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December 16, 2006

Why Most Traders Fail
by Jay DeVincentis

Bi-Weekly Stock Barometer No. 149
12/16/2006 10:33:47 AM

Dear Subscriber,

Here's an excerpt covered in my stock trading class.

Welcome to the biweekly stock barometer. This article comes out every 2 weeks and gives our big picture view of the market. If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so too can our interpretation as the market gives its daily clues to the future. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

Most fail as traders. Why?

Well, this is a topic that we could spend a while talking about, so I'll just covera few points here.

They lack the discipline required to trade. Discipline is essential to trading. You should treat it like a business. It always amazes me how much research a person will do when they're spending $1000 on a fridge. But when it comes to buying a stock, one hot tip and they're in with $5000. Discipline is having a set plan, doing your research and following that plan to a T.

They lack the patience required to trade. Patience is definitely a virtue when it comes to making the decision when to trade. And that includes when to buy, when to sell and when to apply your stop. Most people think that you should trade every day, when in fact, unless you're a day trader, there are times when you should be buying and selling, and then there are times when you need to just sit back and watch. Knowing those times will do you wonders. Having the patience not to trade is critical to your success. There's no good in trying to buy a rally that's extended or sell a downturn that's about to bottom.

They don't know how market works. This is one area where we can help you out. But if you don't understand that the market moves in waves of buying and selling and don't have some method for reading those waves, then you're missing a key element of understanding how the market works. I can't tell you how many people come to my beginner classes and say they get their ideas from CNBC. Big mistake. This is not trading. Think about it, they talk about a hundred or more stocks a day - even Cramer on his Sad Money - excuse me - Mad Money show makes about 38 recommendations a show. That's ridiculous.

They don't have a plan. To me it's all about the plan. And this is the basis of my beginner classes. I teach them how to read a chart and how to interpret the market and figure out which style fits best with current market conditions and finally how to set up a basic trading plan. What to buy, when, at what price and when to sell and how to apply your stop loss.

They don't know the difference between Trading and Investing. This is another area where new traders fail. They turn their bad trades into investments. They buy a stock - thinking they'll sell it when they make some money. It goes down and they then rationalize that it's a good company and they'll hold on to it as an investment. Even worse, they exacerbate the situation by buying more. And as it continues to go down, they continue to buy more. Eventually the stock becomes a penny stock and they vow never to trade again. And they shouldn't. That's not trading - it's more akin to investing. But even in investing, you shouldn't reward your losers, but reward your winners with reinvestment.

Think about it - who Takes more risk? The trader or the investor? From the trader's point of view, an investor who buys and holds is crazy. They tie up their capital for long periods and hope that the company will do well and the stock price will reflect that. From the investor's point of view, the trader is crazy. They think they can figure out what to buy, when to buy, when to sell and so on.

Usually market conditions will periodically favor trading over investing. For example, we've seen a strong trending move in the markets since July. But if you think about it, the Qs are only 2 points above their high from earlier in the year. Big trending up-moves favor investors. Traders like and perform best in sideways markets (depending primarily on their style).

That's it - just an excerpt of what I cover in my stock trading 101 class.

On to the charts.

Message From The Markets

Market action is ruled by sentiment and by monitoring market internals and studying sentiment; you can gain reasonably predict future market movements. The basis of the Stock Barometer system is overlaying extremes in sentiment with sound technical analysis to predict the likelihood of future price movement. Each indicator and chart measures the hope, fear and greed of investors and traders from different angles. Follow along with my charts and over time, you'll also learn to understand how to read the markets, which is essential prior to setting up each and every trade.

STOCK BAROMETER CHART

The Daily Stock Barometer is a proprietary measure of market energy. The direction of the stock barometer determines our short-term outlook on the market's direction. A BUY or SELL signal is triggered when the indicator clearly changes direction. If the line is moving up, we are in BUY MODE and if it's moving down, we are in SELL MODE. The black line is a 5-day moving average that we use to confirm changes in direction.

