Stock Exchange: Are You Trying To Win Every Trade?

The Stock Exchange is all about trading. Each week we do the following:

  • Discuss an important issue for traders;
  • Highlight several technical trading methods, including current ideas;
  • Feature advice from top traders and writers; and,
  • Provide a few (minority) reactions from fundamental analysts.

We also have some fun. We welcome comments, links, and ideas to help us improve this resource for traders. If you have some ideas, please join in!

Review

Our previous Stock Exchange considered a couple of the biggest causes of trading failure (hint: position sizing and psychology). If you missed it, a glance at your news will show that the key points remain relevant.

This Week – Are You Trying To Win Every Trade?

This week we build on last week’s theme by offering another cause of trading failure: perfectionism. Trying to win every trade is not only unrealistic, but it’ll drive you crazy. According to Dr. Brett Steenbarger:

“There is nothing constructive about perfectionism. It’s self-abusive; it doesn’t move us forward. It’s a dumping of anger, not an effort to learn from mistakes.”

In reality, you don’t need to win every trade. You don’t even need to win more than 50% of your trades, as long as your net gains are strong compared to net losses. This means having a process in place to deal with your losing trades. According to Irrational Investors:

“A strong investment process is easy to describe, challenging to implement, and rewarding when done well.”

For example, it’s easy to describe a process for dealing with losing trades, challenging to actually stick to that process, but it’s ultimately rewarding in the sense that it will help you achieve strong net gains, and it’ll help you avoid the psychological pitfalls of striving for perfection.

For reference, Nial Fuller explains why you need to learn to lose properly to win at trading. His article is targeted towards forex trading, but the lessons are applicable to a wide range of traders. According to Nial:

“Losing truly is part of winning, especially in trading. If you want to become a complete trader who truly knows how to trade properly, you must learn how to lose properly in addition to actually learning how to trade.”

All of the expert picks from our models are implemented with clear exit methods and risk controls in place, and a high-level description of those methods and controls is included in the table near the end of this report.

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark D. Hines). Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Holmes: This week I bought Helmerich & Payne (HP). This stock’s dip over the last month is the sort of set up I like to see. From the chart below you can see it is well below its 50-day and 200-day moving averages. However, it has attractive upside over the next six weeks.

Blue Harbinger: Attractive upside? This company drills oil and gas wells for other companies, and business has not been good. Helmerich & Payne’s net income has been negative for the last five quarters.

Holmes: I’m not thinking in terms of quarters. I’m typically in and out of my trades in about six weeks, and Helmerich & Payne isn’t expected to announce quarterly earnings again until November.

BH: So then what exactly is it that you do like about this company?

Holmes: My style is based on dip buying and mean reversion, and this stock is setting up nicely for a rebound in the coming weeks.

BH: And if the stock continues to move lower? Then what will you do?

Holmes: I have a disciplined sell-process in place. I’ll exit when my price target is achieved, and if the price moves against me then my stops will kick in. I don’t have to win all of my trades, I just want the net gains on my winners to be strong.

BH: Interesting Holmes. How about you RoadRunner? What do you have for us this week, and do you also have a process that focusses on net gains?

RoadRunner: This week I purchased Electronic Arts (EA). And yes of course I have a process in place. I essentially use “time” as my exit method and risk control.

BH: Is there a particular reason you bought Electronic Arts? Because I seem to recall you bought Electronic Arts back on August 4th as well.

RR: I look for stocks that are at the bottom of a rising trading channel and if you look at the chart below you can see why I like Electronic Arts. It’s been in a steady rising channel since before July and has just pulled back in the channel to $118.75. I expect the price of EA to rise back to the top of the channel, but it will only hold that position for so long.

BH: Well, you’ve told me in the past that you hold your positions for four weeks, and if you held EA for four weeks after you bought it back during the first week of August then you probably did pretty well for yourself.

RR: I don’t like to brag. But yes. And if you notice, the shares have pulled back again, and I’ve initiated a new position. And since we’re talking about my previous picks, did you notice my RH (RH) pick from two weeks ago?

BH: Nice job on RH, RoadRunner!

RR: Thanks.

BH: And as long as EA keeps churning out new releases of its highly sought-after video games (e.g. Madden, NBA Live), I suspect it’ll continue to be just fine. How about you Felix, what have you got this week?

Felix: I don’t have any specific picks for you this week. But for your reference, here is my list of rankings. And just so you know, my average holding period of 66-weeks is quite a bit longer than the rest of the group.

BH: Thanks Felix. Oscar, what have you got?

Oscar: Here is my list (below), and this week SOXX looks interesting.

BH: Thanks for the list, and I agree SOXX is interesting. This is the iShares semiconductor ETF, and I really like a lot of the specific semiconductor names held within this strategy. I suspect there will be a ton of volatility, but over the long-term, as the uses of semiconductors continue to grow (e.g. more semiconductors in smart phones, smart cars and even in datacenters) this fund will be a winner.

Oscar: I don’t like to hold things for the “long-term.” My process is to invest in attractive sectors based on momentum, and I’m usually in and out in about six-weeks. And when you say you like a lot of the specific semiconductor names, that just seems too risky to me. That’s why I go with the ETF basket of stocks—less risk. And just so you know, I also manage risks by using stops to limit my losses. I know I cannot win all of these trades, so I try to minimize my losses so my overall net gains remain strong.

Conclusion

Trying to win 100% of your trades is not realistic. And worse, pursuing this goal can cause a lot of unnecessary frustration that can detract from (and even prevent) your overall success. Rather than trying to win on every trade, investors that have a process in place to minimize losses are often more successful. Because at the end of the day, it’s not your winning percentage that matters, it’s your net gains.

Stock Exchange Character Guide

Background on the Stock Exchange

Each week, Felix and Oscar host a poker game for some of their friends. Since they are all traders, they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out http://dashofinsight.com/background-stock-exchange/  for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am usually the only human present and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Getting Updates

We have a (free) service for subscribers of our Felix/Oscar update list. You can suggest three favorite stocks and sectors. Sign up with email to “etf at newarc dot com”. We keep a running list of all securities our readers recommend. The “favorite fifteen” are top ranking positions according to each respective model. Within that list, green is a “buy,” yellow a “hold,” and red a “sell.” Suggestions and comments are welcome. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

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