By Kevin Marder
A good strategy, and properly executing it, are obviously a large part of being a successful trader. The type of strategy itself is largely unimportant, as long as it falls into the comfort zone of the person using it. Today we’ll discuss how one finds that after a look at what the markets are doing currently.
Shares idled late last week after Wednesday's takeout of the top of the Nasdaq Composite's expanding triangle formation.
Friday's Nasdaq volume was uncomfortably high for a down day at 20% above average. The session marked the third major distribution day in the past 10 outings.
Chart created using TradeStation . ©TradeStation Technologies, 2001-2014. All rights reserved.
The distribution, or institutional selling, seen at the surface, is mirrored by the action of some individual leaders. Both are indicative of a market showing some churn at elevated levels.
It is always instructive to keep an eye on the progress of recent breakouts. A breakout in a leading stock should follow through for a 20%-plus gain before pausing to form another base.
A relative few recent breakouts such as CaesarStone Sdot-Yam /zigman2/quotes/207563497/composite CSTE +0.54% , ExOne /zigman2/quotes/207261429/composite XONE -3.02% , Under Armour /zigman2/quotes/208967132/composite UA +0.92% , Statasys /zigman2/quotes/207628786/composite SSYS -2.44% , Fiesta Restaurant Group /zigman2/quotes/204950173/composite FRGI +0.57% and Michael Kors Holdings have resulted in technical failures, as sellers emerged post-breakout.
Crucially, the lion's share of leaders hang in well, failing to show the worrisome distribution that could quickly change the market's speculative sentiment for the worse and potentially kick off a much-awaited secondary correction in the averages.
Otherwise, while it may seem obvious to many that it is necessary to operate under the auspices of an actual strategy, a bull market like this one can lull many into using a “seat-of-the-pants” (SOTP) strategy. This participant used one in the mid ‘80s when he first began investing. It worked because everything went up back then.
In the ‘90s, SOTP also worked. Until it didn't. The ensuing bear market kicked the Nasdaq for a 78% loss, while many household names dropped a sobering 90%-95% — e.g. Cisco /zigman2/quotes/209509471/composite CSCO +1.27% -90%, Oracle /zigman2/quotes/202180826/composite ORCL -3.31% -84%, Hewlett-Packard /zigman2/quotes/203461582/composite HPQ +1.44% -84%, Computer Associates -91%. Many less-experienced participants saw their accounts shrink 50%-75%.
If you are using a seat-of-the-pants methodology to govern your entry and exit decisions, chances are that it will prove disappointing sooner or later. All the more so if your emotions are an undue part of the strategy. While there are no shortcuts to riches in speculation/trading, a strategy that is appropriate for your risk tolerance, temperament, experience and timeframe, combined with sound money management and a profitable history, can go a long way toward stress reduction and higher satisfaction.
The part about sound money management is important. For most less-experienced traders, finding that elusive holy-grail strategy that will automatically deliver profits to their doorstep is the be-all, end-all. Yet based on research, development, testing and/or trading of many different strategies, the view here, if given a choice, is that it is actually preferable to have a mediocre strategy with good money management than a good strategy with mediocre money management.
Money management should not only be sound, but should also be a good fit for a trader's risk tolerance, objective and temperament.
Do not take losses personally. Learn to associate taking losses with paying the normal operating expenses of any business. If you have yet to become profitable, do not feel as though there is a conspiracy to prevent you from becoming the trader you would like to become.
The only thing standing between you and the trader you would like to become is knowledge. Knowledge is the great playing-field leveler. Knowledge of method, knowledge of money management, and knowledge of mind. Successful traders have these things covered. So will you if you have the time and passion to succeed.