Here’s Where Your Focus Should Be
So
I badmouth the market on Monday
and it shoots up over 2% today. I’m still gonna badmouth it. To me, this
looks like the oversold bounce we were expecting. Volume ran about the same
as yesterday. The bull case would like to see it heavier. I’m going to
need more convincing than one good day of gains before I believe that all the
negatives I pointed out on Monday are nothing to worry about. Get ready to hedge
those remaining longs with a few shorts.
Today, I’d like to
share a few thoughts with you. I’ve received mail from several intermediate-term
growth traders who have been frustrated this last week. One thing that needs
to be understood when trading is that every system, every timeframe, every style
has drawdowns. There is no way around it. Intermediate-term trend followers
will always miss out at tops and bottoms (not that we necessarily have a top
in place — but it wouldn’t surprise me if we didn’t make a
new high for a while). Show me someone who has never had a drawdown and I’ll
show you someone who keeps all their money in a savings account.
A friend of mine that trades
intermediate-term momentum stocks sent me the following email:
“I was shocked and
bummed out to see so many stocks getting sold automatically when stops were getting hit left and right and my hard-earned gains were getting
slashed…But I knew it made sense for my desired holding timeframe. Now today
I look at RTIX (I stopped out at 15.2) and the doubt is erased. Anyway, I will
always strive to honor my stops. Those things work, and they also save a ton
of time playing guessing games that I rarely win anyway.”
Below is a chart of
(
RTIX |
Quote |
Chart |
News |
PowerRating).
When a stock approaches a stop level after it has sold off for three days in
a row along with the market, many people think “The market is due to bounce
and so is my stock. I’m better off waiting and selling into the bounce
than exiting here.†Just because something is “due†to bounce
doesn’t mean it is going to. In this case the earnings warning was released
on Tuesday morning. (Think anyone got wind of it beforehand?) As hard as it
may have been for my friend to sell his shares, if he had waited for the bounce,
then he would still be waiting and his position would be worth over 40% less.
Forty percent is a big loss to try and make up for.
Lastly, I would encourage
everyone to read Larry Connors’ article from this past Sunday. He has
a great softball story in there that really relates to trading and dealing with
drawdowns. Next time you consider going into panic mode, and possibly ignore
stops, or try some wild-ass trades that don’t mesh with your normal trading
style, all because your trades are going against you, just imagine Larry Connors,
Softball Coach, standing behind you screaming “Enough! Forget about it.
It’s over. I don’t care. Get the next two outs and we’ll come
to bat. JUST STAY FOCUSED ON THE NEXT TWO OUTS. NOTHING ELSE! AGREED???â€
No sense worrying about
the trades you already lost money on. Focus on the ones you are still in or
the ones you will soon enter that will make you money.
Good trading,
Rob Hanna
robhanna@rcn.com