Unleash You Inner Little Old Lady

With the trading industry so heavily populated by intense, manic, and fast-paced men there is little wonder why so many huge gains and loses in the stock market can take place in a mere matter of minutes; seconds even! The violent swings that the markets make throughout a single trading session can easily make a black cat's fur turn gray, can cause your heart to thump right out the window, and the market is definitely well suited for those who like action that is quick and frequent.
In order to put your frantic mind at ease while you trade and give you some much needed sea-legs to stand on as you navigate the markets' stormy waters, you might want to tone down your bravado and think a little differently: Like a little old lady.
One of my worst habits as a trader is that once I am involved in a trade I tend to stare at my quote board, agonizing over every tick made by the stock I just traded. I share this habit with many traders but it is especially common amongst novice traders who do not have enough experience in the market to understand and feel comfortable with its movements. Anyone who has ever traded before can empathize with the feeling: You buy a stock at $85.50 for example, cringe the second it trades at $85.40, and rejoice as soon as the price prints $85.60. You watch this happen in a volatile market for about 10 minutes as the stock goes 30 cents against you, then 30 cents in your favor, back and forth, back and forth, up a bit, down a bit; all the while your cursor is tensely poised on the sell button. You nervously decide to sell, either for a small profit or you settle for a small loss and then the stock suddenly cruises up two dollars and you curse your timidness. Or, perhaps, you decide not to sell when the stock was a few cents in your favor and you could have taken a profit. It then plunges two dollars and you are left to lament a hefty loss.
It happens time after time, even after we have sworn that it will never happen again.

There Was an Old Lady Who Bought MDU...
My father has a very poignant analogy whenever I bemoan the impatience and anxiety that cost me a tidy profit by getting out of a trade too quickly. He will often remind me of how a little old lady is likely to trade and suggests that I try doing likewise.

The basic premise is this:

An old lady will invest in the market from time to time and may be holding on to certain stocks from around when Edwin LeFevre wrote his classic investment mock-memoir Reminiscences of a Stock Operator; which would be since the 1920's. All the while, this old lady is not fretting over the market, worrying about the news, or checking the ticker every five seconds. In fact she probably doesn't even think much about her stocks at all. Then one day, maybe because she had been casually keeping up with her stocks, or maybe because some associate from the firm in which her money is invested contacted her after taking inventory of their long inactive accounts, she finds out that those 500 shares of some auto manufaturer that her late husband had bought somtime after World War II are now worth 5,000 times more than when originally purchased. Overjoyed, the little old lady decides to finally buy that beachfront condo in Boca.
The obvious lesson in this analogy is that you need to see your trades through and that the right trade will garner the favorable result if you give it time to work in your favor.

Grant Me Patience (But I Want it RIGHT NOW!)
If you are a day trader you hardly have the time to while away the hours knitting sweaters for the grandkids, catching up on the soap operas, and playing bridge with the ladies at the clubhouse while you have tenuous positions on in the stock market. But, does a day trade necessarily have to be a five minute trade? One of the most critical qualities for a trader to posses is patience. This may seem counterintuitive in such a frenetic business, but it most certainly is true. Perhaps the most important aspect of patience is having the discipline to wait for a trade to come to you. Like a well thought out game plan, you need to come in early to work each day, having looked the night before at the charts for the stocks that you like to trade, and have a good idea of the areas at which you would like to make trades, from both the long side and the short side. Then, as the trading day unfolds, you must wait until your stocks get into the desired areas before making your trades. If you lose patience in your areas and jump on a trade before the one you had hoped for materializes, you run the risk of making an ill-advised trade that may force you to suffer through some unnecessary loses as the stock makes its way to your originally desired area. There is always the possibility that you will lose money even when you finally execute the trade for which you had patiently waited. If this happens, it just might not have been the right trade to make after all. When faced with the reality that you are in a bad trade, you should take your loss and look for areas to trade that stock again, either later that day or the next day. If you wait for stocks to get into the areas that you want them to, you will make money an overwhelming majority of the time. If you find that you are losing money even when the trades you want come about, then you are probably not reading the charts correctly, are not comfortable with the stocks, or are not being patient enough... which brings us to the second aspect of patience in regards to trading.
The Little Old Lady analogy best applies to when you are actually involved in a trade. If a large part of trading is about patience, then an equally large part of trading is about discipline. You acquire discipline through a consistency of thoughts, habits, and behaviors. One very important behavior (which I of course often fail to display) is that you need to approach each trade knowing how much you expect to make if you are right and where you will cover if you are wrong; and stick to those exit points. Once you do actually get your trade off, put in your stop order, whether it is $.50 against you or even $5.00 against you, and then let your trade do its work. You can then turn your attention to other stocks and other trades. If you happen to get stopped out of a trade, then you get stopped out. Move on to the next one.
If you spend so much of your time staring at the stock you just traded on your computer screen, agonizing over every tick, your uneasiness will get the best of you and right, wrong, or indifferent, you will make a hasty decision that will more than likely not be to your benefit. Plus you will not be putting your focus where it needs to be: the market in general. Another philosophy that my father preaches is that bad behavior begets bad behavior. If you make a bad trade or make a bad decision while involved in a trade, you are likely to jump too quickly into another trade, if for no other reason than to compensate for your previous mistakes. Acting in such a way is a surefire way to lose a lot of money.

