Last Friday, I traveled to Scottsdale, Ariz., with my brother to watch a few baseball games before spring training ended (and before my emotional stake in the games grows). When I got back, I found emotional overflow: I was surprised to see how full my email box was -- with the biggest concentration of hate mail I've ever received, both in volume and intensity.

The genesis of these love letters was my writing on Generex Biotechnology ( GNBT) last Wednesday and Friday. Both columns were follow-ups on a March 10 column noting Generex's impending breakout. As I responded to those emails, I started thinking about the major lesson to be learned from this situation.

In every transaction, there is a buyer and a seller. The buyer believes the stock is moving higher. The seller believes the stock is moving lower. Only one will be right. But here is where it gets interesting: Most amateur traders are more than willing to credit themselves when they are on the right side of the trade. They revel in their trading skill and prowess. The same behavior is not true for losing trades. Many traders look for external reasons to explain their losses. Here are some common excuses for losses:
  • "I didn't get a good fill." So what? Move on.
  • "My broker convinced me to make the investment." Did he talk you into your profitable ones, too, or only the losers?
  • "My data feed isn't fast enough." You're reaching, unless you are using 20-minute delayed quotes for daytrading, in which case you really need to upgrade or you'll suffer more painful losses.
  • "The market is rigged." If you really feel that way, why are you participating in a fraud? That doesn't make you a trader with a loss, it makes you a loser.
  • "That lousy article that caused the selloff was put out by somebody who wants to buy the stock cheaper." Highly unlikely; but if you believe it, then buy more on the decline and capitalize on the opportunity.
  • "That lousy article that caused the selloff was written by an idiot." Great, buy more!

The last two excuses encapsulate much of my recent fan mail. I understand this reaction from the painful experiences I endured during my early years of trading. But the real lesson transcends the recent price action in Generex.

If you are in a position that is moving against you, be very sensitive to your first reaction. Your first reaction will reveal your commitment to the position. Are you licking your chops because you have an opportunity to buy more on the cheap? That's Jim Cramer's approach; his style is to capitalize on overreactions or misinformation to buy stock on the cheap. If you believe in the fundamentals of the underlying company, then walk your talk and buy more. But if the pullback really fills you with doubt or despair, you probably are involved for reasons other than underlying fundamentals.

In that case, focus on discovering your real reason for being in the trade. Are you trading momentum? If so, then bail when the momentum stalls. Are you trading out of boredom? If so, close the position and get a life. Are you in the position because of a tip? You've probably been set up for a loss.

The bottom line is, the more intense your emotion on a trade gone bad, the less conviction you probably have in the trade. Step back and do some soul searching. Once you figure out your specific underlying reason for the trade, you'll know what to do.

Let's look at some charts.

24/7 Real Media ( TFSM) once again is testing the $10 level. Until this level is broken, the stock remains in congestion. However, notice that volume bars on advancing weeks tend to be higher than for declining weeks. The buyers are more aggressive than the sellers. If you're long, let the reason for your involvement dictate your stop, because the price would have to drop below $8 before the uptrend would be in doubt.

Fluor ( FLR) has been consolidating some impressive gains for quite a while. But the uptrend is intact, so the presumption is in favor of a continuation of the uptrend. I've highlighted what I suspect is a washout of profit-taking. Notice how the stock dipped clear down to the mid-$70s on more than two times average volume a few weeks ago? The stock has been pretty strong since then, indicating decreased intensity of selling pressure. If you're long, consider keeping a very loose stop on this stock.

Atheros Communications ( ATHR) continues to move higher, but money flow -- a comparison of buying vs. selling pressure -- is revealing a significant reduction in buying pressure. At the same time, the on-balance-volume indicator is pulling back. That's indicative of distribution. Do these warning signs amount to a sell signal? Nope. Plenty of stocks will show weakness in their secondary indicators during consolidation. But these yellow flags should certainly get your attention. I'd stay long unless the stock pulls back below $22.50. And I'd be a buyer on any breakout above $25.

Beazer Homes ( BZH) continues to stairstep higher. As long as this channel remains intact, this homebuilder is still a buy at support and a sell at resistance. I'd like to get a better entry on a pullback closer to support, and some intraday volatility might present that opportunity. And if you're already long, watch the $60 level as key support.

aQuantive ( AQNT) broke support last month when the stock fell back beneath $25. But it's too early to tell whether this is a top or simply consolidation. The next logical support level is clear down at $20, more than 10% below Friday's price. If you are a believer, consider waiting for the stock to test $20 before buying.

Be careful out there.


Please note that due to factors including low market capitalization and/or insufficient public float, we consider Generex Biotechnology and 24/7 Real Media to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Fitzpatrick was long 24/7 Real Media, though positions may change at any time.

Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. 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; click here to send him an email.

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