Notes From The Editor

No matter how much we all want to be perfect, there's no getting around the facts. If you're human, you have a few traits you'd like to improve on. Active trader and licensed psychologist Brett N. Steenbarger has come up with several common vices that dramatically affect trading performance. The remedy? He believes one of the best ways to avoid getting trapped in negative trading patterns is to become an observer of our own behaviors.

Below below you'll find excerpts from Brett's article, "The Three Vices of Trading." I certainly find his writing helpful in sorting through my "stuff." I'm sure you will too.

Trade well,

~ Thomas Sutton, Editor


Trader Vice One: PERFECTIONISM

"Perfectionism is often the chief culprit when the pain of losing exceeds the pleasure of winning. Desperately trying to feel good about themselves, perfectionists set unrealistically high ideals."

The emotional theme of the perfectionist is "not good enough". Perfectionists are driven to do more and more because they never feel competent, worthy, and loved as they are. Thus, even when there's a profit on a trade, perfectionists will look for the portion of the move that they did not participate in.

If they caught most the move, they will reprove themselves for not trading a larger position. And when trades don't go well, perfectionists review all the reasons that shouldn't have made the trade, should have known better, etc.

By focusing on the portion of their performance that doesn't match their ideals, perfectionists transform successes into defeats, losses into failures. They rationalize their perfectionism as a drive for achievement, but all they are accomplishing is an undercutting of their confidence.

Perfectionism shows up as negative self-talk and self-blaming. Emotionally, we recognize perfectionism from frustrated, angry feelings when trades don't work out as planned. "Beating myself up" is how many perfectionists describe their self-talk.

The way to beat perfectionism is to make a concerted effort to talk to yourself the way you would talk to a good friend in a situation where things went wrong. Most people know how to treat others with respect, love, and dignity. They just haven't learned to do the same for themselves.

If you would be more nurturing, understanding, and supportive of a friend than you are of yourself in the identical situation, then you know that you're not being your own best friend."

Trader Vice Two: EGO

Everyone likes to win in the markets. It's only natural to feel good when you've done your homework and end the day with a profit to reward your efforts. Ego involvement in trading, however, goes further than this. When the ego is involved, we write the market a blank check for our self-esteem. If trading is green, we feel good about ourselves; if we go into the red, we feel diminished.

That places tremendous pressure on our trading over time. Not only do we have the burden and challenge of reading complex market patterns; now we also have a psychological gun pointed to our head ready to go off any time our pattern recognition fails us.

When traders invest their feelings about themselves in their trading, they are operating with maximum emotional leverage.

So much of their emotional account rides on each trade, that it inevitably affects decisions about cutting losses, letting profits run, and entering and exiting in a timely fashion. The successful trader wants their trades to work out; the ego-involved trader needs them to be profitable.

We know that ego threatens our trading when we find ourselves needing to trade just to win back some recently lost dollars; when we feel a desire to advertise our positions; and when we find ourselves riding an emotional roller coaster as profits wax and wane. Just as we can recognize traders' perfectionism from anger/frustration, we recognize ego-involved traders from euphoria/depression.

If trading has us truly depressed, we know that it's not just our trading account that's hurting. The antidote to ego-involved trading is to place our self-esteem eggs in many baskets: recreational interests; other work involvements; relationships; and our spiritual lives. Many times we pour our self-esteem into trading because those other facets of our lives are not properly developed. A balanced life makes for balanced trading.

If your good feelings in life come from good relationships and worthy achievements, you won't need the markets for your happiness. Market success can be the frosting on the cake of your successful life, rarely can it substitute to the cake itself.

Trader Vice Three: OVERCONFIDENCE

It is common for traders to complain of a lack of confidence in their trading, but very often it is overconfidence that does them in. Overconfidence results from a lack of appreciation of the complexity of markets and an underestimation of the challenges of trading them successfully.

In a sense, overconfident traders lack respect for the markets. They think that reading about a few setups or buying the newest software will prepare them to make money. Overconfident traders don't want to work their way up the trading ladder: they resist the idea that screen time is the best teacher.

