This column was originally published on RealMoney on Oct. 26 at 11:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Have you ever noticed the high number of acronyms for ailments, disorders and afflictions? It's as if someone spilled a bowl of Campbell's alphabet soup over our collective medical records. You might have GERD (gastroesophageal reflux disease) or ADHD (attention deficit hyperactivity disorder). The list goes on and on. There is one little known disorder that afflicts many traders: EHTD.
Emotional hyperactive trading disorder is a silent killer that is known only to the trader and his broker. The symptoms are as follows:
- Extremely short holding periods for virtually all positions.
- An almost simultaneous opening of new positions with the closing of existing ones.
- Unusually high trading commissions relative to the size of the trading account.
- Rapid fluctuations between bullish and bearish bias resulting from minor oscillations in price and the prevailing mood of the trader.
- Frequent bouts of memory loss when trying to recall the rationale for buying a particular stock.
These are the basic symptoms of EHTD, though there are many variations of the disorder. If you suspect that you might have this devastating illness, try performing the following three-step self-diagnosis:
Review your last three months of account statements, noting the date each stock was bought and sold. Now, analyze the chart for each stock, taking note of the conditions at the time of purchase and of sale.
Determine whether you had a specific reason for buying the stock that would compel you to make a similar purchase if the same conditions existed today. Do an identical analysis for the sale -- would you make a similar sale if the same conditions existed today?
For each trade, examine the price action on the chart between the time of sale and today. Would you now be better off had you refrained from selling the stock?
After you've performed this exam, look for a pattern. An occasional impulsive trade, while undesirable, is no cause for alarm. However, a persistent pattern of unsupportable trades and premature sales confirms a case of EHTD.
Treating this disorder is fairly easy. Perform steps 1 and 2 in a proactive manner, ensuring that the trade is being made because of external market conditions rather than your internal emotional state. If those two steps are followed consistently, you'll find that step 3 becomes a moot point.
Let's get to readers' picks.
I've zoomed out on this weekly chart to illustrate the usefulness of Bollinger Bands. Notice how
was supported by the middle Bollinger Band on the way up from 2003 through 2004. During 2005, the stock oscillated between the upper and lower bands in a fairly tight range. Now, it is moving lower in a stairstep pattern between the lower and middle bands.
So how will we know when it's really time to buy? When the stock starts pushing above the middle band and refuses to tag the lower band. Until that happens, I'd sell it on any rallies.
has been in the news quite a bit lately, and the news has all been good. The stock moved above the $70 level on heavier than average volume last month. Since then, there has been enough buying interest at $70 to support any pullback.
I've drawn circles around the two longest
price-by-volume bars. Those indicate the levels with the most emotional and financial commitment, so if the stock falls below $70, I wouldn't expect much support until it hits $60. If you're long (or are buying stock at this level), try putting a stop just beneath $70. I think the stock will move higher from here, but a prudent stop-loss mitigates the loss if I'm wrong.
has been trending higher for the past several months after stepping along the 50-day moving average during May and June. The uptrend had been stalled at $56 for the past month, but Wednesday's breakout really clears the way for higher prices. If you're long, try keeping a stop beneath the middle Bollinger band. If this breakout is for real, UST shouldn't trigger that stop.
Martha Stewart Living
is on a new breakout above $20 after a couple of prior failures at that level. This weekly chart gives the impression that the move has just started, but the stock has advanced almost 25% in just two weeks, so it's due for a rest.
I'd try to be patient and wait for a pullback to test $20, but if you're already long, consider protecting your profit with a stop just below the breakout level.
has had a nice run since June, but the uptrend appears to be in trouble. A lower high in October followed by a pullback to the prior low makes a reversal a real possibility. If you're long this video-game stock, try putting a stop just below support. If the stock falls any lower, my bet is that a decline to $48 would be a real possibility.
I'm not exactly sure why the stock has come under pressure, but it could be due to some of the problems relating to the latest version of the
video game. I'll keep you posted on any further developments.
Be careful out there.
At the time of publication, Fitzpatrick held none of the stocks 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., and contributes to
. 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;
to send him an email.