The markets have had everyone confused for many months now with all the bad news and volatility. Just when everyone expects there to be a strong move down because of all the bad news in the financial sector, somehow, the resiliency of the market comes through and proves the majority wrong with a strong move to the upside instead. These moves sometimes end up scaring the weak shorts out of their trades and they end up just getting whipsawed in and out.
These strong moves up, like Friday, could be just bear market rallies but nevertheless, if you are caught short during one of these rallies, you end up losing money on a day when the market goes higher. Nobody likes to lose money but when you lose it when the market is going up, it is the worst possible scenario that could happen.
A Post on our Board from Friday
Here is something I posted to the StockTradersHQ.com message board on Friday about being caught short on a big up day. In case anyone missed it, I think it warrants repeating.
“One thing that I have always hated to do is lose money when the market has a big up day like today. I can accept losing money if I am long and the market goes down but if the market goes up, I can't stand to lose money by having short positions on. This is probably the biggest reason I don't short much. We never know when a short covering rally or a technical bounce in a downtrend will happen and if you get caught short, you lose money on an up day and for me, that is unacceptable”.
Why is that post important?
It is important because I want people to realize why I don’t fight the trend. Whether that trend is only for a day (trend day) it is still a trend albeit small. You will rarely see me post a day trade short position no matter which way the market is trending for the day. If the market is trending up, I go long (Not short). I never fight the trend and I never try and pick a top to short, no matter how much resistance I see on the chart. Why? Because momentum can at times dwarf all resistance levels and blast through them, overshooting on the upside, taking out the stops of the short sellers. When the market is trending down for the day, I will only short stocks that are also moving down. I will not short the stocks that happen to be moving up that day. Instead, I may get long those stocks that are showing relative strength that day when all other stocks and the market are heading lower. My positions in these stocks going up on a down day will be smaller than normal because even though the stocks are moving up with momentum, they are still moving against the market for that day so those trades are of greater risk.
Personal Preference
Obviously, it doesn’t matter whether the market moves up or down as long as you are on the right side of the market so it shouldn’t matter either way but for me, it’s more of a psychological factor. Since it is a statistical fact proven over time throughout market history that the market spends more time going up than it does going down, the logical position to be in when playing the odds is to be long the market rather than short. For this one reason alone, it is a cardinal sin for any good trader to lose money when the market is going up. For me personally, I can accept losing money, when the market goes down if I happened to own stocks. But it is unacceptable for me to lose money on a day the market is going higher.
Please understand that I’m not against shorting stocks, it is just a personal preference of mine to be on the side of momentum. I want to make it clear to members so that there is no confusion; so for my personal day trading activities, I will always be long on days the market is moving higher. I will sometimes be long the stocks of the day that are moving up even if the market itself moves lower for the day. And I will sometimes be short but only short the weak stocks moving down when the overall market is moving lower that day.
David Colletti
Founder
StockTradersHQ.comThe Headquarters for serious traders
Copyright © 2008 StockTradersHQ.com
Saturday, August 23, 2008
Thursday, August 7, 2008
The Dreaded Price Target
One of the most common requests that we receive both in email and on the message board is for us to supply price targets with our trading alerts. This is a reasonable request since most people want an idea what our objective is when entering a trade.
Although price targets may give some piece of mind to a trader when a position is entered, we believe that these target prices actually do more harm than good. Tonight we will explain this philosophy.
Price targets are irrelevant and to back up our stance, we need to look no further than to those brilliant Wall Street Analysts. Analysts price targets are meaningless and if we trade based on these price targets, we are setting ourselves up for not only losing trades but serious time involved and opportunity costs related to waiting for those targets to be reached if ever they are.
Price targets can often result is a false sense of security about a certain stock. They can also cause a pre-mature selling of a position due to the fact that a price target may have been reached. So what if the price target is reached, does it mean the stock can’t go up further? In my early years in the stock market, I would sell stocks after I reached a certain percentage gain on each trade. It was a good conservative plan, but I never made the huge gains because I never let the winners run long enough to get those big gains. I sold too early. In bull markets, it is essential NOT to sell too early. When you are right on a stock in a bull market, your goal should be to be even “righter”. In flat or sideways markets, things will change; you may have to sell at certain price points but not in Bull markets where there is an identifiable uptrend in the overall market. We are not in a bull market right now but there will be one again at some point and we want you to be prepared for it.
Logical Targets in an illogical Market?
