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Thursday, July 31, 2008

Mental Rehearsal Helps You Cope

These days there is no sure thing when trading the markets. You may have a good chance of winning, but the next unseen catastrophe may be around the next corner. Who knows what will happen next? Well, if you are the typical trader without the right connections or insider information, it’s almost impossible to know with exacting certainty what the Fed will do, what institutions will do, or how the media will report it. After a few years of seeing new highs, we are now seeing the Dow trending downward each week. Whether you are a short term trader betting on the daily or weekly trend or a long term investor worried about what will happen next year, it may be difficult to execute a trade when the time comes. You may feel calm during the planning stages, but when it comes time to put your plan into action, you may get nervous and flustered to the point that you can’t pull the trigger.

If you freeze at critical moments of trading, it’s understandable, especially during uncertain times like these. You can intellectually understand what to do, but when it comes time to execute the trade, you can't do it. It is much like knowing how to make a golf swing in the abstract, but being unable to do it while playing an actual round of golf. When the psychological or financial stakes are high, you may choke, and all the preparation that went into your plan may be of little benefit if you cannot put your plan into action at the right moment. You don't have to let anxiety and uneasiness get the better of you, though. You can use the technique of mental rehearsal to cope with emotions that may thwart your ability to trade effortlessly.

The Problem

When your money is on the line and you are not sure if you will lose precious capital, it may be hard to execute when you need to. A sudden fear reaction may catch you off guard and may seem mysterious. When caught off guard, the uncertainty of the markets can impact your ability to trade calmly and rationally. When you anticipate your potential fears, however, their potency will be greatly diminished.

Mental Edge Strategies

One of the best ways to cope with unexpected anxiety-provoking events is to use mental rehearsal. Mental rehearsal consists of pretending a series of events is unfolding occurring while in a safe, quiet place. It's much like making a videotape of a set of market events and replaying it in your head. For example, you can imagine having to make a profit during times of extreme uncertainty and feeling that you are not sure of what will happen in the long run. If you are the kind of person who would find making a trade while afraid of what will happen to your stake, you can try to practice making the trade effortlessly through your imagination. By replaying the events in your head at your own speed and under your own terms, you can learn to control your fear response. When you first replay the mental “movie” in your head, you may feel anxiety and apprehension. Your breathing may be heavy and difficult. When this happens, you can "pause" the "video" and practice relaxation exercises. Take deep breaths and relax your muscles. By replacing anxiety with feelings of peace and relaxation, previously stress-inducing events will lose their potency. Through practice, you will soon be able to replay the movie without stopping and without feeling any sense of anxiety or uneasiness. Eventually, you will be able to face actual stressful events during the trading day with a calm and relaxed response. You can imagine yourself trading under the most chaotic conditions with ease. You can imagine entering and exiting a trade calmly and effortlessly. By mentally rehearsing the event, you can face incidents that would be difficult to address during actual trading conditions. Rather than facing them in reality, and repeatedly experiencing stressful, paralyzing emotions, you can practice coping with approximations of the event until you can trade decisively and effortlessly. Don't let stressful emotions adversely impact your trading. Cope with them through mental rehearsal and neutralize them. Soon, you'll be trading effortlessly with the proper mental edge.

By Michael S. Shopshire, PhD. Mental Edge

Tuesday, July 29, 2008

Technical rebound and a deciding moment

The KLSE saw some active buying yesterday with the CI surged up 12.34 points to 1154.09 and volume rose to 785 million shares. This volume coupled with many active 3rd liners counters rising indicated that the retail players jump in actively after a 2 months down trend since 20th May from the 1302 level. However, one need to exercise caution when trading under the present scenarios. I would say that the market is at present only experiencing a technical rebound after an almost continuous fall for 2 months under all kind of negative factors, be it economically or politically.

Technically one can see from the chart that the CI was deeply oversold and fall beyond the lower LR channel, a pull back or rebound is expected. As mentioned previously, CI has to go above the 1160 level in order to stay within the long term uptrend channel. At the moment, the overhead resistance is at 1157 which was the low registered on 10 Mac 08. The downtrend line and the 30 days MA are also pointing at the same level which make the 1160 level difficult to cross at the moment. The CI may pull back a little before it gathers enough strength to break the resistance at 1160. A small inverted head and shoulder was formed, and the CI break through the neckline yesterday, this indicates that if CI is able to break through the 1160 level, it may have a chance to test the 1200 level indicated by the brown dotted line. This is a deciding moment in which if CI can't hold well and head south again (with more surprises surfacing), then we may even see it going to the 1080 level.

