but if traders keep learning and working hard, reading about the few we know of (Livermore, O'Neil, etc), then it is possible. I hope this blog helps me in this endeavor.

bmbull said...

On earnings - like you, if I've got a nice gain, I might sell 'some' and ride the rest out. It all depends on the situation.

Gary Kaltbaum has talked on his radio show about holding on through earnings, and he says that he asks himself the question: Which would make me feel worse? Selling and seeing the stock take off without me, or holding on, and having the stock tank? His answer to that question then helps him decide what to do.

As far as learning goes, you've learned the one major rule - Never Lose Big - so you're a long way there.