Stock Trading Advice from Yoda

[pns01]

Since Star Wars 3 is out at the moment I thought I would post a few of the Jedi Practices and how they relate to the stock market.

"Anger...fear...aggression. The dark side of the Force are they.”

We give in to the fear when we skip the next trade because we have had a run of losers and we fear losing again. We give in to the fear when stop losses are placed too close without giving the trade enough room to maneuver. We give in to our fear when we fail to sell as a trade begins losing money. We give into fear when we can’t admit that we made a mistake.

We give in to greed when we take a profit too early, before the sell signal, because we don't want to give back any profits. We give in to our greed when we trade larger than we can afford because we feel good about this trade.

The jedi spend many years at the Temple learning to control heir emotions, center themselves and think clearly about everything that goes on around them. When training for battle the jedi apprentices study there own movements, their own thoughts in order to “feel the force” and minimize their weaknesses. Traders today flock to the market like rats looking to scavenge every little of profit they can without first reflecting on why they are there in the first place. Greed and fear cloud the judgment of many in the marketplace. They are there for the excitement, the thrill, the joy of a quick buck.  

Take time to reflect on the market and why you trade the market.  Reflect on your trading strategies, why they work and why they don't work. What are the strengths, weakneses of both the strategies and yourself ? There are numerous questions to ask but you should always know why things work. For example why does a moving average work ? When does it not work ?  What are the inherent problems with it and how can they be overcome ? What are the strengths of it ?

Just to answer the above questions.  A (simple) moving average works because it takes a consensus of the price over a number of days. It displays this in a graphical form which allows the user to see a trend. It works well in stocks that tend to trend for a long time. It does not work well with stocks that are choppy or do not move a great deal.  The inherent problems with it is that it does not take into consideration the volume behind the move.  This is a major disadvantage as stocks with low volume moves usually turn out to be false moves.  This weakness can be overcome by adding other indicators to the buy signal such as a check for a large increase in volume.  The strengths are that it shows trends over a given timeframe which are obvious to the trader.

Hope this helps.
Good Luck Trading.