Most if not all price targets set by institutional analysts are set based on fundamentals. Rarely are these targets based on technical analysis of the stock chart. If we at STHQ were going to set a price target for a trade, it would be based solely on the chart and the resistance levels and other technical indicators would also come into play. However, we have found that technical price targets are often just as irrelevant as fundamental price targets. While we may often say that a certain stock we are trading or watching may have resistance at a certain price point, we try to not to label that as a price target. Rather, we prefer to think of this area as a level of interest that we should be watching and re-evaluate our trade as the stock approaches that level.
The reason we do this is simple; if resistance was always stubborn and sent stocks reversing in a downward spiral, then stocks could never advance. We know that resistance is penetrateble so we would much rather evaluate our trade as the stock approaches or reaches this resistance level rather than pre-announce that level as the final objective.
Also, as you know by now, the technical picture of a stock changes every day. A strong technical chart can change quickly with one bad new release and large volume selling. Setting price targets ignores this action. The day-to-day fluctuations and changes that occur in the technical picture cannot be ignored.
There are technicians that use what we call “measured moves” to determine price targets. For example, when there is a wedge pattern on a chart, a breakout of the wedge suggests the move will be the same distance from the bottom to the top of where the wedge pattern started. We have used the measured move target to predict where a stock would go before but this doesn’t mean we are setting that level as a price target to get out of the trade. When people use these targets to get out of trades, this suggests orderliness about the market that just doesn't exist. The market is anything but orderly so planning an exit based on what seems to be a logical price target does not make sense in an illogical market.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Although price targets may give some piece of mind to a trader when a position is entered, we believe that these target prices actually do more harm than good. Tonight we will explain this philosophy.
Price targets are irrelevant and to back up our stance, we need to look no further than to those brilliant Wall Street Analysts. Analysts price targets are meaningless and if we trade based on these price targets, we are setting ourselves up for not only losing trades but serious time involved and opportunity costs related to waiting for those targets to be reached if ever they are.
Price targets can often result is a false sense of security about a certain stock. They can also cause a pre-mature selling of a position due to the fact that a price target may have been reached. So what if the price target is reached, does it mean the stock can’t go up further? In my early years in the stock market, I would sell stocks after I reached a certain percentage gain on each trade. It was a good conservative plan, but I never made the huge gains because I never let the winners run long enough to get those big gains. I sold too early. In bull markets, it is essential NOT to sell too early. When you are right on a stock in a bull market, your goal should be to be even “righter”. In flat or sideways markets, things will change; you may have to sell at certain price points but not in Bull markets where there is an identifiable uptrend in the overall market. We are not in a bull market right now but there will be one again at some point and we want you to be prepared for it.
Logical Targets in an illogical Market?
Most if not all price targets set by institutional analysts are set based on fundamentals. Rarely are these targets based on technical analysis of the stock chart. If we at STHQ were going to set a price target for a trade, it would be based solely on the chart and the resistance levels and other technical indicators would also come into play. However, we have found that technical price targets are often just as irrelevant as fundamental price targets. While we may often say that a certain stock we are trading or watching may have resistance at a certain price point, we try to not to label that as a price target. Rather, we prefer to think of this area as a level of interest that we should be watching and re-evaluate our trade as the stock approaches that level.
The reason we do this is simple; if resistance was always stubborn and sent stocks reversing in a downward spiral, then stocks could never advance. We know that resistance is penetrateble so we would much rather evaluate our trade as the stock approaches or reaches this resistance level rather than pre-announce that level as the final objective.
Also, as you know by now, the technical picture of a stock changes every day. A strong technical chart can change quickly with one bad new release and large volume selling. Setting price targets ignores this action. The day-to-day fluctuations and changes that occur in the technical picture cannot be ignored.
There are technicians that use what we call “measured moves” to determine price targets. For example, when there is a wedge pattern on a chart, a breakout of the wedge suggests the move will be the same distance from the bottom to the top of where the wedge pattern started. We have used the measured move target to predict where a stock would go before but this doesn’t mean we are setting that level as a price target to get out of the trade. When people use these targets to get out of trades, this suggests orderliness about the market that just doesn't exist. The market is anything but orderly so planning an exit based on what seems to be a logical price target does not make sense in an illogical market.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Saturday, August 2, 2008
Some Pitfalls of Short Selling
You know bull markets end just when everybody and their brother decide to enter the stock market. Mania brings in any and all people that think there is a quick buck to be made. Bear markets end the same way, when any and all average investors give up and cash out. Or worse, think they can make money by shorting stocks. It is about the end of the bear market when these average investors finally realize there is a way to profit from falling stock prices but by the time they find out, the downtrend is ending. These people will always lead the charge and flood the market in a bull’s final days and be the last to leave the market or start selling short in the bear’s final days. So, now you know that it will be time to go long in a big way when the public finally gets around to selling short.
