At the end of EVERY day a trader must make one decision:
Do I sell ... or do I hold ?
EVERY trader makes this decision each day - even if not intentionally.
Making no conscience decision is in effect the decision to accept what ever occurs.
This is the same thing as not voting during an election.
If somebody doesn't vote, then they have "effectively voted" for the winner as
they did nothing to cancel at least one vote against that winner.
The lack of intentional action has still effected the outcome.
The simple knowledge that there is a position, be it long or short, is enough knowledge to realize that a decision is required before the market opens again.
Understanding this, one does not need to be aware of what priced was paid for the
position.
One only has to be aware of whether the position is Long or Short.
We are looking at how to deal with the "deer in the headlight" scenario.
We are holding a long position in each of our study stocks below, and looking at what goes into our "decision" prior to the open of the market tomorrow.
First, remove all emotions from the trade (position).
Remember that the sole purpose for having purchased the stock was to sell it at a profit,
or at the least amount of a loss as possible.
Secondly, ignore all outside conversation about the company
itself.
Let the trading activity tell you what the other buyers and sellers are doing.
You are only concerned about the amount of loss you can withstand.
Not just tomorrow, but period.
Now look at today's close and calculate the next step DOWN to the next support level.
Do the math of dividing that next support level by today's close.
Ask yourself if you are willing to give back that amount by the end of tomorrow ?
Since this is something you have been doing EVERY DAY, you do not have to consider what
you paid for your position.
You have actually HELD any profit up to this point at one time and have given it back
since that time if you are still holding the position.
Read those last two lines again and take some time to let that sink in.
You have held every profit step in your hand along the way.
You either still have it or you left it slip away.
If the stock does not bounce at the support level, it will most likely test the next support level.
A stock can easily lose 50% in a day and certainly often loses 10% and 20% so don't be fooled into thinking that it will creep slowly down to a support level.
It can happen in a blink or it may crawl so slowly you won't feel it ebbing away.
One last comment before we get started. As you surely recall from all of our text during your training period ...
"Think in terms of PERCENTAGE and NOT in terms of DOLLAR VALUES !"
If you typically trade $50 stocks and get use to referring to being up or down by a $1.00, you will learn one of the worst habits in trading that you could possibly come to terms with !
When you later trade a $25 or $10 stock, each $1.00 move will be the equivalent of TWICE to FIVE times as large a move as that original $1.00 on the $50 stock !
And when you are use to telling yourself that you'll let it move "a bit more", as it is only moving "1/2 a point", or to say $0.50, then that which use to be only 1% on the $50 stock is now 6% on that $8 stock !
This is the same problem with the talking-heads stating that "the DOW has taken a dive and is down 100 points !".
Well when the DOW was at a value of 300, this WOULD have been terrible, but with a DOW at roughly 10,000 this same move is only a -1% move where as the other would have been -33% !
Of course you are already familiar with our opinion of the DOW - an index of only 30 stocks to represent an entire market and even then not comprised of a fair representation AND each stock "weighted" to reflect it's sector impact !
DUH ?!?!
Speaking in terms of dollars makes NO sense at all because you mind will actually approximate if this "dollar value" was a good percentage or not.
For example, you tell me you just closed a trade and made $100 on the position.
Did you do well ??
Yes - IF your total risk on the trade was $100 ! because you would have made 100% !
CONGRATS !!
NO - If your total risk on the trade was $10,000 because you would have made 1%.
A win is ALWAYS better than a loss, but the point here is that:
you MUST learn to think in terms of PERCENTAGE !!
Ready, let's try our study group and see what it looks like.
Our study stocks for this session will be Ariba, Cisco, Harley Davidson and Lucent Technology.
Again, this is Monday the 9th of March 2001.
While typically we do these alphabetically, we are going to save Ariba until last.
CSCO = $ 20.60 ( 03/09/01 )
The first technical support level is about $16.00 and a
secondary around $13.75 if the primary should fail.
16.00 / 20.60 = (-22%) 13.75 / 20.60 = (-33%)
Had this been a new position as of this year, the opening
price on Jan 02, 2001 = $38.13.
The failure to make a decision regarding this position would equate to a return of:
13.75 / 38.13 = (-64%) if CSCO fails on it's support levels.
The most you would have held on this trade since 01/01/01 would have been on 01/23/01 at
$42.63.
This would require a recovery of 210% ABOVE where this support level of $13.75 is
at, just to break even on what you once held.
Remember, it does not make any difference if you bought this
six years ago or on the first of this year, your value for this portion of your hand was
worth the closing price EACH DAY.
HDI = $38.09 ( 03/09/01 )
Harley is not very well defined.
However there is a more defined level at $35.50 and on
failure of this another at $30.25.
35.50 / 38.09 = (-7%) 30.25 / 38.09 = (-21%)
Had this been a new position as of this year,
LU = $12.34 (
03/09/01 )
The first support level is about $11.40.
But the next one doesn't occur again until near $8.25.
11.40 / 12.31 = (-8%) 8.25 / 12.31 = (-28%)
Had this been a new position as of this year, the opening price on Jan 02, 2001 = $13.75.
The failure to make a decision regarding this position would equate to a return of:
8.25 / 13.75 = (-40%) if LU fails on it's support levels.
The most you would have held on this trade since 01/01/01 would have been on 01/19/01 at
$20.56.
This would require a recovery of 149% ABOVE where this support level of $8.25 is at,
just to break even on what you once held.
Remember, it does not make any difference if you bought this
six years ago or on the first of this year, your value for this portion of your hand was
worth the closing price EACH DAY.
ARBA = $11.50 ( 03/09/01 )
We saved this one for last as there are NO technical support levels below us at
this point. In other words - NO hope for previous buyers to refuse to sell at ANY
level now.