The Blood, Sweat, and Tears Market
Everybody sing along with me, now (and if you don't know the song or the lyrics, look them up):

What goes up must come down
Spinnin' wheel got to go 'round
-- Spinning Wheel by Blood, Sweat, and Tears

If ever a business was a cycle of ups and downs, trading stocks is it. Like the name of the group that played the song quoted above, every trader has experienced his or her share of sweat and tears (and maybe even a little blood) while enduring the markets' vicious swings. Two things that are an absolute given in the stock market are that for one, it will go up and down, but secondly it is a cycle and you will see patterns repeat themselves.
My good friend Barry Cooper, not a trader but a success in business nonetheless, when asked his opinion of the stock market, harkened back to the great J.P. Morgan by profoundly proclaiming:
"The market will fluctuate."
Truer words have never been uttered and it is absolutely the one thing in all of trading that you can count on. You need to understand this when you go into a trade. It would be wonderful if you can buy a stock in the morning and simply watch it tick its merry way up from there until the end of the day. I can think of a few very rare occasions on which I bought a stock exactly on its daily low or sold a stock on its exact daily high. Numerous times I was very close, perhaps the stock pulled away a nickel or a dime from where I traded it before going my way. There have been at least an equal number of maddening instances when a stock got to within a few pennies of the price at which I wanted to make the trade and then went right in the direction I thought it would, leaving me out of the trade and out of some serious profits.
However, given the cyclical nature of trading, I know that trades made in good areas often repeat themselves. I can always sit down after the market closes or before it opens the next day, look at the trades that I either lost money on or misssed out on altogether, and revisit the ideal areas where trades can be made, knowing that I will have another opportunity for the right trade in the near future.

Tipping the Trading Scales in Your Favor
Usually I have to endure a little pain, as they say, on even my most successful trades. I often see a trade go anywhere from $.25 to more than $1.00 against me before it starts to work in my favor. Very often, if the trade begins by going against me, I will actually increase my position by buying more shares a bit lower than where I had originally bought the stock, thereby lowering my average price and giving me a chance for exponentially greater profits when the trade starts going my way. This trading method is called scaling and should be done carefully, only if legitimate areas exist slightly above (if you're selling short) or below (if you're buying) the price at which you originally made the trade, taking on small positions each time you trade. For example, let's say you think that a stock is a buy $65 and you want to have a position of 500 shares, but you notice other price points a bit below at which the stock can reasonably get down to before climbing upwards. In order to scale in to the trade, you should buy 200 shares at $65, 100 shares at $64.25, and then 200 more shares at $63.75, assuming that sufficient areas of support exist at or around those prices. In this instance, you can figure out appropriate stops along the way if you get nervous about losing money, maybe by selling out 100 shares before buying your final 200. Either way, you must know where your stops are and in the example given above, you should probably decide that you are completely out of the trade if the stock were to plunge below $63, finally acknowledging that that trade just did not work out in your favor. If the stock were to pretty much go right up after hitting your $65 price, well then at least you were in for 200 shares and can manage your profits as you see fit.
It is never a pleasant experience to see a trade go against you, even for a few minutes. You are literally holding your breath, waiting for it to go your way. If you are involved in a trade for 300 shares and it almost immediately trades $.50 against you, the trade has started out as a $150 loss. Truth be told, in trading parlance, a $150 loss is almost like a gift. Any seasoned trader, who has been involved in trades worth thousands, even millions, of dollars will tell you that they wish that they could lose $150 on their losing trades. However, when a young trader who has not had opportunities to really see the markets move and might not have ever really made a lot of money sees even modest losses, it can be very discouraging. To put it in perspective, four losing trades in a day, each totaling $200 (plus commission) equals more than what most young professionals a few years out of college take home in a week. Knowing that you might have lost that much over the course of only a few minutes can really turn your stomach. Believe me, I know, it happens to me all the time, and it can make a trader very nervous.
But, if you are patient, disciplined, calm, and practice good habits, you will be much more at peace with the market's moves.

