It is never the system or author that fails. It is YOU! It is your lack of focus.
Focus on yourself and then you can focus on trading successfully.

Trading is at least 98% psychological. It’s a mental state of mind based upon your beliefs of what may happen. Books, systems and technical indicators can only take you so far! You must submit and understand that the market is all in your head. It is you versus the other guy or gal. If you don’t understand yourself, how will you ever understand other traders; therefore taking advantage of market moves based on their mental state of mind and their underlying beliefs.

Many investors, both novice and experienced, switch from book to book to book and system to system to system and never understand why they aren’t consistently profitable. They are confused, looking at too many things, complicating the entire process while ignoring the essentials to success.

Follow this statement: Keep it Simple Stupid.

Why complicate things when simplicity works; especially when it comes to trading? We know that trading may be the most difficult endeavor that any human may attempt to undertake.

Thousands of different systems work in the stock market; it’s the user that ultimately fails because of lack of concentration and motivation to stay the course. It is hard work to play in Wall Street and not many people can hang because they never sharpen their own mental skills while applying basic money management techniques

We all see people come and go every day: rags to riches to rags. They are motivated for weeks, months and sometimes years but most fizzle away after they fail and can’t figure out what they are doing wrong. Some investors copy a system from a so-called guru and may find success for a while but they don’t tailor it to their personality, integrate it with their investing style and focus on their mental state of mind, therefore, it will become obsolete and they will fail. Traders work, then they work hard and finally they work even harder to become successful in the market but understand that working smarter will always take you further.

Our goal as traders is to understand the crowd and anticipate how they will act based on thoughts you used to have when you were just one of the sheep!

Focus on what is important and the success will follow.

Stop focusing on stochastics, Bollinger bands, MACD, ADX, earnings releases and bullshit news stories. Yes they can aid you to success but the main focus is on you!

Personally, I need specific fundamentals, price, volume and basic daily and weekly charts but they are secondary tools. They can help me make money as long as I am focusing on the overall picture which is my mental focus and my emotional balance.

I know I am getting all Dr. Perruna on you but it is true.

Once your conscious mind understands how the beliefs of the crowd work, your subconscious mind takes over and intuition kicks in and you start making some of the best decisions of your life by flawlessly following your system.

As Jesse Livermore said:

“Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes”

Why? Because humans never change!

Once you understand this and learn to trade other humans, you will become successful. Yes, you will need some of the tools mentioned above but don’t focus your attention in this area. Focus when investing by mastering the beliefs of the crowd and you will always be one step ahead.

I don’t have many quality “stock of the day” case studies to provide due to the recent action in the market. My market research has been spitting out very little in the way of opportunity so I am currently holding several partial positions and an increasing cash position (from sells last week). My research is still telling me that most of the opportunities are too far extended to take an ideal risk to reward position so I will continue to write about the subject of fear.

I spoke about the fear of losing money yesterday and want to extend that into the fear that the media creates, specifically book authors. I am going to repost an edited version of an article I wrote last year for many of the newer readers of the blog.

See these links for the originals:
Baby Boomer Bust is BULL
‘Crisis Authors’ feed on people’s Fears!

Authors and their sheep followers continue to predict coming great depressions, stock market crashes and real estate busts. I am not saying that it can’t happen but their readers sure make them rich by eating up most of their negative crap.

What happened to the predictions from the books in the late 1970’s and early 1980’s? Glance at the book titles from the 1970’s and 1980’s and then read the book titles from today (several listed below). Are you seeing a pattern?

I didn’t go back to the 50’s or 60’s but I know I could find similar titles and probably many more in the 1930’s. My point is: don’t believe everything you read and stop panicking by reading books from theorists (talkers, not doers). I give credit to many of the 1970’s and 1980’s books listed below to Martin Schwartz and his book Pit Bull as he calls them out in a great chapter. I highly recommend his book Pit Bull as it is a great summer read while at the beach or pool.

Theorists make money selling books that sell fear while investors and entrepreneurs make money by following their ideas hedging against a possible crisis. I aim to learn from history and history shows us that these “crisis” books will always sell during tough times. Readers eat up this garbage because most people are trapped in the rat race working their asses off just trying to stay afloat. Their attitudes are typically piss-poor and they love to read about negative events that may be catastrophic (especially a crash that may hurt others).

