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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Compadre who wrote (12787)	5/4/1999 8:22:00 PM
From: Vitas	Read Replies (1) \| Respond to of 99985

So You Want To Be A Day Trader? Here's How To Stay Sane If you buy and sell positions quickly, these hints will save you from free fall. By Bernie Schaeffer, May 1999 1. Leave your ego at the door. Trading is not about always being right; it is about being right often enough to turn a bottom-line profit. You are involved in a probability game, and you will have losing trades. Understanding this will allow you to focus on the next two steps toward trading success. First, define an "uncle point" at which you will close a position at a manageable loss. Second, set profit targets for your winning trades that are comfortably in excess of your typical loss. By executing this strategy, you can achieve a bottom-line profit even if you lose more than half the time. 2. Understand the expectations underlying the stocks that you are trading. By expectations, I mean the collective beliefs of investors and the investment community about a stock's prospects. Great optimism about a stock often signals vulnerability, since it indicates that most of the good news is reflected in the share price and investors have already made major commitments. Conversely, pessimism often signals a buying opportunity, since it suggests that investors have been avoiding the stock and good news would tend to boost its price. The "expectational environment" is particularly important just ahead of earnings releases. For example, just before IBM and Cisco Systems announced their fourth-quarter 1998 earnings, speculators lined up in droves to buy call options on the stocks, optimistic that the announcements would exceed Wall Street's forecasts. Instead, both companies reported earnings that were good but not great, and their stocks declined substantially. (For more detailed discussion of expectational analysis, see my book, The Option Advisor.) 3. Gather all the information you can about your prospects. Being blindsided because of lack of information is a trader's worst nightmare. I'm not referring to tips and rumors but to hard data. There's nothing wrong with being aware of "the buzz," but it's extremely hazardous to use this as the basis for your trading. Legendary trader Jesse Livermore described his lapses into trading on tips as the single biggest threat to his success. I've always been impressed by option market makers' and specialists' depth of knowledge about the companies they trade. They can instantly recite everything from the date that a company will report its earnings, to the status of a pending legal action, to which analyst just upgraded the stock. I strongly encourage you to follow their example. You need not know a company's ratio of current assets to liabilities to be a successful trader, but you had better know the date of the meeting that is going to determine whether a stock split is declared. Remember that if you are not steeped in information, you will ultimately lose the trading game to those who are. 4. Have a game plan and stick to it. The best traders plan exactly what they are going to do before the market opens. This approach significantly reduces the risk of reacting emotionally to random intraday price movements, which is the way most losing traders operate. I've found the first half hour of trading to be particularly treacherous, since that is when major "fake outs" often occur that can cause the unwary trader to make foolish decisions. As a result, I generally wait till about 30 minutes after the market opens before I take buy or sell actions based upon my predetermined price levels. 5. Don't trade when you're distracted. A successful trader is razor sharp and totally focused on the market. If you're trading while trying to pay attention to your day job or when you are emotionally upset, you will pay the price, and it will be extracted from you by those whose trading is not encumbered by these handicaps. 6. Learn to trade in both directions by also selling stocks short. Yes, we've been in a bull market for as long as most can remember, but within a trader's time frame, even a bull market can record some pretty nasty spills. Plus there are always stocks that can be traded profitably from the short side. As a trader, you don't want to become totally dependent on a bull market for your profits. 7. Use technical analysis overlaid with an awareness of investor sentiment. I've found that this combination generates the best trading results. In next month's column, I'll discuss my favorite technical indicators for trading and how I add value to these indicators by studying investor sentiment. -- Bernie Schaeffer is chairman of Schaeffer's Investment Research (SIR) in Cincinnati. He is the author of The Option Advisor (John Wiley) and senior editor of The Option Advisor Newsletter.