Remember:

• You must choose your areas carefully when trading and wait for your stocks to get to them. If they don't, you should forget it and move on to the next trade, perhaps taking time to evaluate why the trade eluded you and where else you might be able to trade that stock. Understand that the market does indeed fluctuate and that any trade that you make will probably go against you by a little bit before it starts to work for you.
  
• Don't live and die by the tick on your quote board. It will only cause you anxiety over the trade you are in and keep you from paying attention to the markets and to other possible trades. Just put in your stop order and come to terms with your loss if the trade does turn out to be a loser. Knowing the general direction of the market will give you an idea as to whether you are making or losing money and you can then turn to your charts to see where you want to either take profits or cover your loses, provided you want to do so before getting stopped out.
  
• Always consider scaling in to a trade. I would recommend that any new trader take small positions on anyway, just so that you can get comfortable with the markets. If you have a good idea of the area where a stock should be traded but are not completely confident, then scale in bit by bit, buying or selling small amounts a few cents away if you happen to see sensible areas of support or resistance along the way.

Patience always pays and it will help you to reflect constructively on your trading and allow you to channel your energy in to making good trades. Any little old lady who has lived for a long time and has seen many of life's real ups and downs will tell you that there are very few matters of life and death. The money that you invest in a trade, provided that you were smart and did not trade above your limits, will probably not be a matter of life a death either and that there will always be opportunities to make the right trades. As day traders we cannot ignore our trades by simply putting them on and then cruising the internet for the rest of the day. As Linda Loman so famously says in Arthur Miller's classic play Death of a Salesman "Attention must be paid." There is a difference, however, between patiently and carefully paying attention and becoming obsessed. If we obsess and agonize over our trades we most certainly will not pay attention to the dynamics of the trade we have on or to the market as a whole and that will always lead to destructive bad habits. While we may not necessarily have the luxury of squirling away our investments for a rainy day, we do have to realize that it may take time for some trades to work in our favor. A choppy, volatile market is really nothing to be nervous about and there is a lot of money to be made in them. If we are not patient, we stand to lose out on the money we really could be making, money that would be very useful when we become old men and old ladies.