Because they're so eager to make money - and so sure they can make it - overconfident traders generally trade impulsively. They won't wait for the setup to form; they'll jump the gun-and get whipsawed in the process.

The hallmark of overconfident traders is that they think they are going to make something happen in the market, instead of patiently waiting to take what the market gives them. Spelling out profit goals for each day or week of trading is one manifestation of overconfidence.

Humble traders know that markets expand and contract their volatility- sometimes the trade just isn't there. The overconfident trader, however, feels that he/she is bigger than the market. Indeed, overconfident traders will often take great pains to try to catch the tops of bull swings or the bottoms of corrections. As a result, they often fight the market trend - and can get run over in the process.

If the emotional signs of perfectionism are anger/frustration and the emotional signs of ego involvement are elation/depression, then the emotional signs of overconfidence are impatience/impulsivity. Overconfident traders overtrade. They fear missing opportunities more than they fear losing money.

The antidote to overconfidence is rule-based trading and the intensive rehearsal of trading rules. By making entries, exits, stops, and position sizing rule-governed and vigorously rehearsing trading rules during simulated trading (as well as in real time with small positions), traders can greatly reduce their impulsive trading.

Very often this means training oneself to focus on (and rehearse) what-if scenarios of being wrong in the market, as well as forcing oneself to spell out the rationale, targets, and stops for all trades. By making trading a more self-conscious process, traders interpose thought between impulse and action, gaining greater control of their trading.

~ Brett N. Steenbarger, Ph.D

Note: Brett is a former Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and the author of "The Psychology of Trading." You can purchase Brett's book at the following link. Enter item #626308 for pricing information.
http://www.invest-store.com/rightline/

Quick List

    
Stock     02/07     02/07      Buy      Short   Trailing Stops     Gain 
Symbol    Price      +/-      Entry     Entry   Initial/Tighten   Amount 
------  --------  --------  --------  --------  ---------------  --------

LMPX      23.71     -0.69     24.92                  5.45/2.73      9.40
RGEN     101.32      0.70    102.93                  7.03/3.52      4.08
PNTG      27.97      0.24     28.48     26.34        2.14/1.07      3.02
TBPH      30.65     -0.12     31.40     29.36        2.04/1.02      1.72

The "Quick List" provides a brief summary of each stock write-up and should be taken in the context of the related write-up presented in the "Stocks Covered in This Issue" section of this Report.

Be sure to read "How To Use The RightLine Quick List" and always use the RightLine Risk Control Calculator before entering any position. For access to the Risk Calculator, go to http://www.rightline.net and login to the Member's area.

For more on controlling risk go to the RightLine Risk Control System

For a glossary of terms unique to The RightLine Report go to: Glossary

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Market Summary

US stocks closed lower on Friday after four consecutive bullish sessions prompted traders to lock in some profits ahead of the weekend. The modest selling came despite a better-than-expected labor report for January. Equity news featured strong quarterly earnings announcements from Take-Two Interactive Software (TTWO $115) and Activision Blizzard (ATVI $62). Gold and the USD/dollar finished higher, treasury yields were lower, and crude oil prices closed down.

                      Friday                 On The Week      
                  --------------------   --------------------
Dow                    29,103  -277.26         +847        3%
Nasdaq               9,520.51   -51.64      +369.57     4.04%
S&P 500                 3,328   -18.07         +102     3.16%

NYSE Volume                      3.86B                       
NYSE Advancers                    1053                       
NYSE Decliners                    1863                       

Nasdaq Volume                    2.30B                       
Nasdaq Advancers                  1004                       
Nasdaq Decliners                  2214                       

                                 New Highs/Lows

                   01/31  02/03  02/04  02/05  02/06  02/07
                 --------------------------------------------
NYSE New Highs       159    141    239    250    261    241
NYSE New Lows        114     85     46     16     32     64
Nasdaq New Highs     101     78    150    181    184    109
Nasdaq New Lows      126     86     53     34     47     80
   

TRADER'S TIP: "Sometimes You Gotta ..."

The fear of "missing out" can cloud a trader's judgment, so be sure to base all buy or sell decisions on careful planning instead of emotional reactions. The market is full of opportunities - there's plenty for everyone. Rushing in can lead to problems, so remember the old saying "sometimes you gotta slow down to go fast!"