Hopefully the coming budget 2009 can inject some life into the market which it badly needed. Do keep track on this blog for trading opportunities.

Thursday, July 24, 2008

The Silver Lining

During the past few months it’s been difficult to look on the bright side. Whether it has been rising oil prices, housing woes or the banking crisis, it’s easy to fall prey to a pessimistic attitude. If you aren’t careful, you may start to think it’s impossible to overcome the many obstacles in your way. But there is always a bright side. For the past two days, for example, oil prices are down and things don’t look so bleak. These events illustrate that setbacks are often temporary and with enough creativity they can be overcome. It’s always better to look on the bright side than fall prey to pessimism.

Winning traders trade using a scientific approach. They don’t become overly emotionally and pessimistic when they hear bad news. Rather, they just press on. They develop hypotheses, devise sound trading plans, and test out their theories by executing a trade and seeing what happens. A very systematic, objective approach is taken. Sometimes a hypothesis is supported, and a method is confirmed to produce a profit under specific market conditions, but at other times, a theory is not supported. Revisions are then required. It's vital to determine what went wrong, and what went right, and make any necessary changes.

When things aren't going right, it is useful to look on the bright side: Remember that things could be worse. When you lose $10,000 on a sure thing, for example, you might as well think, "At least I didn't lose $20,000." It works to think positively. A study by Dr. Chris Davis, a professor of psychology at Carleton University, and his colleagues illustrates the usefulness of looking on the bright side. Participants were asked to imagine they had just experienced a major setback. Some of the participants were instructed to look on the bright side in that they were asked to consider the fact that matters could have been a lot worse. Other participants were asked to consider how the situation could have been much better. The mood of the participants was measured and compared. Research findings clearly favored looking on the bright side of things. People who focused on how matters could have turned out much worse felt happier after a major setback than people who focused on how events could have been more favorable. So if you want to be happy after you encounter a setback, look on the bright side.

The Problem

When facing setback after setback, it’s easy to fall prey to a pessimistic outlook. When pessimism sets in it is difficult to trade with the proper mental edge. Opportunities are blurred by a negative outlook.

Mental Edge Strategies

How you look at a setback strongly influences how you recover from it. If you view a setback as a dreaded event, and imbue it with strong personal significance, you'll feel so emotionally overwhelmed that you will be tempted to engage in avoidance and denial. Rather than taking decisive action, you will waste precious psychological resources denying the reality of the situation. It's better to take setbacks in stride, find solutions, and move forward. Don't mull over what went wrong. Instead, figure out what you can do next to improve your strategies and methods and take home huge profits.

There is always a bright side. You just have to find it. As long as you have trading capital to trade, you can look for opportunities to profit. Similarly, even if you don’t have sufficient trading capital right now, you can build up your capital, continue to observe the markets and develop your understanding of the market action. Rather than feel stuck and ready to give up completely, there is always a bright side.

Looking at the bright side keeps your spirits up, and you need to keep your spirits up in order to feel buoyant enough to search for creative solutions to problems. When carefully analyzing how a trading plan went awry, for example, it's easy to start beating yourself up for not having a trading plan that was foolproof. But if you mull over the possibilities too much and start thinking, "Why did things turn out so wrong?" then you will feel disappointed. It's vital that you stay focused on taking active steps to solve problems, and that’s why keeping your spirits up by looking for the bright side is so important. Rather than react to setbacks with emotion, it’s vital to think like a scientist. Pretend you are merely solving a mundane problem, like finding the solution to a basic math problem. Figure out what you can do next. Don't question your abilities. Self-doubt is a complete waste of time and energy. Look on the bright side for a moment, and optimistically search for ways to pick yourself up off the ground. By looking on the bright side rather than falling prey to a pessimistic outlook, you will trade with the proper mental edge.

By Michael S. Shopshire, PhD. Mental Edge

Wednesday, July 23, 2008

Technical Rebound

Last few days have been very much like a roller-coaster ride in the KLSE. The CI first found a support around 1120 and rebounded to 1153, the there comes more surprising news and pressed the CI down. Last Friday, the CI took a further beating when the foreign funds sell down major plantation stocks like SIME, IOICorp, KLK etc. The way KLK falls was really scarry, down by Rm2.60 to a low of 12.60 from 15.20 in 2 days before recovering slightly to 13.70 yesterday. This tells us that during a bear trend, no matter how fundamentally strong is the stock, it will still come down under market force. So, never fight the force, flow along with it, that is what trend trading is all about.