Reflective Sidenote
Be very careful not to confuse being patient with being stubborn. Another bad habit of mine which I know I share with countless other traders is that I am often times very stubborn as well as impatient. I very often get involved in a trade and then hold my position for much too long as it continues to go against me. I reason that it has to reverse at some point and if I just hold my ground my trade will start working in my favor. It is a known aspect of the human psychological condition that we are much too willing to stay in negative situations for far too long, only escaping when we are past a breaking point and severe damage has perhaps been done. Think about all of the people who stay in bad marriages for so long and you will understand what I mean. These people are convinced that they are nobly staying the course and that whatever effort they are making to improve their situations will finally pay off. However, the situation rarely pays off and both parties in the failed marriage emerge emotionally scarred and resentful.
It is difficult for people to admit that they are wrong because it means that somewhere along the line they will have to cut their loses. When I stay in a bad trade for too long it is because I do not want to come to grips with the fact that should I exit the trade and forestall further damage, I will still come out of the trade a loser, therefore rendering the trade a waste. Nobody ever wants to feel that their efforts were wasted and the knowledge and perspective that we gain from our mistakes is rarely recognized as ample compensation. In circumstances such as this, we can convince ourselves that we are "patiently" waiting for the trade to work as we had expected it to but in reality we are only be stubborn and shortsighted.
Losing money is as much a part of trading as making money is. We need to accept that loses will occur and it is how we manage our loses that will determine whether or not we will be successful traders.
Setting limits and putting in stops are very disciplined and effective ways of managing our loses. Determining the areas where a better trade might be made is an extremely proactive way to make up for our loses. Scaling in to a trade is a very prudent means by which to cover ourselves should we not be 100% certain as to exactly where a trade should be made. However, when deciding to scale into a trade, NEVER keep throwing on more and more shares of a stock as you continue to lose money, with the intention of "getting back" at your loses and "wearing the stock down". Acting as such is in many ways similar to what the now infamous French "Rogue Trader" Jerome Kerviel did when he somehow recently managed to lose more than $7 billion for Societe General, the bank at which he was employed. Needless to say, this type of trading practice will only wear down your money, your nerves, and eventually your patience.

The Road(s) to Profit

There are countless ways to get from point A to point B.
Ask any five people the best way to get to a busy metropolitan airport during rush hour and you're likely to get five completely different answers, each person claiming to have the can't fail route. Invariably there will always be one person who will direct you to take those less-traveled back roads, that only the locals know about, free of traffic, devoid of tolls, and guaranteed to get you to your flight hours ahead of schedule.
We are all trying to get somewhere and many of us are sure we know the best way to go. That is, of course, until we are hit with a massive delay and have to consider rethinking our route altogether.
As traders, there is only one chosen destination: Profit.
Of course the fastest way to get to that destination is to hold the right positions. If you are long a stock and the stock goes up, you are well on your way to your destination. The same can be said when we you are short a stock and it goes down.
However, like a carpooling mother rushing to drop a car full of kids off at school, you must know more than one way to get where you are going or else you might get stuck in a jam and not reach your destination on time. Worse still, the chaos mounts with each passing minute as the children grow restless. Your aggravation mounts as the childrens' squirms and impatient wails mash together with the curses from other drivers and the sustained blasts from their cars' horns. Such a situation can lead to frustration and helplessness, feelings common amongst traders on the losing end of a trade. You may have had excellent success trading a particular stock in the past, just like your regular route to the school may have always been fast and efficient. However, for any number of reasons you may be taking a loss in your stock on this particular day. All the while, you notice that other stocks may be making significant moves, steadily fluctuating back and forth into great areas and that other traders, either in your office or those whom you just know, have been making a lot of money trading their stocks. Meanwhile the stock you are trading pulls away from you or barely moves at all. The agony of a losing trade both depresses you and frays your nerves at the same time.
We all have a favorite way of driving to any particular place. It may not be the fastest way, or the cheapest way, or even the shortest way. But, whatever your reason (closest to home, less complicated, most gas stations), it's the route you like to stick with. Sometimes, though, your tried-and-true way to your destination just might not get you where you want to be. A horrible accident a few miles up the road, some unexpected construction, even bad weather can delay you for hours. Likewise, in the stock market, any number of factors can influence the direction of the market and can determine whether or not you will make money trading a particular stock on a particular day.
Sometimes we need to quickly realize when our favorite route is jammed up and make fast decision as to which alternate route to take. A trader must also realize when their favorite stock is not moving in their favor and quickly find alternatives in order to avoid minimal profits or worse, take a loss.

