Tuesday, July 20, 2010

Preparation, Process and Discipline

This one is for the newbies. The ones who got A's in school because their teachers were afraid of their parents. The ones who got a trophy at the end of the end of the season just for showing up. The ones who have been conditioned to believe that they can do anything well from all these rewards for mediocrity.

Welcome to the Real World

No not the MTV version but the one where every day, all day long, everybody else is trying to take your money. Your confidence and bravado might get you noticed. Quoting lines from Sun Tzu's "The Art of War", or movies like "Wall Street", or "The 300" may pump you up and impress your friends. There is a place for that in trading. It is a competitive game. As I said every day, all day long, EVERYBODY ELSE is trying to take your money. ALL OF IT!

Are you scared now because you should be. So what are you going to do about it?

Preparation, Process and Discipline

Get prepared. Preparation sets the stage for success. For me preparation for the next week starts Friday at 4:30pm. I trade mainly off of technical analysis so I start the process by reviewing the daily and weekly macro charts, to reaffirm and reacquaint myself with the current trend. This is not just the S&P 500, Nasdaq 100 and Russell 2000, but also inter-market indicators that influence the stock market like Gold, Oil, and the Dollar as well as indicators of market breadth and momentum. With a reaffirmed understanding of the trend I then look for relative strength or weakness, and divergences from that trend by reviewing the Sector SPDR's.

Over the course of the weekend I then proceed to go through all of the individual stocks I follow looking for those where there is an interesting story. For me this encompasses about 600 names and is constantly growing. I seek out new names to review as the more practice I get the better I become even though I have been in the markets for over 20 years. when I see something interesting I write it down either on the chart or in my notes or both. This has recently yielded a smaller list of 150-200 names which I then review for price movement potential. At the end of that process I might have 30 - 50 names that I think hold potential to play on Monday morning. Finally I take that list and determine the best of the best ideas to put on the first page of my watch list (and here on this blog).

During this whole process I also look at the work of other technicians to see if I can see what they see or if I have missed something. I seek out the work of technicians that have different styles of TA than I do as well as those who have a similar style to keep my thinking fresh.

I do most of this process transparently on twitter over the course of the weekend. As such I see people come and go and ask their opinion of a single name or a few names here and there and sometimes express their view as well. It makes me wonder if they are doing the same thing as me, just not as transparently, or if they are looking for a short cut.

Execute the Plan

Now prepared for Monday morning I check the Sunday night futures market and go to bed. Rested and ready Monday morning I am prepared, not for the week, but for the day or maybe two days. Despite the best preparation and process the market can do whatever it wants. So often times all this becomes old within a couple of days or hours. Sunday night I put the idea to short Dendreon, Ticker: DNDN, based on the rejection of the top of the down channel with a target of 27.

I did short it and got stopped out 3 1/2 hours later up 83 cents, but look what happened after that. It closed basically unchanged.

This is where discipline comes in. If after all your analysis none of your ideas trigger, or the market changes direction, then don't trade or get out. Take the time to reassess the changing conditions. More on that in another blog.

I trust that you see there is a lot of work and time that goes into being ready to trade (or sit on your hands). Do that work. Put in that time. Everyone else who is trying to take all of your money is. I am. I am not trying to crap on a whole generation. I know of many young traders that do put in the time and do their homework, day after day, week after week, month after month. Be one of them.

1 comment:

  1. As a relative newbie, though not of the gimme generation, thanks for telling it like it is. A great reminder that one can't just spend 5 minutes a day figuring out what to buy or sell and expect to make money...and I know people who expect it to work this way.