Amazing what a mid-afternoon shot of quality bourbon can do for your sense of humor.
We’re going to press on today with our series on becoming a full time stock and options trader. As you recall, this is only an overview; we hope shortly to be able to offer you something more systematic and exhaustive in the Normandy mode.
That said, we began our discussion some two months back with a look at ‘trading signals’ and ‘cash management’, two of the three foundations of the trading game. The first we examined in our letter called Short Sellers Disappeared? Time to Short and the second in Kissing Apples. Feel free to go back for a refresher, or even a first look if you haven’t already done so.
Today, we move on to our third and last pillar of the independent trading ‘infrastructure’, trading psychology, a subject that requires a great deal of fleshing out, but whose main principles we’re going to outline in brief today.
Let’s be clear about what psychology is not.
Though many might argue otherwise, there is no ‘trading psychology’ as such. That is, there’s no one out there, who, by dint of birth or education or training, possesses a mindset native to success in the trading profession.
Rather, there may exist a certain set of behaviors or ‘habits’, that could be considered advantageous to trading performance, all of which can be learned either via trading itself or by way of another discipline that demands excellence and to which one must apply oneself wholeheartedly.
Concretize that, Matty
Any athletic endeavor, for instance, that one is dedicated to, will certainly inculcate in the doer a set of traits or habits that are transferable to the trading regime. That includes – but isn’t limited to – perseverance, an ability to deal coolly and effectively with both losses and wins (either of which can prove destructive, if not mastered), a penchant for self-analysis, a ‘play’ mentality rather than a ‘win/lose’ one, a sense of discipline and rigor, and a strong sense of curiosity and imagination.
These are traits that might be garnered via a great many fields of endeavor, including education, music, acting, etc., and shouldn’t be thought exclusive to the athletic field.
The most important thing is that one sticks to one’s knitting and learns from his mistakes.
Or, more to the point:
Weak psychology will convince you to ignore your stops, trade against your established signals, double down on bets that should have been left as is, and commit either too much or too little to a trade, in direct opposition to those same, rigorous cash management standards you set in advance.
And that’s not good.
Because there are bound to be mistakes.
And by letting yourself succumb to mental errors and breakdowns in discipline, you’ll only compound the misery.
So if you’re an individual who has trouble sticking to the script, who regularly fails himself and doubts or flaunts the parameters he knows he should adhere to, then life as an independent trader is probably not for you.
If, on the other hand, you’re generally confident and want always to be better, and aren’t afraid of a setback every so often – if failure actually challenges you to be better – then you could well be a great trader.
And one more thing.
Please don’t sign on if you’re looking for a life of excitement and thrills, a kettle-drum 160 pulse rate alternating with Jacuzzis and Swedish massage. There may be a time for all those things, to be sure. And if you make enough money, you can do precisely as you wish.
But if you’re doing it right, the practice of trading is actually a lot more like knitting (as mentioned above) than anything else – and about as exciting.
Read your signals, place your trade, read your signals, read your signals, read your signals, read your signals, read your signals, read your signals, close your trade, read your signals, start again…
This Week’s Trade
We’re moving now from the theoretical back to the practical, and offering you a trade on the latest Trumpian gallop skyward that seems ever effervescent and packed with energy.
For many the question is ‘how’?
How does a rally continue for this long and with this intensity?
And the simple answer is that we are now in the last stages of a bull market – one that is also the tail end of a bullish supercycle that goes back to either 1980 or 1929, depending upon how sharp your knife is.
And that means the market will be ruled by SENTIMENT above all.
The extraordinary fundamentals that typify the BEGINNINGS of a bull market, when all the accountants and corporate forensic experts show up with their magnifying glasses and clipboards, are now a thing of the past. How folks are FEELING, and whether they ponied up on the last break above resistance is all that matters these days. And before long, even that won’t make a difference. Buying decisions will be based upon whether the cork of the Dom Perignon struck the ceiling or not.
Have a look here –
This is Goldman Sachs’ proprietary Sentiment Indicator, a tool that’s meant to signal downside risk when it rises above 90.
For the last ten weeks it’s been flashing ‘RISK’, yet the rally rides high…
So much for that!
The shorts are getting called in!
Another item: those who trade short for a living or who’ve held longstanding short positions are now getting the wham-doggy gloria.
It’s not the time to fight the tape, friends. And we have no immediate plans to do so.
In fact, we’re taking the opposite tack. One of the biggest shorts on the New York Stock Exchange is Fitbit Inc. (NYSE:FIT), a company plagued with lawsuits whose stock has been lubricated and bunjee-jumped for the last eighteen months.
That said, we see technical evidence that a turnaround is in the making, and we note, too, that last week’s earnings report and guidance were dismal, with the company missing all the Street’s expectations – yet FIT managed to climb some 3% in the following session!
That’s a sign of the times, friends.
ALL NEWS IS GOOD NEWS.
Now take a look –
It’s our contention that FIT shares will spike on the stock’s RSI and MACD indicators surfacing above their respective waterlines (in green). The long, positive divergence on the chart is also a sign that a solid bottom is in place.
The pain appears to be over.- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
The stock currently trades for $6.25.
Many happy returns,