We Miss Out When We don't Look Out
It's happened to all of us at one time or another. I once sat helplessly in traffic for hours, not knowing what had caused it and with no end in sight. Meanwhile, I was late for my good friend's birthday party. Upon finally arriving at the party everyone else who was there had already settled into their niche for the night: Some outside on the back deck, keeping an eye on the beer, many involved in their own conversations off in various areas of the house, a group of friends watching the game on T.V., and others having seemed to have had more than enough to drink. Already tired, irritable, and anxious, it did not make me feel any better when a random acquaintance of mine, who just happened to live right near me, who left at roughly the same time as me, and who I subsequently did not like very much to begin with mockingly boasted that I would have been there hours earlier if I had just gone his way.
Although it took a couple of minutes, by the time I had taken off and hung up my jacket, said a few hellos, heard a funny joke, and got started on my first drink, I quickly fell into rhythm with the other guests and ended up having a fantatstic night. Trading stocks has a rhythm as well and that rhythm varies from stock to stock and in different types of markets. The more you trade, the easier it becomes to pick up the rhythms of particular stocks and you will have a better feel for when you should get in and out of a trade. When we are late getting somewhere it often takes a little while before we find our rhythm and get comfortable being where we are. But when the environment and the company is familiar to us, such as at a party amongst friends, it is much easier to settle into that rhythm. Making a bad trade at any time during the day can certainly throw you off rhythm and even make you apprehensive about getting back into the market at any other time throughout the day. There will always be opportunities to regain your rhythm and recover from a losing trade, though. The more familiar you are with the market, the more confident you will feel about rejoining the party. It is very important to approach trading with an open mind, much in the same way you would any other facet in life. If you arrive late to a party, with the narrow-minded view that your night has already been sacrificed and you brood over the fact that you were at the cruel mercy of the traffic, it might be too late before you decide to take advantage of the the other options all around you that could contribute to a great evening. Likewise, if you are too focused on your losses while trading one particular stock, you will miss out on opportunities to make other trades that might work in your favor
In order to avoid getting waylaid in the future, you must know more than one way to get where you are going, so that you can bail yourself out of a bad situation and reach your destination comfortably, happily, and on time. While this is true anytime you get into our car and hit the open road, it is especially true when trading stocks. Like a familiar and well-traveled freeway, one or two particular stocks can garner a trader immense profits. The more familiar one is with a particular stock, the more he or she can understand its trends, its volatility, its ideal areas of support and resistance; and will have a greater chance of making a successful trade. Many traders have actually made a decent living by continuously trading in and out of one or two particular stocks.
But, what does one do when their one favorite stock, their fast track to profit, suddenly does not yield returns? Just as on a busy highway, countless variables can impede your progress, stopping you dead in your tracks. Suddenly a stock on a steady bullish climb can reverse into a bearish descent. Sure as an overturned tractor trailer in the right lane can snarl a four-lane expressway for hours, a gloomy earnings report, some innovation by another company in the same sector, or an increase in taxes can halt a fast-moving stock to a complete standstill and often cause it to tumble for a loss. Without a few other stocks to fall back on, it becomes very difficult to turn a profit and you can become easily frustrated when your favorite stocks start working against you.

All Roads Lead to Profit (Make Sure You Know a Few of Them)
Some individual investors are too limited in the number of markets that they trade. They become extremely loyal to those few markets and try to find trades in them when there really might not be any to make. Trading as such can lead to tremendous loses and breed bad habits that can leave you without the leverage to make the right trades when they finally do arise. For this reason, it is important to be familiar with several stocks, anywhere from 5 to 15. Generally speaking, you should watch at least one stock from a variety of different sectors. That way, you will have a better idea of the stocks in which you can make the correct trade, rather than trying to force an incorrect trade. Even in a market that is trending one way or another as a whole, different stocks move differently throughout a trading period, based on any number of various factors facing the market. For example, energy stocks might actually decline in a bull market if a surplus in the amount of crude oil reserves is announced. Likewise, a recall on a popular new heart medication can send shockwaves through the pharmaceutical sector, even if the rest of the market remains fairly strong. In each of these cases a trader who primarily invests in a particular energy stock or a particular pharmaceutical stock would be at a loss, assuming he or she is long. But, a trader who actively trades a number of different stocks, rather than just one or two preferred stocks has the flexibility to invest more creatively and take his profits elsewhere. Therefore, a diversified, yet not too broad a list of stocks, will leave you with plenty of options for making a successful trade.

