A Must Review: The Trader's Equation

Welcome back from the New Year, everybody, and I hope we're going to have a good one this year. The New Year is a good time to review your trading plan and actually write it down so as to make sure that you are reminded of any changes you must make. The Trader's Equation is a must review to determine your weaknesses. (See the Day Trading Course for those of you who aren't aware what the Trader's Equation is.) You should ask yourself the following questions: Is your win percentage too low, putting too much pressure on you to have major multipoint moves to offset a low percentage of winners? Are you pushing the ejection button to keep your losses small, thus conserving your capital? Is your average win size bigger than your losers by a 2-to-1 ratio? Have you managed your winners or do you cut and run too soon? Are you in the correct stocks and groups that are in the momentum phase? If you are position trading, what groups and stocks are emerging from consolidations around their 200-day exponential moving averages? If you are an intraday trader, how are your entries? Do you use second entries which have a much higher probability of profit and keep you out of some of the shake-outs by market makers and specialists, especially during the first half-hour of trading? 

"Are you taking most of your trades when the market dynamics are on the same side as your trade?"

One of your key New Year's trading resolutions should be to keep it simple. Pick out a few patterns and search for the best stocks that have pulled back and given you a continuation entry. Ask yourself, is your stock-dynamics recognition good? Are you taking most of your trades when the market dynamics are on the same side as your trade? Remember, it is only necessary to trade when it sets up. Don't force it. We don't know what the Generals will do in 2000 but we will quickly recognize it because elephants can't hide. You will be looking for increased volume, range expansions and closings above the mid-point and near the top of the range, indicating stronger buyer pressures. Vice versa for sales. When the good stocks pull back, it will probably be on lighter volume and then you will be alert for the signals that buyers have returned. I suggest you go to the Stock Traders section today and run a current list of RS values from top to bottom and then do the same with the ADX trend finder. Once you do this, check each chart individually to identify any patterns and what phase these stocks are in. You should run this list at least three times a week. Also, you should do the same with the higher Relative Strength and EPS lists and vice versa if you're looking for shorts. If you do this, you will always be focused on what's moving, because that's where the Generals will be. The more work you do yourself, the better you will become as a trader or investor and I feel very strongly going forward that you should be both.

Program Trading Numbers
Fair Value	Buy	Sell
16.80	18.00	15.65

Pattern Setups: We will stay with what's got momentum until proven otherwise which is tech, Internet and telecommunications, in addition to some of the broker stocks and retail. Yes, I know the basics such as the chemicals and the forest paper products picked up but, given the choice, stay with the high test few. Pattern setups include Comverse [CMVT>CMVT], Cisco [CSCO>CSCO], AMCC, Emulex [EMLX>EMLX], EXTS, BEA Systems [BEAS>BEAS], DoubleClick [DCLK>DCLK], Apple [AAPL>AAPL], BMC Software [BMCS>BMCS], Lam Research [LRCX>LRCX], Redback [RBAK>RBAK], Nortel [NT>NT | Quote | Chart | News | PowerRating], Standard Microelectronics [STM>STM], and Gateway [GTW>GTW].

I gave you more stocks than normal because they do set up and it is the New Year and it is the reinvestment period, so we should get a lot of activity.

Have a good trading day and get ready for a good year.