The Trader's U E-Letter: Issue # 168
Wednesday, December 28, 2005
Stock Trading in 2006: How to Make the New Year Your Best Yet
by D.R. Barton, Jr., Chairman, Trader's U
"Insanity: Doing the same thing over and over again and expecting different results."
- Albert Einstein
Oh no, Edmond! Don't do it again…
I had the pleasure of watching the enthralling film Narnia with my family during the Christmas holidays. One of the central characters, a boy named Edmond, keeps making the same mistake over and over again during the story.
In his quest for treats (not to mention power and importance), Edmond keeps giving away valuable information - information that hurts friends and loved ones. For those who haven't had the chance to see this delightful film, I won't divulge any more of the plot.
But Edmond gives us a keen insight into a bit of human nature that also happens to plague traders and investors: We fail to learn from our mistakes.
It's time to turn that around and make stock trading in 2006 your best year yet for investing. Let's review the trading methods and techniques you can use to learn from experiences.
The Periodic Review - The Cure for a Stock Trader's Insanity
The quote from Albert Einstein at the top of this article is so enduring because it hits so close to home. We do make the same the mistakes over and over again in all areas of life.
So how do we keep from becoming the trading world's equivalent of Edmond?
I've looked at lots of ways to capture trading and investing experiences and learn from them. The best I've found is Van Tharp's concept of the periodic review. Van is a wonderful trading coach and a truly innovative thinker. He considers the periodic review so important that he includes it as one of his "Ten Tasks of Trading." (For more on the Ten Tasks, see the Tips and Tricks section below).
Use the Periodic Review's Core Principles for Stock Trading in 2006:
- Keep a record of your thought process for each trade or investment you make in 2006. This can be as simple as a writing down, "Why I got in" and "Why I got out" of each trade. Or it can be very in depth and include the research that you used and the emotions you encountered at every step of a trade or investment.
- Be honest with yourself and keep a complete account. If you made a mistake, say so in your trading log. This is even more important on that rare occasion when the mistake resulted in you making money.
- Put every trade or investment in your 2006 log. It really does no good to only write down thoughts for your winning trades. You can only make real improvement when you work on all aspects of your trading - especially correcting your chronic missteps.
- Set time aside for an in-depth review of your trades, investments and stock trading strategies. Do your periodic review when you can be away from the market. Find some quiet time that is free from distractions. Dig into each and every trade or investment you made. Ask yourself the tough questions: Did I follow my rules? What was good about that trade? What could I have done better? Did I make a similar mistake to another trade?
The periodic review is a powerful tool that can make a huge difference in your 2006 trading and investing results. Make it part you're your monthly or quarterly routine.
Today's Trader's U Tips & Tricks
- Dr. Van Tharp's "Ten Tasks of Trading" are one of the cornerstones of his excellent Peak Performance Home Study Course. Long-time readers know that I have recommended this great course many times in the past. The "Ten Tasks of Trading" alone are so valuable they are reason enough to get this course. But this course is so rich that the section on the "Ten Tasks" only occupies one part of one book in a five-book series. Do yourself and your trading profits a favor - go get this course!
- What are the warning signs of a bad trade? Look back over my Trader's U series, The Curse of the Low-Quality Trade, #165, #166 and #167. These are great to look over as you're setting up and beginning to write in your own periodic review for the New Year.
The Chart of the Week
In a departure from our technical analysis, this week we'll look at the savings rate for the U.S through 2006. Amazingly, it continues to be below zero (meaning that Americans are spending more than they are making!). Since April of this year, the U.S. has continued to take on debt to fund its spending. While many individuals have done this for years, this is a completely new phenomenon because the country as an aggregate whole has never before gone on such a borrowing binge. In the weeks to come, we'll dig into the ramifications this over-spending will have and how we can prepare to take advantage.
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