I'm sure everyone has heard the phrase "It's better to be lucky then good", and it's generally true for most facets of life. I'd rather cag out a shot in golf, or get lucky drawing into a gut shot straight in poker, then miss a shot or lose a hand playing with good technique. Everyone loves the feeling when "lady luck" helps them overcome the odds with a miraculous play. The problem with getting lucky, is that it has a way with instilling false confidence in your psyche. If you accept the definition of luck as "advantage or success, considered as the result of chance", then you need to acknowledge that a like amount of bad luck will probably occur as the result of chance. That is the nature of chance, and what is life other then a big game of chance. In the long term, chance is neutralized by probabilities.
It is human nature that remembers the "good luck" as the time YOU overcame the odds and then remembers "bad luck" as the time THEY got you. We have a funny way of remembering how bad luck hurt us on a stop loss, or bad fill, but then credit ourselves when a stock drops to within a penny of our stop, or gaps higher for some surprise news. Sometimes this is exacerbated if you knowingly took a chance and got lucky while doing something you knew had low odds. If you are rewarded by chance for doing something that has low odds, then the next time you are presented with the situation, you are more likely to pull up that memory, and go for it again. The problem is, the odds are certainly against you.
Trading is one place where you better know when you have been lucky. This is one endeavor where things have a way of evening out rather quickly. If you happen to catch a break with a "Cramer mention" or "News release" on one of your holdings, make sure you make a mental note that Lady Luck was on your side, and whatever you do, don't let cockiness seep into your psyche. If you find yourself increasing your lot size with your "winnings", or gambling on a "Cramer" pick, keep in mind that you are a downgrade or "Cramer" bashing away from a steep loss.
Another way to fool yourself, is with the pulled stop rebound. All of us have pulled stops before, and have it actually work. I would venture to say it works a lot. The problem is, that you will pull a stop again and again, thinking you are good enough, since it has worked before. The problem is, luck has rewarded a negative behavior and trust me when I say that there is gonna be a time where your stop was only the beginning. Stops are there to protect you from the huge loss, and the more you pull them, the higher your chances of a breakaway move going against you.
The key point here is that Traders need to be brutally honest and acknowledge when luck was on their side, and not only complain about bad luck. One of the keys to trading is truly understanding your weaknesses and strengths, and knowing how you deal with luck or chance is a big advantage. Don't let chance which is random enter your psyche and modify your trading habits. Make sure your plan allows for chance and have a plan to act accordingly.
Market Update
The Bears were relentless today. Market internals were about as weak as I've seen them in quite some time. I read on Worden today that 2729 of the Russell 3000 and 468 of the SP500 were down today. Yikes. Volume was higher today, but Friday was also a half session and overall volume was not alarmingly high. The interesting thing will be to see what happens next. The markets have shown persistent strength the past few months and one session a bear market does not make. So, have we seen a high, or will the markets truck through the end of the year? I won't pretend to know, but my guess is that there will be a bounce, and it may be to new highs, as tops aren't formed in a day. Transition areas like this are hard to trade, because you could either buy weakness or short into the bounce expecting a top. I will wait for more clues to present themselves.
DXP Enterprises, Inc. (Public, NASDAQ:DXPE)
Somehow, I was lucky to have the stock with the second largest gain in the Russell 3000 today in my holdings, which softened todays weakness considerably. DXPE had a huge move on good volume. I am showing a before and after chart to show why it is important to look at where candles are formed. I love using candles, and I think the proper use of them gives me an edge.
Here is a chart I highlighted November 19th as a stock to watch. Look at how previous candles showed an area where demand overwhelmed supply.
Now look at the result.
There is a possible Head and Shoulders bottom forming here, although it still has a bit to go.
If you look at EGY in this previous Trade review I highlighted the same trading tactic. The beauty of candles is that they work on all timeframes as well, so daytraders can benefit from them as well.
Good Luck,
DT