Short selling can be very profitable if done at the correct time, but can be very frustrating if entries are not perfectly timed. It is never easy to make money in the stock market and selling first, and buying later (short selling) is probably the most difficult way to succeed in trading. In fact, most traders can study a stock chart that is plummeting for hours, and still enter a short sale exactly at the wrong time.
Tonight we will look at some common pitfalls of the short selling trading strategy. After you review this list, you'll understand why short selling can cause so much mental and financial pain and stress.
1. Volatility
A bear market has tremendous overlap in daily price ranges of stocks and indexes. The daily high and low of a stock in a bear market seem to be more volatile in that of a bull market. These wild intra-day trading ranges can make it difficult to trade and set up trades for the next day. Usually, stocks will trade through a portion of the previous day’s range undermining logical stop placement, and makes good entry prices harder to find.
2. Nowhere
Fast Stock prices don’t go anywhere most of the time in bear markets. Though there is intraday volatility, markets will often end flat. Then out of nowhere, prices decline very quickly and in sudden bursts. This means you need to wait around for a while before you get the big sell off that gives you the big gains. Most people are too impatient to hold short positions for a lengthy period of time.
3. Everyone is at the party
Short selling is a terrible group activity. Many stocks have a high short interest and attract latecomers. These latecomers will be scarred out of their shorts as soon as the stock starts to go up. This will result in frequent short squeezes as the weak shorts bail out for a loss, regardless of how technically bad the chart looks. If you short with the crowd, you become most exposed. Don’t short the same stocks as everyone else.
4. Misguided Entries
So you think you're a wizard when it comes to resistance levels? Not so fast. Here’s why: support-resistance is what most traders are looking at and remember, the market always disappoints the majority. This is why price will often go further than you expect, up and down. You could find yourself shorting into bear rallies that keep on going up, and up and up until you give up and cover your position well above resistance. Stocks overshoot resistance and support more times then we’d liked to admit.
5. Too Late Harry
It's often too late to sell short by the time most people realize they should because the sell off is gathering steam. The smart money that shorted from higher levels are already looking to cover by the time most people think it's safe to sell short. The traders that shorted at the top add buying power to the market when they close their positions. That's why the people late to the party short at the bottom and get crushed on a short squeeze.
6.Bill Fleckenstein strikes again
It's the end of the world, stocks should be going down, there is no good news or catalysts to drive stocks higher so you better get short. But, ask yourself “How does the chart look?” You may hate a company and think it's on the verge of collapse and you want to get short to take advantage of the stocks decline. If fact, the whole market should be going down because of the terrible economy. However, none of that matters unless the stock chart is in a down trend. You could be way too early entering your short position based on what you think the stock or market should do. Instead, take a look at the chart. If the stock is still in an up trend, DO NOT take a short position no matter how bad you think you want to.
7. Cat and Mouse
The cheese sure looks appetizing, but there is a spring-loaded mousetrap just waiting for the next short seller. The most obvious selling points on the chart routinely trigger the most violent short squeezes. When it’s too obvious, it will most likely not work.
8. Unbearable Market
Are you sure we are in a bear market? Just because the market looks and feels like a bear market on the daily charts does not mean it is a true bear market. Look at the weekly charts to determine if the trend has changed to down. Many stocks will trade sideways for a long period of time and consolidate in this manner sometimes pulling back from higher levels. This can sometimes look bad on a daily chart but when looking at the weekly charts, this tends to be normal consolidation in a bull market. These charts reveal a balance of buying and selling power, rather than a one-sided rout.
9. Look at the Calendar
Profits from short selling sometimes depends on the time of the month. For example, positions entered around option expiration get burned because of all the put/call unwinding. Also, buying power can surge near month's end, especially during mutual fund window-dressing season. This can make a falling market snap back and look powerful just enough to shake all the weak shorts out. It happens every month around options expiration with uncanny effectiveness.
