Sunday Self-Scouting

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Many traders often cause self-inflicted wounds to their portfolios, by way of letting their past mistakes haunt them. They constantly think in terms of what-if’s, and woulda-coulda-shoulda’s. They daydream something like, “If only I had gone all-in long on $GOOG when it first had its IPO, I would be sitting pretty right about now.” Indeed, as the old axiom goes, hindsight vision is 20/20.

By its very nature, trading the market attracts ultra competitive types, who are their own harshest critics. While genuinely caring and taking pride in your work are great qualities to have, you absolutely must have the ability to shake off your losses and move forward to the next trade with a clear head. Although you may subconsciously feel better for beating yourself up for making a bad decision (by showing your inner self that you truly care), Mr. Market is not going to give you any consolation prizes, nor an “A” for effort in class participation.

With that in mind, I try to be forward looking. Whatever does not kill you…well you know the rest of those cliches, but they do ring true. The distinction I would like to make is between foolishly beating yourself up for not going all-in on a stock that went up 10,000%, versus doing some constructive self-evalution of your analysis from time to time. In American football, self-scouting is a crucial aspect of preparing for the next game, as teams spend so much time studying their opponents that sometimes they forget to see if their own schemes have become fundamentally unsound. Similarly, traders spend so much time looking outwards at sentiment of other traders, charts, data, etc., that they often miss out on some self-scouting opportunities that could truly increase their profits.

Below, you will find me reflecting on some of the ideas and theses that I have discussed in the past few weeks. If nothing else, I am following up on them, so as to not leave you twisting in the wind and hanging out to dry, like so many other financial writers do.

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THE BAD

I was wrong to say that $GLD was not a short in late June of this year. Although I never took a position in the yellow metal, and I have been cautious on the miners, I put my readers on the wrong track by saying that shorting gold was foolish. In retrospect, I should have seen that the upside momentum in gold was waning, and I should have also been more open-minded to the idea of shorting what turned out to be a crowded trade, in the face of panic in Europe.

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I was also incorrect in assuming that just because a chart is putting in a bottoming formation, then it is safe to trade. I made this error with $GMXR a while back. I eventually got stopped out for a loss, and I deserved to lose every penny on the trade, for my hubris. I still like the prospect of the stock putting in a broad base of a bottom here in the $6 zone, but bottoming formations are often sloppy and cause great frustration amongst both bulls and bears.

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THE GOOD

I took some handsome profits on my $ARUN trade within the past few weeks. I noted when I sold out of it that I thought the doji indecisive candles, after the sharp run up that the stock had, were likely warning signs. Although I may very well look to reenter this stock in the near future, it turns out my short term call and analysis were correct.

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I was also correct in turning bullish on the Euro/Dollar as early as late June. While many traders were trying to short the Euro back then, I noted the bottoming formation that the stock had formed. Unlike $GMXR, this bottom was more pronounced, in the form of an inverted head and shoulders pattern, and had also held its breakout. I still believe that 1.32 is a realistic target here.

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I was also correct to point out the bullish divergences in late June, as neither the trannies nor the small caps had broken below their February lows, while many traders–not to mention the financial news media–noted how bearish it was that the S&P 500 had done so.

I could go on with a much more extensive list, but I would risk turning this post into a novel. Hopefully every now and then you can take a slice of your weekend and do some honest, constructive self-scouting.

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