This column was originally published on RealMoney on April 19 at 11:06 a.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
Before I take a look at some reader-requested charts --
-- I want to talk about the "learning loop."
Wednesday I was reading a book that I had heard good things about,
Enhancing Trader Performance
by Brett Steenbarger. He was describing what he calls the learning loop of performance, feedback and learning. In this continual loop, a trader implements what he knows in his trading decisions, gets feedback in the form of the success or failure of those decisions and then incorporates what he has learned from that feedback into his next trade.
It's a pretty basic idea that certainly isn't unique to the trading business: Athletes, salespeople and politicians are just a few of the groups that study past performance to identify ways to succeed in the future. So if the learning loop is a widely used method for getting better results from your efforts, why do so many traders continue to struggle with the same mistakes trade after trade, month after month, until they have no more money left?
I believe it's because the overwhelming majority of losing traders don't learn from their mistakes. Instead, they focus on learning from what they did
. But that's not consistent with the learning loop principle.
It's fine to do everything we can to reproduce the last good trade. Here's the goal: "Buy right near support, be patient and let the position work for you, then sell right near the top, just before the position reverses." Now, if you can just do that over and over, you'll be fine.
But that's easier said than done. There are many pitfalls along the way to superior performance, and the way to get around them is to recognize them. Focus on your
trades. Learn from your mistakes so you can avoid making them again. Sooner or later, you'll have spotted -- and eliminated -- most of the mistakes you'll make as a trader. That leaves more of the good stuff. Pretty soon, by process of elimination, you'll have nothing but good habits.
Now to get to those reader requests.
This monthly chart provides a good perspective for where Pfizer really is in the cycle. After falling through a series of lower highs and lower lows, the stock bottomed in late 2005 and has been repairing some of the damage in a series of higher highs and higher lows. But the stock is now back up to test the downtrending resistance line. While the short-term pattern looks pretty bullish, I'd wait for the stock to prove itself before buying. Note also the double bottom in the moving average convergence/divergence.
In less than a month, Lundin has run about 30% since breaking out of a prolonged downtrend. After the stock peaked at $13.50, it looked as if the fun was over. However, that's not the case and Lundin is back to test the prior high. I'd be a buyer only if the stock closed above resistance. And I'd keep a very close eye on volume. While it's still relatively high, the trend has been down. So the most convincing breakout would be accompanied by heavy volume.
Cognizant has pulled back to test this well-defined support trend line once again, presenting the latest opportunity to buy. The relative strength index is also back to the lower part of the range. If I was a buyer on this pullback, I'd try keeping a stop just below last week's low.
I can see why a reader wrote to me about Compuware; there's not a lot to go on here. The stock is at the top of the channel, which usually favors selling into strength rather than buying. There's nothing wrong with this uptrend, but I'd be a lot more comfortable buying it if it pulled back to support. Otherwise, the stock could fall about 7% before even testing support. That's a bit too much room on a new trade.
Utility company Progress Energy yields about 4.5% and is in a steady uptrend. However, the stock could also pull back as much about 4% before testing support. The stock is a slow mover anyway, so there's no real rush to buy now. I'd wait for a pullback deeper into the channel before buying.
Be careful out there.
At the time of publication, Fitzpatrick had no positions in any of the stocks mentioned in this column, though positions may change at any time.
Dan Fitzpatrick is the publisher of
, an advisory newsletter and educational forum dedicated to teaching effective risk management and trading methodologies to aspiring traders and investors. He is a former hedge fund manager and a member of the Market Technicians Association, and he now trades from his home in San Diego, Calif. While Fitzpatrick holds various securities licenses, he does not give recommendations to buy or sell stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He appreciates your feedback;
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