posted on 25 December 2016
by Jeff Miller, A Dash of Insight
Last week’s Technical Thoughts was about how emotion and symbols affected technical analysis. Could our charts help us when the picture displayed involved some psychological event like Dow 20K? This week I turn from the charts themselves to the trader who must interpret them. Successful trading requires focus and the discipline to stick with successful methods - even through a bout of bad luck.
Dr. Brett Steenbarger, the leading expert in trading psychology, puts it this way:
Dr. Brett writes almost every day about helping human traders achieve their best results? Does this have meaning for our models? Let’s start with a look at their current ideas.
I have offered a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We will report regularly on the “favorite fifteen" in each category - stocks and sectors - as determined by readers. Sign up with email to “etf at newarc dot com". Suggestions and comments are welcome. In the tables below, green is a “buy," yellow a “hold," and red a “sell." Each category represents about 1/3 of the underlying universe. 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!
This Week - Focus and Discipline in Trading Systems
I love chances to buy on a dip, and this is quite a dip. United Health Services, Inc. (UHS) is down 8% in the last month alone - more than likely an overcorrection. While I like it for short term turnaround potential, I’m not just going to buy and hold. If things keep going south, my active approach to trading stops will get me out of this position before I take too big of a hit.
J: Do you realize that the new President is going to repeal ObamaCare?
H: We have a new President? What is ObamaCare?
J: I know, I know. You do not read news; you just look at charts. But you might have a point here. The original repeal will be rich in symbolism, but is not likely to end insurance for millions of people. There is a lot of selling in this stock based upon fear - not actual knowledge of what will happen. You could have a winner.
H: I usually do.
Athena: I generally go for stocks that are already popping upwards. This week’s pick, United Rentals, Inc. (URI) is no exception. A substantial jump over the past two months really put this one on my radar, and I like the potential for future growth in the next 4-6 weeks. The rankings on the Relative Strength Index don’t particularly scare me. A high-volume event could push the stock well above the current price, yielding a tidy profit.
J: This idea also has some support from the fundamentals. The FAST graph shows the strong earnings growth and the underlying value.
A: I know you look at P/E ratios and such, but that is not necessary to find a great trade.
J: Shouldn’t you have bought this one in 2015? It has doubled from the bottom?
A: I did not exist in 2015.
J: You were just a glimmer in Vince’s eye.
A: You must learn to look forward. We can all wonder why we did not take some action in the past. That is a waste of time. It is more important to make good decisions in the future.
I will begin with my responses to reader votes for the favorites list.
As you can see from my presentation, which is neater and more informative than Oscar’s, I show the answers for last week as well as now. I also provide rankings within each category so that you can see which stocks are moving from one group to another.
Bristol Myers (BMY), for example, became a marginal “buy" while Apple (AAPL) dropped into the “hold" group.
J: You have nearly twice as many stocks listed as we agreed upon.
F: I am giving my readers more information. Do I get paid more for that?
J: No. And you must start reducing the list. Just go with the top vote-getters. What is your featured stock for this week?
F: I like Rice Energy, Inc. (RICE) as a long-term investment. A couple sharp declines in the past quarter put the 50-day moving average on a downward trend, but we’re still up on the 200-day moving average. My bet is we’ve bottomed out on this one, and it should be a solid holding looking 10-12 months ahead. That said, a few additional drops wouldn’t surprise me. This is a solid pick if you don’t panic, and keep your timeframe in mind.
J: Isn’t selling losers a part of trading discipline? The other models all do it with trading stops or a similar technique.
F: It is also part of my method. I am just not so quick on the trigger. My performance is similar to that of the others, but has a longer holding period. Some people must pay taxes, and prefer long-term gains. Oscar does not think about that.
J: What about Holmes and Athena?
F: Dogs and goddesses do not pay taxes.
Here are my ratings for the top reader interests. There are still five open slots, so keep the questions coming.
While no one asked about it, I’m big into trucking this week - think of your power running backs from Alabama. For our purposes the IYT Transport ETF will do. This area has experienced broad-based gains through the last quarter. I’m of the opinion we have some time before we peak. When you come across a 200-day moving average this flat, it’s hard to believe you’ve hit the ceiling.
J: How often do your ratings change? Are these listed in any particular order?
O: Any changes are strictly the result of the stock chart. If the markets change, my ratings will as well. I report the list in order of my strength ratings.
J: Are those like the ratings you use for your fantasy football team? I see that you switched to college football for this week’s column.
O: My fantasy teams depend upon a different algorithm, but it is also a good one.
J: Is that available to our readers?
O: Not unless you give me a raise!
Human traders are constantly at war with their own emotions. Losing streaks are inevitable - just part of the job.
Our models do not know, of course, when they are in a bad performance streak. Using models is a great way to maintain focus and discipline. That is not, however, the final word. As long as humans remain in control, there will be psychological issues. Is your model still “working?"
Maintaining confidence in your model or trading system is just as important as confidence in your own trading skill.
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