Also notice how the same authors try to write books when the market starts to go back up again. For example, Howard J Ruff was writing about the crisis in 1979 through 1982 but then started to write about how to invest as a serious investor in 1987. Guess what: he was on the wrong end of the crisis in 1982 (the tail end) and the wrong end of the boom in 1987 (crash later that year). These “fools” are always late to the party and sell millions of books to the “average” person that engrosses themselves in fear! Fear is just another word for a negative mental attitude. Success and opportunities will not gravitate toward the individual that is consumed with fear.

Read more »

Many investors fail in this world due to their fear of losing money. Brilliant people continue to fail at trading the markets because of their emotions, not their intelligence or their work ethic. It’s their psychological make-up and their pre-programmed society based beliefs as partially explained in The Holy Grail of Trading: It’s not your System.

I don’t want to confuse the concept of conserving one’s wealth by employing proper money management techniques and the actual fear of going broke. Fearful investors base their entire system, thoughts and style of investing on a negative thought process or a negative mental attitude. Successful investors, whether it is stocks, real estate or businesses, always develop strategies to protect from the down-side by focusing on the reward versus the original risk. Successful investors develop systems with expectancies that allow them to negate emotional fear by knowing what can happen if the investment fails. Successful investors are emotionally prepared to handle the side effects of losing money. Unsuccessful investors think about losing the initial investment and more often than not, pass up on a potential golden opportunity.

How many times have you heard a person say: ‘if I only put my money into that stock or that piece of real estate”? These same people are also the ones that continue to pass up on potential opportunities today because they are scared to lose. Nothing comes easy and life rarely serves up a free pass without some form of risk attached. When speaking in terms of stocks, an investor must place money after their best ideas or they will never know if they have a winning system. Many people paper trade and claim they can pick winners but I view them as fearful of losing money. The fear of money and the fear of losing are two of the main reasons why so many people go broke on Wall Street.

If you don’t fear money and can accept losing as part of the game, you will eventually become successful.

A scared poker player can serve as a perfect example of the type of person that fears to lose money. Take the time to sit at any $1-$2 no-limit hold’em game at a casino and you will quickly realize who fears money and who plays without fear. Good players may continually lose because they fear the dollar and fail to play according to their strategy. I have seen several bad players win lots of money at the tables because they bully the scared players out of their hands. They essentially make suckers out of the better player so in the end; the better player goes home broke and emotionally damaged.

For example: let’s say you are dealt a KK and raise on the first bet but one of these fearless “garbage bully players” re-raises all-in to scare you out of the pot.
Would you fold?

I have heard many stories of players folding high quality hands due to their fear of getting a bad beat. In this case, the bully can only represent one hand that can beat yours, so the odds are heavily in your favor so you must call and call quickly (don’t have fear when the odds say you should win). Two remedies exist for the fear of a bad loss: a bankroll that can withstand a few bad beats and a strategy that capitalizes on hands with high odds for potential winners. Over the long term, you will be a consistent winner but must understand that beats will happen and some of them will be large (if it is a bad beat). Assuming that you let go or cut poor hands short, these larger losses can be avoided consistently. In poker and in life: scared money is dead money!

The same principal holds true in investing and in life. The people that assume the risk and calculate the odds of success are typically the ones that come out ahead with larger bank accounts. They don’t focus on the losing aspect of a deal and never blurt out the words “what-if”. To repeat, they don’t ignore possible failures as they prepare for the worst and expect the best. I will not deny that I have been in situations where I was scared to lose but that helped me seek out the answers to consistent winning. Losing will always sting but I now accept losing as part of the game.

I expect to win each trade but ultimately understand that some will fail and it’s ok as long as I don’t let it become catastrophic. I have learned to accept losing trades, losing money and I have challenged the fear of money. I place risk under control by developing and using a positive expectancy system, position sizing and money management techniques that eliminate my fear of losing money. I may lose many small battles but I depend on my system to win the ultimate war. I am a trend-trader so my wins are large in a market similar to what we have just experienced.

