Getting to Know Your Stocks

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  • on April 8th, 2010

The series of posts recently put out by David at CSS Analytics contains so much goodness that a 140-character tweet couldn’t cut it.  In it, he unveils studies demonstrating just how different one’s results can be if applying trend trading to mean reverting stocks, and vice versa.  The theory makes sense, and the results are so revealing it should cause any trader to review his or her rules for an opportunity to improve.

Everyone can point to a stock/sector in which they just “kill it”.  At the same time, we have a stock/sector that just gets us every time…the setup looks great, but the follow through just isn’t there(for me, it’s energy stocks).  My logic, as Dennis Gartman often says, is to do more of what’s working, and less of what’s not.  Dr. Brett Steenbarger has said on many occasions that superior performers spend time enhancing their strengths rather than trying to improve upon their weaknesses.

So how do we “get to know” the stocks we trade?  Own them.  You can prepare yourself using tools like David’s “LTR”, but until you have a stake you just can’t be fully prepared.  It’s like the stupid dating show “The Bachelor”…of course you can fall in love with an attractive person while thousands of miles away from your normal life.  The real test is on a random Tuesday night at home…enjoy that, and you might have a match.

You can’t own(date?) everything, so you have to pick and choose.  For some, this is easy, as they focus on all patterns inside a given stock or commodity or currency, and get to know it so well that it becomes a part of their fiber.  You’re up against these pros, so when you put on a trade you’re entering their territory.  Not necessarily a disadvantage, as long as you operate with a fresh eye and recognize your lack of experience in the name.

What about guys like me, who scan hundreds of stocks looking for the patterns that have treated us well in the past?  If it’s a new name, throw out a small line.  We all know that most of our successful trades were winners right from the start, so if you begin to get on top of one you can always add to it.

One of the most helpful things I’ve done is adapt my style for the personality of the stock in which I’m operating.  Not abandoning my principles, just recognizing things like the speed of a stock, its propensity to trend, the violence of its counter moves, etc.  Besides typical stats like ATR and SD and ADX, consider the makeup and expectation of participants by knowing the sector, capitalization, institutional ownership, and/or short interest…it takes about 10 seconds at a great site like FINVIZ.

I think it’s harder now…when I started trading you just had to know which firm was the “ax” in a stock, and watch them for clues ahead of big moves.  Perhaps this still goes on, but it’s not part of my watch anymore as research and market-making have been democratized for the better.  Luckily, the tools available today give you every piece of info you could ever need and more.

Bottom line, you have to choose whether you want to be a pattern expert or an axe in a few names.  If you choose the pattern route, just know that the path from entry to exit is going to change from one name to the next.  Better to accept that going in, and give yourself room to get in sync with your new partner.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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