EQUITY PUT CALL RATIO CHART

The CBOE put/call ratio is comprised of two sets of data; equity options and index options. The index component contains items that are used as a hedge, thereby distorting the correlation and interpretation of the indicator. I use the equity put/call ratio. This is one of the most accurate read of investor's fear and complacency.

TRIN/ARMS CHART

Richard Arms developed the arms index. It is also referred to the Trading Index or TRIN for short. It is a measure of the ratio of up stocks and down stocks divided by the ratio of up volume and down volume. Our Spread Chart converts the arms index data into momentum Buy and Sell Signals.

TICK CHART

The tick index is represents the sum of all stocks ticking higher minus all stocks ticking lower (a stock is said to be trading on an up tick when it trades at a higher price than the last sale). It's utilized as a day trading tool as it gives you an up to the second read of the intensity of buying and selling.

BREADTH (ADVANCE - DECLINE) CHART

Each day several thousand stocks either advance, decline or remain unchanged. The number of advances and declines normally ranges from +2500 to -2500. A high number of advancing stocks normally marks a top just as a high number of declining stocks normally marks a bottom. Monitoring the 5 and 13-day moving averages of this allows us to better predict future prices.

VXO CHART

The VIX is a measure of volatility on options pricing. We use the old VIX, which is now called the VXO. The higher the volatility, the more likely the market is close to a bottom, as traders are willing to pay more premium for puts, which act as Insurance on their long positions.

Cycle Time

Monday is day 2 in our Up Cycle.

The Stock Barometer signals tend to follow a 5, 8 and 13 and sometimes 21 day Fibonacci cycle that balance with 'normal' market cycles. Knowing where you are in the current market cycle is important in deciding how long you expect to maintain a position.

Potential Cycle Reversal Dates

2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28. 11/28 is our last reversal date of the year. We publish these dates 2 months out.

The market appears to have bottomed 11/28 and should rally through the new year.

My timing work is based on numerous cycles and has resulted in the above potential reversal dates. They're predictive and have nothing to do with the barometer cycle times. However, due to their accuracy in the past, I post the dates here.

2005 Potential reversal dates based on 'other' cycle work were 12/27, 1/25, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.

Stock Barometer Buy And Sell Signals

QQQQ or SPY Chart: A chart is provided in every bi-weekly report and shows the barometer Buy and Sell Signals (which are provided in my morning updates) as well as showing the next highlighted 'reversal' window. The numbers adjacent to the buy and sell signals are the number of days between signal (cycle time).

Here's one years of our end-of-day buy and sell signals for the Stock Barometer over the past year. They're marked on the QQQQ chart with red and blue lines (or red and blue arrows).

The following work is based on my price based spread/momentum indicators for the USD$, XAU, GLD and TLT. They are tuned to deliver signals in line with the Stock Barometer. Combined with up/down indicators and you have a powerful tool for pinpointing market reversals.

Gold (GLD:AMEX & INDEX:XAU.X)

I monitor Gold in the form of GLD and the XAU as well as the US Dollar Index as a general guide to the overall health of the US Economy and the markets, as well as to assist us in the entry of positions in our Gold Stock Service.

Bonds (Amex:TLT)

I include bonds in our studies and use Lehman's 20 year ETF, as the direction of bonds can have an inverse impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

Summary & Outlook

We remain in Buy Mode looking for the market to continue higher for the rest of the year and into January. That move appears clearer on the NYSE - but the Nasdaq is just about to break out to new highs.

Again, if you're new to the biweekly stock barometer, welcome. This article comes out every 2 weeks and gives a big picture view of the market and our recent activities. If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so to can our interpretation as the market gives its daily clues to the future. Or sign up for our free weekly newsletter, where we provide up to date articles from our various trading services. We're also going to be releasing a free trading video in 2007 - so sign up today.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

Regards,

Jay DeVincentis
Dynamic Trading

Trading involves high risk. Past results are not indicative of future returns. Stockbarometer.com and all individuals affiliated with Stockbarometer.com assume no responsibilities for your trading and investment results.

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Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

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