It's hard to believe another year is coming to an end. Outside of a few scary weeks, the stock market performed well in 2010 and heads toward 2011 with a lot of bullish momentum. Complacency is a short-term issue that we dealt with last week and will continue to have to deal with in the near-term, but history is on the side of the bulls. During the last 10 days of the year, the NASDAQ has produced annualized returns of 68.29% since 1971. 68% of the days that fall within this 10 day period have been higher over the last 40 years. Those are compelling numbers that shouldn't be ignored. This period contains the days that make up the "Santa Claus Rally" from the Christmas holiday through New Year's Day. Since 1971, the odds of any day moving higher on the NASDAQ is roughly 55%, so this period's 68% is substantially above the norm and worth noting.
As we approach the end of the year, it's a good time to assess what worked for you in 2010 and what didn't. We should all be prepared to alter our trading styles and strategies to encourage more successes in 2011 and beyond. I'd like to offer up four New Year's trading resolutions for 2011. While these aren't designed to be the only resolutions that you should incorporate, they are four that I believe separate successful traders.
1. DON'T CHASE STOCKS:
Sounds easy enough, right? After all, at what other point in your life do you wait for prices to rise before buying? Probably everyone who's ever traded a stock has made this costly mistake. Sure, there are the Apple's (AAPL) of the world that never seem to pull back that reward this type of risky behavior, but the masses of stocks do not. Common sense should prevail here but, at a minimum, check out the RSI and stochastic on a stock and avoid buying when readings are in the 70s and 90s, respectively. Allow uptrending stocks to relieve overbought conditions. Buying these stocks into weakness - so long as there's been no significant technical deterioration - will improve your trading results while limiting your risk.
2. EXPAND YOUR HORIZON OF STOCKS:
There's no need to limit yourself to one, five or ten stocks. The StockCharts scan engine makes it incredibly easy - in minutes - to uncover a large number of trading candidates that meet certain criteria - your criteria. I see traders trying to force trades all the time, attempting to get into their favorite stock, and doing so at inappropriate technical times, and at their own expense. There are literally thousands of stocks across the major exchanges, so there's no need to focus on just a few.
3. IMPROVE YOUR RISK/REWARD STRATEGIES:
Enter every trade with a plan and stick to it. Understand first who you are as a trader. Do you like to daytrade? Do you prefer swing trading? What is your risk tolerance level? Everyone has a unique style and situation. As a result, what might be a great entry point for a swing trader may turn out to be a not-so-good entry for a daytrader. A trader with a low tolerance of risk might find that trade far too risky. The key here is to know why you're entering a trade, what it would take for you to exit (stop loss) and an appropriate target. These should all be determined BEFORE you enter the position. Many unsuccessful traders have one or two of these criteria figured out before they enter the trade. It's the third one that derails them.
4. REMOVE THE EMOTION:
I'm sure most of you have heard this before. This one sounds easy too, until you start losing money. Then fear creeps in and you begin altering your plan, assuming you had one in the first place. All of a sudden, you begin to alter your stop loss lower in order to allow your position to "recover". It usually results in good money wasting away in a weakening stock. This is a serious trading crime as you violate the theory of keeping losses to a minimum. But that's not the only emotional disorder we suffer. Greed can be even more powerful and disastrous. Greed results in many problems, but there are two problems that immediately come to mind - position sizing and failing to execute and take profits when your original plan works perfectly. Incorrect position sizing can occur for a number of reasons. One is trying to "catch up" after a loss. You figure if you play twice as many shares as appropriate, then you can recover prior losses quicker. This type of thinking may work on occasion, but many of us have felt the despair as losses only deepen. Another example of incorrect position sizing occurs after a trader has correctly called several trades in a row. Overconfidence breeds greed. It's not easy, but we must remain grounded. Those who can develop and execute a plan with little interference from fear and greed will produce better results over the long-term.
I try to address these resolutions every single day in our Chart of the Day. I don't guarantee their success. I never have and never will. But I can justify the risk/reward on each trade, discussing the type of trader that might benefit from them. Occasionally, I feature a very aggressive small cap stock that might appeal to those traders who enjoy taking big risks for the potential of bigger returns. Other times, I might feature a Dow Jones component that allows traders - who are looking for capital appreciation and limited risk - to sleep at night. There is one common thread to every one of them - education. I try to learn something new every single day and you should too. CLICK HERE for my Chart of the Day for Monday, December 20.
I will also be providing my 2011 Stock Market Outlook on Tuesday, December 21st at 4:30pm EST. For more details, and to register, CLICK HERE.
Happy trading, Happy holidays, and HAPPY NEW YEAR!!!