The Technical Analyst

For help with this chart, be sure to read "Understanding The Importance Of Support And Resistance"
and "Boost Your Profits With Moving Averages".

S&P 500 - 3327.71 February 7, 2020

52-Week High: 3347.96
52-Week Low: 2703.79
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 3528.37
Resistance 2: 3416.07
Resistance 1: 3371.89
Pivot: 3303.77
Support 1: 3259.59
Support 2: 3191.47
Support 3: 3079.17


NASDAQ Composite - 9520.51 February 7, 2020

52-Week High: 9575.66
52-Week Low: 7225.14
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 10202.46
Resistance 2: 9815.35
Resistance 1: 9667.93
Pivot: 9428.24
Support 1: 9280.82
Support 2: 9041.12
Support 3: 8654.01
        
Dow Industrials - 29102.51 February 7, 2020

52-Week High: 29408.05
52-Week Low: 24680.57
Daily Trend: UP
Weekly trend: UP
Weekly Pivot Levels
Resistance 3: 31120.20
Resistance 2: 30031.80
Resistance 1: 29567.15
Pivot: 28943.40
Support 1: 28478.75
Support 2: 27855.00
Support 3: 26766.60
 

Market Calendar

ECONOMIC REPORTS AND EVENTS (all times are Eastern):    

Monday, February 10, 2020:
10-Feb          None scheduled

Tuesday, February 11, 2020:
11-Feb   6 am   NFIB small-business index
11-Feb  10 am   Job openings
11-Feb  11 am   Household debt

Wednesday, February 12, 2020:
12-Feb   2 pm   Federal budget

Thursday, February 13, 2020:
13-Feb  8:30 am   Weekly jobless claims
13-Feb  8:30 am   Consumer price index
13-Feb  8:30 am   Core CPI

Friday, February 14, 2020:
14-Feb  8:30 am   Retail sales
14-Feb  8:30 am   Retail sales ex-autos
14-Feb  8:30 am   Import price index
14-Feb  9:15 am   Industrial production
14-Feb  9:15 am   Capacity utilization
14-Feb  10 am   Consumer sentiment index
14-Feb  10 am   Business inventories

For a chart of typical Up or Down market reactions to specific major US economic reports go to:
Economic Indicator Effects

TRADER'S TIP: "100% Guaranteed Winner!"

When it comes to the stock market, everybody wants a sure thing. Some traders will go to any length to be absolutely certain that their next trade is a winner. Unfortunately there's no way to do that. It doesn't matter how great the company is or how many analysts recommend you buy it, there is no way to be certain that your next trade will be a home run. In the world of stocks, certainty is a myth. Instead of struggling toward the impossible goal of certainty, focus your efforts on finding the best trade setups and executing your trading plan.

Stocks Covered in This Issue

CONSUMER CYCLICAL SECTOR

LMP Automotive Holdings, Inc. (LMPX: Consumer Cyclical/Auto & Truck Dealerships) - BULLISH BOUNCE. Among other strengths, the Bullish Bounce protects traders from buying a stock "at the top" of its current cycle. The entry into this setup always takes place in upward-moving stocks that have retreated a bit under normal conditions. Now sitting at 23.71, LMPX is on our radar for a BUY entry at 24.92. If you purchase shares of LMPX, be sure to also place a trailing stop of 5.45. Snug it up to 2.73 on a 9.40 gain. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 187.617M. Not Optionable.

HEALTHCARE SECTOR

Repligen Corporation (RGEN: Healthcare/Biotechnology) - BULLISH BOUNCE. Everyone familiar with price charts knows that a stock tends to bounce its way higher rather than move in a straight line. The lower levels of these short-term rebounds offer a safe and often early entry into stocks that are in the process of establishing longer-term uptrends. RGEN's reaction to support on Friday created a Bullish Bounce setup with a BUY entry trigger at 102.93. Use a 7.03 trailing stop, which should work well with RGEN's typical daily range. Tighten it to 3.52 on a 4.08 profit. RGEN closed at 101.32 on Friday. Earnings Report Date: Feb 19, 2020. Beta: 1.26. Market-Cap: 5.259B. Optionable.

