Market Overview

Much as we anticipated, the markets finished the week on a mixed note as the 3 major indexes were unable to keep any of the mid-week gains and finished the week pretty much where they started.  The DJ-30 gained a measly .4%, the S&P 500 posted just a .1% gain, and the Nasdaq finished slightly lower down .3%. Let’s be honest, the sideways action we saw over the past 5 days was not surprising for many of the reasons we mentioned last week, but I did see a few positives for the market in the midst of all the negativity. It is actually quite impressive that we didn’t see bigger losses considering the fact North Korea continues to provoke the world towards a nuclear disaster. Then, take into account that an entire country was completely devasted by Hurricane Maria (Puerto Rico), yet we still saw no major knee-jerk reaction from Wall Street and we should realize things are starting to look up in a weird way.

I’ve read numerous articles this week over the looming economic bubble waiting to burst and it gets me excited to see what October will bring. As far as this coming week, the odds are not in our favor to see any significant gains posted by the market as a whole. The indicators are showing the market as majorly overbought, even more so than last week, however many stocks on an individual level are looking close to setting up. I would tread carefully this week and wait for clearer waters to come, as October should be a good month, as it always is historically. Don’t force any unnecessary trades by being impatient. As usual, take the setups as they come without hesitation. The odds likely favor a shorter run than usual (2-3 days).

Long-Term Herd
The LTH odds favor more of the same from last week, as indicators point to the market being considerably overbought with slim chances of any big runs beginning over the next few days.

Short-Term Herd:
The STH odds show there is some upward movement possible, but likely on a small scale so keep your trades on an extra short leash this week and protect your profits.

Bull Market Status:
Still in a confirmed uptrend. Bull market alive and well. Stocks & Trade Ideas

Stocks & Trade Ideas

Tech Sector – XLK is in a bit of no man’s land and needs to come down into the buy zone before the odds favor a big run.
Facebook – FB has been trending sideways since mid-July and needs to give us a proper setup before attempting to spot any entries. Odds favor down to sideways this week.
Alphabet Inc. (GOOGL) hasn’t been able to find steady ground above its 50 dma since late July and doesn’t show us any setups at the moment. Odds favor sideways this week as it continues to form an 8 week consolidation period that should largely find buying come October.
Alibaba – BABA isn’t there in terms of a setup and odds favor it needs more time before buying should be considered.
Amazon – AMZN continues to see sideways price action as it closed the week out with 3 consecutive down days. This is a good thing for all the BTD’ers out there as this stock rock n’ rolls during the holidays and could be getting ready for a wild run in the next month or two.
Apple – AAPL has been getting hammered since the news release of its most recent Iphone but has entered the buy zone. Keep this on the radar, but odds favor we see October come before this stock proves to reverse its course.
Tesla – Tsla hasnt been able to find a major move up for some time now, as it continues to retrace back to its 100 dma support level. Odds favor higher prices unless we see the overall markets with big losses this week.
Powershares QQQ Trust – QQQ found support just above their 50 dma but will need to break its downtrend before any significant entries can be found.
Netflix – NFLX appears overbought and isn’t likely to change course over the next few days.

Trading Psychology

Don’t Rationalize Mistakes If You Want to Improve

Rationalizing Mistakes Is a Huge Hindrance to Progress

You see a perfect trade setup, but for a moment you hesitate and miss the opportunity. You tell yourself “Getting in late is better than never!” and so you jump into the trade, late. By jumping in late your risk may be bigger or different than what it would have been had you taken the original (valid) trade signal.

If your risk is out of whack your position size may be too, and your target may not appropriately compensate for the risk. A rash decision was made on impulse, in the moment. It started with a rationalization which made it seem okay to not follow your plan, and instead do something random.

Rationalization comes in many forms. Here are some of the ways it tricks you into not following your strategy, which in turn leads to inconsistent performance.

