Monday I started talking about the intuitive side of trading. I know: It's shocking to hear this from a puritan trader like myself. The headlines should read: "Gary lets loose!"
Not so fast. So far, I haven't done a thing differently. However, like former
, I have "lust in my heart!"
As background, then, let me tell you about two strange things that I've always sensed -- but never tested -- about my trading:
Strange thing No. 1: 90% of my trades are profitable at some point. Yeah, I know, pretty wild. But I think it's true, although probably not that unusual. I mean if your entry point is even reasonably close to being correct, then you should have a profitable trade from the get-go. Again, though, this is just a gut feeling. I have absolutely zero numbers to back this up.
Regardless, this "finding" is academic without ...
Strange thing (really strange thing?) No. 2: I can look at the quote on the screen, and "feel" when it's time to sell. Oh, I know, this is something straight out of the "X-Files." "
, come quick, there's some nut case who thinks the bid/ask numbers are speaking to him!"
Ironically, though, I am dead certain many of you have experienced this same phenomenon in some aspect of your life. As an example, I received this email from reader
a few weeks ago.
Dear Gary, I have a slow, 28K connection, so when pages are slow to load, I play solitaire in another window. Ever notice how you can have an inkling whether a new hand is going to work out to be a winner or not? My 11-year-old son does, and calls for a new hand over and over until he has at least one ace up to start. I hate having queens up at the beginning -- they always end up as dead ends and don't lead to good further plays. So what, you may ask? Well here's the "what." In a recent book,
(I can't remember the author), about the development of fusion and fission bombs, there is a story about a physicist in the early '50s who was working on the H-bomb program, developed a brain tumor and had surgery. Then, convalescing at home, he began to play solitaire and noticed that initial conditions had a profound effect on outcome. This same concept makes me wonder about trading and TA. Here I am, an average guy looking at what's good and bad, what's breaking out from congestion on good volume, but there is a universe aligning around me -- the aces are up -- market volume and prices may be up everywhere, or maybe a queen is showing on the initial deal -- unemployment numbers have just gone down. Am I being too simple-minded, or do you get an idea of what I'm talking about?
Does Kevin's experience sound familiar? Okay, maybe it's not about cards or nuclear fission, but almost everyone has some experience where they feel the "force." Still with me,
? Good, then mull over these trades:
The CSCO Breakout
A few weeks ago, I noticed
moving sideways for almost three months on decreasing volume, and figured if it could break 120, it could run all the way to 145.
Sure enough, CSCO opened up strong on May 13, spurted past the 120 bar, with my fill being 120 1/4. One thing I always do, of course, is to immediately put in both my stop and limit targets to avoid any second-guessing further down the line. In this case, my stop was 118 1/2 (just under support), with my target being the aforementioned 145.
For whatever reason, though, I was watching the real-time quotes of CSCO go by, and a few hours later saw the stock hit 122 and pause for a few seconds. It was at that exact price, I said to myself, "Forget about the target, Gary. Just grab the few points and go." In fact, I even wrote down "122" in my notebook.
But, you know, I'm a method man, so I did nothing. "Stick to what you know," I said. Plus, I figured there was just no way CSCO would actually hit my stop that day or any day in the near future. The breakout was just too solid for the stock to collapse. By the end of day, though, I
stopped out on CSCO, getting filled at 118 1/2.
Gut override cost: 3.5 points.
GBS Classic I: UNPH
came up on my scan on May 12 as a terrific-looking chart. Sure it was pricey, so to compensate, I only went in with a 1/2 position.
I got a nice fill that morning at 141 1/2, and the stock immediately spurted up to 148. I only needed a bit more of a push for UNPH to hit my target, so I did nothing. A bit later I came back to it, and UNPH had fallen apart, gathered itself, and was back at 146. Just as with CSCO, I thought, "146 is the number -- grab it!" But, no, I again did nothing. Today, UNPH is trading at 134.
Gut override cost (so far): 12 points.
GBS Classic II: INSS
Like UNPH above,
International Network Services
had a perfect chart.
With a fill of 44 1/16 on May 12, I needed slightly better than 46 to hit my target. By midday on May 12, INSS was up nicely to 45. Yes, it was only a point up, but something bothered me about the action, and I knew 45 was the price to take my profits. You know the rest: I was stopped out Monday morning at 41 3/8.
Gut override cost: 3 5/8 points.
I have a few other examples, but you get the point. All told from the past few days, I've cost myself nearly 20 points by sticking to my method and not going by my gut. In fact, my method hasn't beaten my gut yet!
So, it's been a costly run lately. So costly, in fact, I'm tempted to jump to conclusions, and completely abandon my method.
But that's not what I'm going to do because there are a few things to think about and a few more pieces of this puzzle to be completed.
First, I have about six or seven pieces of data so far. Compared to the years of data I have trading the GBS method, that's a nit. It's nothing, really, and realistically could be luck more than anything else.
Second, I just happened to mentally take some profits off the table before the market got crushed on Friday and early on Monday. Again, maybe it was just luck that I was looking at the quote screen when the market was about to slide.
Third, how do I differentiate between gut feel and panic? How do I know when the market is churning down that I'm not jumping out only moments before the bottom, only to see every one of my positions turn to the upside?
Finally, as I alluded to earlier, I've always been a big advocate of nonemotional trading, and the reason is simple: To rely on gut feelings to almost any extent is usually a recipe for disaster. I mean, what if I started eyeballing exit points and was wrong 10 times in a row? Then what? Back to my old method, or figure I'm going to be right the next 20 times in a row?
Given all this, the only logical solution is to subject my ESP to the same rigorous tests I subject any other change I'm mulling over. I can't back-test this kind of stuff, but I sure can test it real-time. Yes, it might take some time to gather a sufficient amount of information, but if I'm on to something, it will definitely be a worthwhile effort.
But, it might turn out to be nothing. In fact, it'll probably be nothing. Yeah, a big zero, and something I'll write off to a "GBS Goes Wacko" stage. Trust me, it wouldn't be the first time.
Regardless, though, it'll be a fun exercise to go through. And, who knows, maybe even profitable.
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication he had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Technician's Take, appears every Monday. Smith also writes Charted Territory, which appears every Wednesday, and TSC Technical Forum, which runs Saturdays and Sundays. While he cannot provide investment advice or recommendations, he welcomes your feedback at