Conclusion
Please don’t misunderstand this commentary. We are not against shorting stocks, it’s great way to profit from falling stock prices. All we are trying to do here is help you realize and understand the possible pitfalls of such a strategy.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Short selling can be very profitable if done at the correct time, but can be very frustrating if entries are not perfectly timed. It is never easy to make money in the stock market and selling first, and buying later (short selling) is probably the most difficult way to succeed in trading. In fact, most traders can study a stock chart that is plummeting for hours, and still enter a short sale exactly at the wrong time.
Tonight we will look at some common pitfalls of the short selling trading strategy. After you review this list, you'll understand why short selling can cause so much mental and financial pain and stress.
1. Volatility
A bear market has tremendous overlap in daily price ranges of stocks and indexes. The daily high and low of a stock in a bear market seem to be more volatile in that of a bull market. These wild intra-day trading ranges can make it difficult to trade and set up trades for the next day. Usually, stocks will trade through a portion of the previous day’s range undermining logical stop placement, and makes good entry prices harder to find.
2. Nowhere
Fast Stock prices don’t go anywhere most of the time in bear markets. Though there is intraday volatility, markets will often end flat. Then out of nowhere, prices decline very quickly and in sudden bursts. This means you need to wait around for a while before you get the big sell off that gives you the big gains. Most people are too impatient to hold short positions for a lengthy period of time.
3. Everyone is at the party
Short selling is a terrible group activity. Many stocks have a high short interest and attract latecomers. These latecomers will be scarred out of their shorts as soon as the stock starts to go up. This will result in frequent short squeezes as the weak shorts bail out for a loss, regardless of how technically bad the chart looks. If you short with the crowd, you become most exposed. Don’t short the same stocks as everyone else.
4. Misguided Entries
So you think you're a wizard when it comes to resistance levels? Not so fast. Here’s why: support-resistance is what most traders are looking at and remember, the market always disappoints the majority. This is why price will often go further than you expect, up and down. You could find yourself shorting into bear rallies that keep on going up, and up and up until you give up and cover your position well above resistance. Stocks overshoot resistance and support more times then we’d liked to admit.
5. Too Late Harry
It's often too late to sell short by the time most people realize they should because the sell off is gathering steam. The smart money that shorted from higher levels are already looking to cover by the time most people think it's safe to sell short. The traders that shorted at the top add buying power to the market when they close their positions. That's why the people late to the party short at the bottom and get crushed on a short squeeze.
6.Bill Fleckenstein strikes again
It's the end of the world, stocks should be going down, there is no good news or catalysts to drive stocks higher so you better get short. But, ask yourself “How does the chart look?” You may hate a company and think it's on the verge of collapse and you want to get short to take advantage of the stocks decline. If fact, the whole market should be going down because of the terrible economy. However, none of that matters unless the stock chart is in a down trend. You could be way too early entering your short position based on what you think the stock or market should do. Instead, take a look at the chart. If the stock is still in an up trend, DO NOT take a short position no matter how bad you think you want to.
7. Cat and Mouse
The cheese sure looks appetizing, but there is a spring-loaded mousetrap just waiting for the next short seller. The most obvious selling points on the chart routinely trigger the most violent short squeezes. When it’s too obvious, it will most likely not work.
8. Unbearable Market
Are you sure we are in a bear market? Just because the market looks and feels like a bear market on the daily charts does not mean it is a true bear market. Look at the weekly charts to determine if the trend has changed to down. Many stocks will trade sideways for a long period of time and consolidate in this manner sometimes pulling back from higher levels. This can sometimes look bad on a daily chart but when looking at the weekly charts, this tends to be normal consolidation in a bull market. These charts reveal a balance of buying and selling power, rather than a one-sided rout.
9. Look at the Calendar
Profits from short selling sometimes depends on the time of the month. For example, positions entered around option expiration get burned because of all the put/call unwinding. Also, buying power can surge near month's end, especially during mutual fund window-dressing season. This can make a falling market snap back and look powerful just enough to shake all the weak shorts out. It happens every month around options expiration with uncanny effectiveness.
Conclusion
Please don’t misunderstand this commentary. We are not against shorting stocks, it’s great way to profit from falling stock prices. All we are trying to do here is help you realize and understand the possible pitfalls of such a strategy.
David Colletti
Founder
StockTradersHQ.com
The Headquarters for serious traders.
Copyright © 2008 StockTradersHQ.com
Subscribe to:
Posts (Atom)