Your Success Is Your Ability to Follow a Proven Method

Great traders are simply excellent system followers. Consistently profitable traders have found an edge and they exploit it repeatably. Not by doing random things, but by following a method they have practiced hundreds if not thousands of times in all sorts of market conditions. They follow their system no matter what pops into their head telling them to do otherwise.

One main rationalization traders make is that they don’t need a system because they are great traders. They believe they can make money acting on impulse, on their wits, instead of following a proven plan.

Save Smarter

This may work for a time, but these traders don’t last. Only takes trades you have practiced hundreds of times getting into and out of.

Don’t take a trade because you tell yourself “I’m good, I can make some money here.” You have no plan for how to handle this trade, and no data that indicates what you are about to do has a statistical edge.

Rationalizing to Trade More or Less

We just discussed not trading outside of your tested and practiced trading method. Market conditions will often make you want to deviate from this rule though. Assume it is a very active day, with lots of price movement and volume. Within a few minutes of trading, you’ve already taken several valid trades.

This is more than normal, but the market is producing the signals. You start to get into your own head and think “This could be a life-changing day!” Depending on how you react to that statement you may take fewer trades going forward than you should because you are afraid of blowing it, or you take more trades attempting to make more money than the market (combined with your system) is allowing.

Your focus has moved from trading to something else. You are no longer focused on just finding valid setups, now you are rationalizing taking more or less trades than you should. Your greed and/or fear is going to start shaping your trading decisions, instead of your system.

A boring day can also lead you to take a trade, when there isn’t a valid one, simply out of boredom. You may tell yourself “I gotta make something!” and before you know it you’re in a random trade, gambling to make a profit. Keep focused on finding valid trades while trading. Let the market conditions and your trading system determine when you trade, not your greed, fear or rationalizations.

Rationalizing to Stay in a Trade or Get Out

Every trading strategy must have an exit point. If you don’t know how to get out of your trades you have missed the most important step in creating a winning strategy. The exit is where profits and losses are taken, so when you take a trade you should know exactly how you will get out.

Once this is established you may still fall into traps. In a losing trade, traders will often come up with rationalizations for staying in it. You may tell yourself “I probably should have used have a larger stop loss based on the conditions” and so you feel justified in expanding your stop loss and taking on more risk.

Or you may find some piece of evidence to warrant staying in the trade: “That indicator is at an extreme level so the price will likely move the other way soon.” The problem is that you are changing your strategy mid-way through the trade. Why have a strategy at all if you can change it at will? If the strategy says to get out, get out, no matter what reasons to the contrary pop into your head.

Most new traders also have a problem with staying in winning trades. They feel compelled to take a profit as soon as it materializes and the mind is more than happy to come up with a rationalization for doing so. “Can’t go broke taking profits” or “Conditions are tough so I best take what I can get.” And just like that you are out of the trade with a tiny profit.

That tiny profit will do nothing to cover any losses which will inevitably come along. You can go broke taking profits when your losses are bigger. There is no escaping it. If you want to be successful you need to follow a plan with an edge. Stick to that plan, no matter what.

Dealing With Rationalizations

There is no easy way to overcome rationalizations. Rationalizations will try to sabotage you constantly while you are trading. The only way to handle them is to ignore them and focus on your plan. They won’t go away though, they often just become more covert.

Your primary defense is to practice following your plan, and executing it perfectly in spite of rationalizations to the contrary. You may also find it helpful to write down all rationalizations that occur while trading.

Go through the list and mentally rehearse what you will do when thoughts like that pop into your head. In this way, you are prepared, and rationalizations will have little power in swaying you away from your trading system and more consistent profits.

The article above serves as a great reminder to stick to your trading system, your strategy, whatever it may be. Rationalizations are not founded in facts and will only serve to hurt your chances of trading success. If you exit a trade early, don’t get upset and rationalize it, rather “trade and learn” and focus on becoming a better-disciplined trader.

Best wishes to anyone affected by the hurricanes down in the south and Puerto Rico. My prayers are with you.

Best wishes this week,

Coach

Randall Hudgens
(805) 837-9211