Picking the Right Kinds of Vehicles
One rule that you should always follow, especially when just getting used to the markets, is that you should look to trade stocks that move at a pace that you feel comfortable with. To this end, mid-priced stocks (those valued anywhere from $30 t0 $100) should be ideal. In any kind of market these stocks will often have steady and clearly defined moves, significant enough to have reliable points of entry and exit. However, they will not move so slow that you feel like your gains after a whole day were just enough to cover commissions. Likewise, they will generally not move so quickly that you have to sweat through a big move against you before the stock abruptly swings back in your favor, or just keeps sliding further away from you.
What you need on the road to profit is a reliable mode of transportation that you feel secure in. A $5 stock is like your grandfather's beat up old hatchback. It may be cheap, but it might keep breaking down and can't handle speeds over 55 miles per hour. You may get to your destination eventually, but you might waste a lot of time in the slow lane or on the shoulder of the highway while getting there. Those expensive stocks, the energy or tech stocks, for example, valued in the 100's of dollars? They are like the fancy, luxurious, European sports cars. Powerful, great to look at, and can give you a thrilling ride. But, without enough driving experience, you may find them to be too muscular to get a handle on and after shifting into gear and stepping on the gas, you might lose control and slam straight into a tree.
Think of your stock portfolio as consisting of a group of Hondas, Toyotas, and Chevrolets: Nice enough, very reliable, and likely not to give you too many problems. Maybe, after some experience you can test drive and then think about investing in some Lexuses, Mercedes Benzes, and at some point a flashy sports car. If I had to recommend either cheap slow moving stocks or the high-octane expensive stocks to a new trader, I would definitely urge caution and recommend the cheap ones. On a day trading basis, there are very few traders who trade super-expensive stocks such as Google (Nasdaq: GOOG). First of all, it costs more to trade only 100 shares of Google than it does to trade 1,000 shares of a well-known brokerage stock such as Merill Lynch (NYSE: MER). So, if you were to trade Merill Lynch for example, you would have much more flexibility to trade it at higher volume, which gives you more opportunities to get out of parts of your position a few times as the stock fluctuates, giving you multiple chances to take a profit. Secondly, stocks valued in the hundreds of dollars tend to have such large moves during one trading session, that they may trade five to 10 dollars against you before going back in your favor. Many traders do not want the worries and pressures associated with trading something that moves so violently, so quickly. After enough trading experience (and some decent profits) you will someday feel confident enough to trade just about anything.

Too Much of a Good Thing can Be Just as Bad as Too Little
When frozen in an endless line of taillights on the highway, we can always take solace in knowing that there is an exit maybe a mile away that leads to an alternate route, getting us back on track and to our destination on time. If we regularly trade more than one stock, we have the piece of mind to try different routes that might easily get us to our desired destination. Following too many stocks can lead to confusion and may cause you to miss out on a good trade in one stock because you might have been too involved scanning through others. Therefore, it is never wise to follow too broad a range of stocks. However, if you can become familiar with a handful of stocks, learn their habits, and be aware of their behaviors given a market's climate, then you can know which stocks to buy, sell, and ignore on a particular day.
Should you find yourself jammed up in the stock market, take solace in knowing that there are many other routes that can help to get you on your way to the profits you are destined for.

Reflective Sidenote
Before you come to the conclusion that a stock that your prefer is "not working" for you you need to seriously consider why your trades in that stock failed. In order to get a stock's rhythm you must trade it continually, and that almost certainly means that you make some losing trades in it from time to time. My father George Kaufman, who is a tremendously successful trader firmly asserts that a stock traded on Monday must also be traded on Tuesday. This is not to say that you should keep bringing yourself to slaughter against a stock that you always lose money trading. If you find that to be the case, it just might be that you are having some difficulty understanding that stock's habits and behaviors; and that might end up being one of the stocks that you should not trade. However, by repeatedly examining a few stocks closely, you will have a better idea as to where the correct areas are to get in and out of the market. That way, if you happen to make a losing trade one day, you can look over that stock's chart, identify why the trade was unsuccessful, and have a better idea of what the correct trades will be for the next day. You should encourage yourself to trade stocks in which your previous trades had failed, but only if you go about trading them with your mind atune to what the correct trades might be. In becoming familiar with a few stocks, you can then know which stocks might not be approaching ideal trading areas and you can then turn your attention to those that can earn you some profit.