Yesterday, the CI rebounded slightly to closed at 1109.57, just slightly above the critical psychological support of 1100. It is very important for the CI to stay above this level, otherwise the downside level mentioned in last post will come true. The immediate overhead resistant is at 1120, for the short term down trend to reverse, the CI must be able to go above 1160 level. However, under current economic situation worldwide, with the high oil price and the many political sendiwara taking place in our country, the CI is lightly to consolidate within a range of 1090 to 1120 to build a base before any uptrend rally can take place.

As the market is deeply oversold, where the CI actually falls continuous for almost two months nows, it might be an opportunity for the medium term player to pickup some quality stocks. There are also some stocks that refuse to come down with the CI and even buck the down trend, these can be a very short term trading opportunity. Whatever, you like to do, placing a stop loss is very, very important to help preserve your capital, as you might be wrong again.

Wednesday, July 16, 2008

Bleak outlook

The regional market including KLSE plummeted yesterday following the Dow's fall on Monday, a result of the continuing financial crisis in the US. This round it involves the two mortgage giants Fannie Mae and Freddie Mac. Locally, the political uncertainty is a little settle with the PM's announcement of his handover plan.

Technically, the CI is not looking good. It has gone into a bear trend. Fibonacci retracement of the recent up wave points to a extended target of 1116 (127.2 % extension) which is where we are very close to right now, the down move may only complete at the 161.8% extension which point to 1066 if the 1100 psychological support is broken. A 200% extension will bring the CI down to 1007 level (green line). Base on the major head and shoulder pattern neckline breakdown, the medium term target is 990 (brown line). Based on the linear regression channel, in order for the CI to still stay within its long term uptrend, it must find its way to stay at least above the 1160 mark.

That is just the broad picture of the CI's future outlook base on technical studies, which looks bleak. However, one must remember that not all companies are affected by the current financial trouble of US, there are still sectors and counters that may buck the down trend, this will need one to do some serious homework to find them.

Wednesday, July 9, 2008

Roller-coaster ride

The bearish sentiments still prevail in the market. KLSE yesterday opened with a slight dip due to overnight Dow's small loss. It then rebounded on speculative buying especially on Gamuda and KPS, CI bounded to the intra-day high of 1136, and profit taking sets in. In the afternoon session, CI took a dip due to heavy selling on plantation heavy weights like SIME, KLK and IOICorp, many that posted gain the morning session turn red. KLCI finished the day at 1121.25, near the low of 1120.31. Volume increased to 450 million shares traded, with market breadth at 258 gainers to 344 losers. The increase in market volume indicates selling by the foreign fund especially on blue chips.

The Support now at 1120 is critical, if this is broken, we may see the CI plunging towards 1102. The other leading indicator is the CI future, FKLI for July has already gone done to the low of 1083 and closed at 1090, running at 31 points discount to the cash market.

The market will turn irrational, when major support like 1100 is broken, this will draw another round of irrational selling. However, as it always is, at the selling climax, it is always the market bottom. Hold your belt tight for the roller-coaster ride and get ready your bucket for the quality stocks at deep discount.

Thursday, July 3, 2008

Bearish sentiments, bearish trend

Since the last posting, the market has been through many changes. Oil price keep making new highs which lead to greater worries on inflation, locally political uncertainties has worsen the situation which lead investors into selling.

Yesterday the KLCI has came down to test the 1157 level which was the low registered on 10Mac08, the CI saw no defense at the level and went straight to test the psychological support at 1150 and registered a new low at 1149, late bargain hunting help to bring the CI to close at 1153. The question now is how low will the CI goes? Technically speaking, the KLCI has entered a bear trend, it will continue to go lower to test the support at 1141, 1130 and 1105. The best strategy now is to hold cash.

Market goes through different phases just like the the four seasons, we are perhaps going into the winter now, this is perhaps the time to hibernate, but as a trained investor, we should be diligently doing our homework while others are hibernating as opportunities are always found in a crisis. Look at the relative strength of the counter relative to CI, look at signs of substantial shareholder's accumulation can perhaps give ones a clue as to where the opportunities are.