This column was originally published on RealMoney on April 5 at 11:03 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
If you've been in the trading business for a while, you understand how difficult it is to beat the market consistently, to have a track record right now that shows greater returns than the market over a multiyear period.
Many traders will outperform the market in a given year, or at least for a quarter or two. But then the market environment changes and returns suffer. Not only is the trader not outperforming the market, profits made during easier times are lost. Over time, many a trader comes to realize that his time would have been better spent simply buying an index-tracking ETF like the
and working harder at an easier profession.
There's the rub: Trading is the best business in the world, but also the toughest. If you stick it out through the learning curve, you'll develop a style and methodology that work for you. But you must devote yourself to the learning process. Away from the computer monitors, high-speed Internet connection, real-time data feed and sophisticated trading platform, the most important tool of trading is ... you! If you can become adept at using this essential tool, your gains will improve dramatically.
Treat trading as a business. It's not just something you do in your spare time -- you're using real money here, folks. You wouldn't dream of opening a new business and expecting to stomp the competition during the first year. Heck, you're typically happy to just survive during the start-up process.
You also don't take big risks in a new business, because you don't have the financial foundation to keep the business going if you suffer big losses. Your approach to trading should be the same way. Take baby steps; don't swing for the fences. It's silly to believe that you'll make 25% to 50% in a year, especially in your early years. It might happen, but it's rare.
Instead, take your time and learn the business, including how to tame your emotions and control your risk. Manage just a few positions and gradually expand your comfort level with a greater number of stocks.
For example, I am not a diversified trader. It's rare that I'll have more than 10 positions at one time. I'd rather scale into positions that are working and trade out of positions that aren't. I'll never hold a losing position more than three days. That's my rule. If I'm still upside down in a position after three days, I'm not early, I'm hoping. I'll typically have hard stops in place. However, some stocks are so volatile that stops can be hit on intraday swings. That's frustrating. So I'll control risk on volatility by taking a small initial position and adding to it only when the trend is clearer.
These are some of the trading habits that work for me. They may not work for you, but you get the idea of what you're trying to do: Learn how to use your most important tool. One sign that you have more work to do is that you can't articulate your trading approach. If you can't do that, you're going to have a tough time running your business. And again, this is a business, one with rewards worth working for.
Let's look at the charts.
closed above $400 for the first time in two months on heavier than average volume. But the bulls have some more work to do. This is still an anaconda to trade, and the swings are big. I'd be a buyer at this level but would keep a fairly tight stop.
has been trending steadily higher since the March low. Last week's high tagged the upper Bollinger Band. The last time SanDisk went that high in the trading channel was clear back in early January, deep into a mature uptrend. Now, the stock is near the bottom of a significant decline. I'm looking for this stock to start moving higher into earnings, which are due on April 20 after the close.
looks like it's just resting after an impressive advance -- try 400% in 18 months. Mild pullbacks on declining volume tend to imply profit-taking and subsiding interest rather than broad-based selling. I'd be a buyer on a breakout above $50 and would keep a fairly loose stop in the low $40s.
traded in a very wide range but closed back in the middle of that range. This mediocre close implies additional work to be done at this level. After a convincing rally from almost $45, the bulls just didn't have enough power to close the stock near the intraday high. Therefore, I'd wait for a move above Tuesday's high before being convinced that the downtrend is near an end. If you're long, consider a stop right around $47.50 or so. If the stock falls back below Tuesday's open, I'd say the bears had regained control.
has been in a series of higher highs since the June low. At the same time, the bulls have managed to push the stock to a new 52-week high. This is a weekly chart, so Tuesday's volume bar appears a bit low compared with last week's. But we still have three trading days in the week. I'm pretty sure that volume will wind up at a much higher than average level. This is buyable now, with a loose stop back in congestion.
Be careful out there.
At the time of publication, Fitzpatrick was long SanDisk, 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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