Read this quote from the movie Rounders:

“In “Confessions of a Winning Poker Player,” Jack King said, “Few players recall big pots they have won, strange as it seems, but every player can remember with remarkable accuracy the outstanding tough beats of his career.” It seems true to me, cause walking in here, I can hardly remember how I built my bankroll, but I can’t stop thinking about the way I lost it.”

That quote can be tied to investing with great accuracy.

One more quote that fits with the article I have written about the fear of losing money:

“They’re trying to goad me, trying to own me. But this isn’t a gunfight. It’s not about pride or ego. It’s only about money. I can leave now, even with Grama and KGB… and halfway to paying Petrovsky back. That’s the safe play. I told Worm you can’t lose what you don’t put in the middle. But you can’t win much either.”

What are you afraid of?

It’s been a quiet week and I have been having some issues with my blog. The home page loads quickly but the all other pages are taking extra time to load (much slower than normal). My host is looking into the issue as it is not the theme since it happens with every theme I try (not the plug-ins either). Let me know if anyone has a suggestion as to what it may be (mySQL, database, etc…?).

It’s the summer and volume is typically quiet and profits have been very handsome in 2007 so I started to sell shares yesterday in JASO. After doing my research last night, I have decided to take down at least half my position in four other holdings:
BIDU, EDU, LOOP and MA

See the attached charts to understand why I am looking to capture gains. I see many leading stocks showing some exhaustion signals and far too many of them are extended from their 200-d moving averages. I am not taking down my entire position as I would like to allow profits to run further if this up-trend has another leg. Some may think that is greedy but I am not concerned because my sell stops are in place so I won’t get hurt if they continue to reverse.

My plan is simple: realize a portion of gains while allowing for further gains but protecting what is left on the table. I am also taking profits because my objective in each trade above has been exceeded.

Leave a comment and let me know what you are doing with your positions (buying, selling or holding).
What you are thinking and what is your plan at this point in time?

Stock of the Day - Update
Rochester Medical (ROCM)
Monday’s Closing Price: ROCM - $14.75

Potential Trade Set-up:
Ideal Entry: NOW (currently $14.75)
Risk is set at 1.0% maximum of total portfolio or $1,000 of $100k
Stop Loss is 5% or $14.01
Number of Shares: 1,356
Position Size is $20,000
Risk is $0.74
Target is $21
Risk-to-Reward is 8-to-1

I am providing this potential trade update with the latest trade setup that allows the previous gap-up to be considered (pointed out by a reader: dankkir, “nobody here mentions the gap at 14.19 which needs to get closed before any long term upside…its just another 5% away“). The entire trade has the potential to fall apart if the overall market starts to tank so be ready to cut losses. However, don’t anticipate anything; follow your rules and the trade parameters.

Take a long look at the support and resistance line on the point and figure chart provided. It tells me that the stock is going to blast higher for a triple top breakout or get slammed lower for triple bottom breakdown.

Too bad we can’t play options here (not offered) because I would trade a move and wouldn’t care what direction it went in, as long as it moved. As Taylor says: “Looks like it’s about to fall off a cliff to me.” If that were the case, a straddle would work.

I would create a straddle – remember; I am not a great option’s trader so don’t listen to what I am saying as I am still learning (please chime in if you see a better strategy using options if they were available in this case)!

Long Straddles (definition from optionsXpress):
Have you ever had the feeling that a stock was about to make a big move, but you weren’t sure which way? For stockholders, this is exactly the kind of scenario that creates ulcers. For option traders, these feelings in the stomach are the butterflies of opportunity. By simultaneously buying the same number of puts and calls at the current stock price, option traders can capitalize on large moves in either direction.

Here’s how this works. Let’s imagine a stock is trading around $80 per share. To prepare for a big move in either direction, you would buy both the 80 calls and the 80 puts. If the stock drops to $50 by expiration, the puts will be worth $30 and the calls will be worth $0. If the stock gaps up to $110, the calls will be worth $30 and the puts will be worth $0.

The greatest risk in this case is that the stock remains at $80 where both options expire worthless.