Stock Market Trading

The Smart Profits Report: Issue #429
Tuesday, June 12, 2007

Stock Market Trading: Two Ways To Eliminate Ill-Advised Stock Investments
By D. R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research

In the persistent stock market battle of bulls vs. bears, there’s no question which side has held the upper hand over the past year.

Since last July, we’ve seen an extraordinary rally, pierced by just one major pullback - the slump at the end of February. Against some pretty major odds (for example, a slowing economy and rising gasoline prices), the market has continued to rise. This has given investors a heavy edge - and many have capitalized on the trend with gusto.

Despite this, however, millions of investors are placing trades where they have little to no edge, simply wading in and hoping for the best. This is a dangerous and unnecessary way to invest - but fortunately, there are some simple steps you can take to help your stock market trading…

Forget The Quantity… Focus On Quality

Have you ever made an investment that you knew in your heart wasn’t that great as soon as you entered it? One of those investments that didn’t quite meet all your entry requirements, but you took it anyway? Maybe you were acting on a hot tip, or - like now - because the market is in bull mode and you don’t want to miss out.

I call these “low-quality trades.” And they’re positions that blot the record of even the most experienced professional occasionally and can drain the profit potential from your account. But there are some key questions you can ask yourself beforehand that might reveal whether you’re committing this mistake, and why you might be making bad market investments:

Does every trade meet all your entry rules and requirements?

Are you taking a stock market trade that “almost” makes it on one or two of your entry criteria, but requires you to fudge things a bit to sneak it in?

Are you trading because you’re bored, or because you have nothing else to do?

Do you need the action of stock market trading - even when a high quality trade doesn’t exist?

Are you taking a trade that just “feels right” when you have no provisions in your investment plan for executing intuitive-style trades?

Are you frustrated because your last trade(s) didn’t work out and you’re trying to make up for it?

If you find yourself answering “yes” too often, then you’ve at least identified the patterns that affect your particular investing style, which is good. Making marginal stock market trades is just like flipping a coin - you lose control and it becomes a game of chance. Here are three ways they can hurt you:

Stock Market Trading: Less Is More

Brain Drain: Managing low-quality positions diverts your attention away from finding higher-quality stock market trades. And the cost can be quite high if it makes you miss some really good investments. Stick to a manageable number of quality investments.

Higher Transaction Costs: While low-quality stock market trades chew up your mental energy, the transaction costs also eat up your funds. For example, let’s say you make five low-quality trades per month, because you don’t want to get bored. With a $10 commission per side, and a $10 slippage getting in and getting out, you are spending an extra $200 per month. That’s $2,400 per year just on transaction costs. And if the frequency of your low-quality trades is higher, or your commissions are more expensive, it’s worse.

Physical/Emotional Stress: Entering poor trades simply adds to your stress level. And investing already has plenty of challenges, without adding the cost of taking low-quality trades that you really shouldn’t be in.

So how do you stop yourself from questionable stock market trading? Here are some tactics to help you minimize or eliminate it…

Two Ways To Avoid Making A Bad Trade

Keep a Stock Market Trading Log: In addition to the routine information (date, time, symbol, number of shares, entry price, stop loss, etc.), make sure you include two columns, labeled: “Reasons for entering” and “Reasons for exiting.” This will help you in two ways. First, it will allow you to see when you’re getting into a marginal trade. Second, since you’re explaining in writing why you took the trade, you’ll subconsciously find that you bend the rules less often.

Find a Trade Mate: Run your proposed trade by a friend or someone who may force you to answer the tough questions before you take the plunge.

There’s no need to turn investing into a game of chance, where you’re simply trading for the sake of it, then hoping for the best. Making ill-advised trades will be a big performance drag on your portfolio. Find out why you’re tempted to take them, then set up a plan to minimize or eliminate this dangerous practice within your stock market trading.

Great trading,

D. R. Barton, Jr.

Today’s Smart Profits Action Center

If your portfolio is looking a little overweight on “iffy investments,” give it a summer tune-up by adding some quality. First, re-evaluate your holdings to see if they still meet your original investment criteria and risk tolerance, paying special attention to small-cap stocks and more speculative investments. Second, think about adding some solid, large-cap value plays that are less volatile than growth stocks. Third, grab some passive income by owning some solid dividend-paying companies to your portfolio.

And if you really want to eliminate the guesswork that is a breeding ground for bad trades, just follow the advice of the guys who’ve proved time and time again what it takes to make money in stock market trading. To see how you can get your hands on a report that gives you 31 tried and tested wealth-building strategies - follow this link direct from the experts.

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