Being Picky Pays

In my four-year-old daughter’s preschool,
one of the things they harp upon is
that a good part of successful living has to do with making good choices.

No philosophy could be better for traders to live by than this one.

I had an interesting conversation with Goran Yordanoff last Wednesday.
He stated that he really wasn’t sure what the market was going to do next, so he
simply didn’t have an opinion. He would wait for the situation to clear up and
not succumb to the temptation to call a bottom.

I can’t begin to tell you the number of times I’ve heard successful traders
say this or something similar. And it’s certainly true in my own experience.
Traders tend to engage in wishful thinking at times. When they don’t have all the
pieces of puzzle in place, they’ll use their imaginations to fill in the
remaining puzzle pieces in such a way that the situation conforms with their
hopes. That’s how traders jump the gun. That’s how they wind up committing to
bad trades.

Every trader is probably guilty of this at some point…hopefully not too
often though.

Here is a good example of an opportunity that looks good on the surface:

One of the bullish components of this chart is seen in the way
that Bristol Myers
(
BMY |
Quote |
Chart |
News |
PowerRating)
has had a strong tendency to rebound back above the
trendline every time it dipped below it. Add to that sturdy looking
support off the 20-day moving average. Over the past four-months, BMY has broken
above two previous trading ranges.

In Tuesday’s post-Santa action, BMY bounced off support which
might lead one to believe that an attempt at new highs is on the horizon.

As tempting as the scenario appears, it is tainted by negative
volume pattern creeping in. The two biggest volume surges were on recent price
plunges. The long-side risk makes this one to sit out on because it looks like
institutions are unloading shares–possibly to unsuspecting chart-oriented
traders.

True, BMY could easily break out and one could miss a great
trade. But just remember, there are going to be better setups just around the
corner.

Eddie