Make no mistake about it: these are internet days and news circles the globe at the speed of light. Couple that with the fact that Wall Street is the world’s most sophisticated disinformation machine ever devised and you’ll appreciate why I believe technical analysis is an individual investor’s primary defense against the dark arts of disinformation.
Okay...I’ll lighten up. How about a few clichés? The trend is your friend. Snooze and you lose. Both of these common sayings encourage you to be nimble and focus on reacting to changes promptly. It fosters the strategy of winning by not losing. Markets move fast, and you must be capable of pulling the trigger based on your technical signals despite a gaggle of possibly glowing fundamentals staring you in the face.
The reality is that humans are incredibly bad emotional decision makers. When they should view their charts as cold numbers, they see their stocks as emotional dollars. This is the wrong approach. Technical analysis is here to help you tame your emotional tiger, and maintain a consistent objectivity from one trade to the next. That’s where the profits lie.
I often cross paths with recreational investors who seem to have two primary objectives. They don’t want to look stupid to their family and friends, and they want to trade without incurring any loses. That is akin to wanting to be alive but not being willing to breathe. Contrast that to professionals whose major concern is not to get trapped into widening losses.
Think more like a pro. Act more like a pro. Winning investors do this by having the discipline to follow their rules and incorporate them into their written trading plan. Winners have a trading plan. Winners trade their plan.
I realize the selling part of the equation is difficult, so I thought I’d share some sell rules from my own trading plan. Frankly, it helps me to “walk the talk”.
- Rule #1: Mental stops don’t work. Write them down. A stop loss is essential and it’s free. Use your broker’s website to enter alerts and triggers or you’ll be tempted to tap a long stream of justifications for holding a stock at the critical selling point.
- Rule #2: The first loss the cheapest. Protect your downside and the upside will take care of itself. Don’t let fear paralyze you into inaction.
- Rule #3: Your sell strategies must be carefully sequenced. Don’t allow the real time market to re-sequence them. Don’t let the media bully you into inappropriate action.
- Rule #4: Adjust your stops to track an uptrend. Don’t sell until you see a downtrend developing and don’t place a cap on how much money you can make on the upside. Let the winners run and actively move your stops up to follow your winners and protect your profits at all costs. Bad news will often mask the true intentions of institutional buyers and the uptrend will continue. I use soft stops (stops that reside on my computer desktop). If you have a full-time job, you likely need to use hard stops (stops entered in the market with your broker).
- Rule #5: Stocks will bite you the minute you turn your back. Never relax. Be relentless and consistent in your monitoring. Never say “I’ll get out when I’m even.” Avoid the sinkholes and you’ll stay ahead of the game. Remember that a 30% loss means you’ll need a 43% rebound simply to break-even.
- Rule #6: Embrace the reality that selling is a solo inner struggle; don’t look for company. There is a large universe of people willing to help you with enticing reasons on the buy side; it’s an infinite party. The universe of sellers is finite. They are your competition. Their eyes are on the same exit sign you are staring at. Don’t wait for a gift-wrapped invitation to the sellers’ party!
Conclusion: An investor’s mental energy is the fuel you run on. Vacillation and failure to promptly sell a loser consumes precious fuel that could be used instead on trading your next winner.
Trade well; trade with discipline!
-Gatis Roze, MBA, CMT
Presenter of the Tensile Trading DVD, Stock Market Mastery.
Developer of the StockCharts.com Tensile Trading ChartPack.
P.S. Click HERE for information on my future appearances & seminars.
