This column was originally published on RealMoney on Aug. 9 at 11:20 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Are great traders born that way, or are they using skills that can be taught? From what I have seen over the years, the skills can be taught to just about anyone who has a burning desire to learn. There are a lot of teachers out there producing books, Web sites, seminars and television and radio programs. While they may all have merit, few seem to teach the most important things.
So what does it take to become a good trader? First, you need a trading plan based on more than gut instinct. How do you react when your hot trading method is going through a cold spell? If you are using a rigid system for trading, you assess whether or not the current market conditions are negating the edge provided by your system. The same holds true for those who look for specific price patterns -- if pattern trading isn't working, perhaps pattern trading is simply not compatible with current market conditions. If you rely solely on instincts, you really have no underlying basis for making adjustments.
Most traders mired in a cold streak aren't quite sure how to alter their trading plan because they never had one to begin with. Only if you can articulate your plan is it really a plan.
Second, the plan must be shown to work by either back-testing or extensive practical experience. And if the plan is based on practical experience, make sure that experience is based on reality rather than a desired result. To be a good trader, you need a good plan.
Finally, good traders have the discipline to stick with their plan. The most accurate map on Earth won't help you reach your destination if you throw it out the window as soon as you start your car. If the plan is worth developing, it's certainly worth following.
Try applying this three-part checklist to your own trading.
Do you have a proven trading plan that you use consistently and without deviation? If so, then you are on your way to successful trading. If not, you'd better be one heck of a natural-born trader.
Let's look at some reader picks.
The recent breakdown in
is exactly what the bears have been waiting for. Over the past couple of years, Hansen has been a real bear killer as it has advanced on the back of a prolonged short squeeze. But with growth now slowing just a bit, the momentum has hit a brick wall.
If you've been riding this uptrend and are still holding in the hope of seeing another high, I'd suggest rethinking that strategy. Hope is not a viable trading method. An old Wall Street adage remains valid: "Your first loss is your best loss."
Put another way, while it might smart a bit to sell right now, your decision will look a lot better soon -- when the price is lower.
A reader notes that
might be putting in a top. Only time will tell, but I think it's premature to get bearish. We can see a prolonged consolidation over the past few months. However, look at how tough the bulls had it during most of 2005 -- the stock really pulled back from a high early in the year before finding support at $50. The recent thrust above $100 effectively vindicates those who bought on weakness. I'd still be biased in favor of a continuation of the uptrend, but I'd keep a stop just below the recent low.
Is the current decline on the weekly chart of
a post-earnings swoon or the beginning of the end for the bulls? I've circled the last several tags of the middle Bollinger Band (the 20-week moving average). You'll notice that each tag has led to higher prices. Perhaps this time will be different, but why bet against the trend?
I'd look at this pullback as a low-risk buying opportunity, with a stop about $2 lower.
shows a pattern that I've seen on more than one occasion: a gradual pullback that gives every indication of a stock that's rolling over into a new downtrend. But rather than following through, the stock accelerates to a new high. This type of breakout is the opposite of the "volatility squeezes" I often feature.
Volatility typically cycles from higher to low to higher again. When a stock is moving higher after a period of low volatility, it has a tendency to run quite a ways. However, this "breakout" to a new high is at the tail end of a 20% run. If you like Walgreen, consider waiting for the stock to fall back below $48 (when those who currently hold the stock will be taking profits) before buying.
I heard from a reader who really likes the fundamentals of
RR Donnelley & Sons
. He wanted to know whether Donnelley was at a good buy point. As I see the action, it hasn't yet broken above the longer-term resistance created by supply at ever-declining levels. The stock has run almost 15% over the past week and a half. That makes it ripe for profit-taking. The best entry -- from a perspective of risk versus reward -- is on the next pullback. Look for a higher low as the buy signal. You can then put a stop below the current low. Your stop will only get hit if this long sideways movement has been one big topping pattern.
Be careful out there.
At the time of publication, Fitzpatrick held none of the issues mentioned, though positions may change at any time.
Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
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