( Turn to your notes on WHY a technical support level works in the first place. )
Had this been a new position as of this year, the opening price on
Jan 02, 2001 = $54.31.
The failure to make a decision regarding this position HAS equated to a loss of:
11.50 / 54.31 = (-79%) at this point NOW.
The most you would have held on this trade since 01/01/01 would have been on 01/02/01 ten
minutes before buying into this position, because ARBA has never been this high again.
This stock has traded as high as $173 in September of 2000.
Remember, it does not make any difference if you bought this
six years ago or on the first of this year, your value for this portion of your hand was
worth the closing price EACH DAY.
Each support level has it's own merit in
regards to support.
This is because of the volume traded and (hopefully) held beneath that support
level.
For example, identify and count the support
levels from the most recent 52 week high back over several years until you find a
significant bottom.
To make this easy, let's say that you find 10 easily identifiable support levels.
Divide 100% by the number of support levels found minus 1 and multiply that by 100.
For this example we would have ( 100 / (10-1 ) ) x 100 = 11%
Now, starting with the first support from the high, label it as 89%.
That is to say 100% - 11% = 89%.
Label each of the lower supports as you subtract another 11% from the one just above it.
You now have the percent of likelihood that each
support level is likely to provide a bounce.
This of course is looking at things in a positive spin, as opposed to labeling
each with increasing units of 11% to indicate the likelihood of each support level failing
to provide a bounce for you.
In other words, each support failure increases the likelihood that the next lower one will fail as well.
So how should a TechChart Trader play this hand ?
We would play each of these positions, and any other position, the same
way.
Let's continue with our discussion.
Hopefully all of our study stocks will bounce on their first support levels.
And hopefully if they do not, you will have at least a mental Stop in place and the
experience required to execute that Stop.
Do not argue with what the stock is telling you.
Remove yourself from it emotionally.
If necessary, print the chart out, cut off the name, price and date columns.
Mark the support levels and make your decisions with NO relevance to your entry point.
Ask another technical trader to access your notes and findings.
The BEST thing would be to have the other trader take a copy of the unlabeled chart, make
their own marks and compare the two.
After all, the only way your stock is going to head up is if another trader can look at
the same chart and see a reason for buying.
Without a reason for buying from somebody else's perspective, there is no reason for the
stock to go up.
SELL it HERE and GUARANTEE yourself that you will not be holding it at a lower price and assure yourself that you can always buy it back at a lower value when it indicates that it is ready to move back up again.
If it never signals a return, then you are now holding the very most that you could
have walked away with at THIS point.
Remember, tomorrow is GONE.
Think of it this way ....
If you really must hold THIS stock and believe that it "might" bounce and
come back soon;
then set a Stop below the support level to sell it.
If the stock fails the support level and you sell it, turn right around and set another Stop order (in the market) to purchase the stock again at the same percentage above the support level that it failed at when you sold it.
Now you are in cash and holding profits (or reduced losses) for at least this price
value.
If the stock continues down, you make out better each day.
If the stock rally's back and passes through the support level (which is now a resistance
level) and takes out your Stop, you will once again be holding it with a minimal loss of
the spread between the sale and buy.
HOWEVER ... if this same stock continues to take out support levels, moving ever lower each time, you will still have your cash and still be able to purchase it back again at a MUCH lower price when it breaks through a lower resistance level.
It's kind of like the adage about riding a motorcycle.
There are two types of motorcycle riders - those that have wrecked and those that haven't
..... YET !
You ARE going to lose money on some, or perhaps most, or your trades.
If you don't at first, this will be your biggest un-doing.
It will teach you a very incorrect lesson and provide you with a very false confidence.
We at TechChart continue to recommend that you paper trade until you have faced at least one trade that drops out from under you.
Continue to listen to the same news and read the same papers you would normally read every day.
Trade your paper chart EVERY day and NOTE on it what you want to do EACH day.
Don't cheat yourself on this as you'll pay big time in the real world when it happens
to you.
Please note, we did not say IF it happens to you, but rather WHEN.
About the only way that I can imagine working the market for any period of time and NOT experiencing this at the very least one time ... would be just like the motorcycle .... you were fortunate enough to call it quits before it occurred.
It has been our experience, as noted so often throughout our text in the past, that we struggle against the losing trades and justify to every extent possible, why the trade is correct and why it must come back.
Keep things in perspective and don't get all heady about "which" stock you are trading.
It really doesn't matter which car you drive, just so you get to the party in time.
Likewise it really doesn't matter which stock you make your money on, just so you make
your money.
You can miss the party and explain all day long why that was the best car to buy and
what a deal it was and this and that.
Sure your friends will listen and agree with you. They're your friends for goodness
sake !
The fact is that you missed the party.
It's your decision. Right or Wrong.
You can make the decision, note the details and learn from them over time.
Or you can let fate take control and hope for the best.
You may make it to a party now and then and of course you may miss the best one of the
year.
The responsible party is still YOU making the decisions.
You might as well start learning now, for the next opportunity could be just around the corner.
Can you actually make money in this crazy market ?
You certainly can - if for no other reason than simply letting go of the sinkers and calculating how much you DIDN'T lose by holding on.
Remember, when you are coming back to that break-even point you are NOT making money.
You are simply spending time to regain lost ground.
Ground which you most certainly owned and could have walked away with.
You will NEVER be able to call the high or lows.
But with discipline and study, you can certainly take the majority of the move
between the two.
You will buy on the way up, after the low has been identified and sell on the way down,
after the high has been identified.
Oh yes, somebody asked where we see a meaningful support level for the DOW index.
We would put that at 9300.
Don't forget ...
A "long term investor" is a trader that doesn't know when to sell !
Be Disciplined, Be Confident
and Best of Trading to all of you !!