The Pennant Group, Inc. (PNTG: Healthcare/Medical Care Facilities) - SQUEEZE PLAY. A look at PNTG's daily chart shows what a price squeeze is all about. The constricted high-low daily trading range has produced a setup similar to a tightly coiled spring. Expect price to move sharply soon, with the direction yet to be determined. Let the upcoming market action resolve whether you will buy shares or sell short. To capture a move either way, place a BUY trigger at 28.48 and a SELL short trigger at 26.34. Once PNTG shows which way it's headed, place your triggered entry order. As soon as your order is filled, follow with a trailing stop of 2.14 and tighten to 1.07 on a 3.02 gain. PNTG closed Friday at 27.97. Earnings Report Date: N/A. Beta: N/A. Market-Cap: 768.344M. Optionable.

Theravance Biopharma, Inc. (TBPH: Healthcare/Biotechnology) - SQUEEZE PLAY. Friday's trading action forced TBPH's daily price range into an abnormally narrow state. This translates into opportunity; for the cyclical nature of price volatility is to shrink extensively, then swell rapidly as shares move in one direction or another. Instead of trying to predict the direction TBPH will take when price volatility begins to increase, we'll set both a BUY (long) and a SELL (short) trigger to get us into the right trade. Be ready to BUY shares at 31.40 if TBPH moves higher, and place your order to SELL short at 29.36 if price declines to that level. As usual follow your entry with a trailing stop, 2.04 should be sufficient. Reduce your stop to 1.02 on a 1.72 gain. TBPH closed Friday at 30.65. Earnings Report Date: N/A. Beta: 1.74. Market-Cap: 1.715B. Optionable.

IMPORTANT: Before entering any positions, always use the Risk Control System to determine the level of acceptable risk and the maximum number of shares to buy. Use Gap Adjusted Entries to reset the Entry Price for stocks that gap beyond recommended entry levels.

Stock Splits

Below are the stocks that have announced splits and have recently executed or will execute soon. There is generally a return to normal price behavior in the weeks following a split announcement in what we call a "Dormancy Phase." As the stock nears its split execution date (Effective Date) it often moves into the "Pre-Split Run" stage where quick and sometimes dramatic gains can occur.

                             Announce     Eff.       Split
Company Name     (Symbol)      Date       Date       Ratio   Options  
---------------- -------     --------    -------     ------  -------   

Currently there are no upcoming stock splits on the major US exchanges.
    

Split details are also available online at the RightLine Online Stock Split Calendar. For a detailed look at the different stages of a Stock Split, Click Here.

Trader's Corner

"Frequency of Trading is Critical"

By Chuck LeBeau

When building or evaluating trading systems the many benefits of systems that trade very frequently are often overlooked. A system that trades frequently has many advantages over less active systems that appear to be more desirable because they have better performance ratios.

If a strategy is profitable the more it trades the more money we should make. I apologize for stating what should be obvious but you would be surprised at how often I hear discussions about selecting systems with the highest level of "expectancy" or highest "profit factor" without relating these measurements to the system's trading frequency.

Simply stated, our goal should be to show the most profit with the least amount of risk and trading frequency plays a critical role in maximizing profitability and controlling our risk.

Trading frequency represents opportunity for profit. The more opportunities we can find the more profit we should expect.

For example, a strategy that has a very high profit factor of 4 (profit factor is total profits divided by total losses) may not produce as much profit as a more active system that has a profit factor of only 2. Since the strategy with the lower profit factor is profitable and it has many more opportunities it may easily produce more total profit than the system with the much higher profit factor.

Active systems should give us a higher confidence level when analyzing our test data. In addition to increasing total profits, a very active system gives us much more data to analyze when doing our preliminary research.

If we have a long-term trend-following strategy that produces only 50 trades over five years of data our positive results may not be nearly as reliable as the results from analyzing a more active strategy that produced 1000 trades over the same data sample. I would be willing to bet that the system with the larger sample of trades is more likely to produce profitable results in the future because our level of confidence must relate to the number of samples in our testing.

Active systems should produce more reliable results and a smoother equity curve. If we flip a coin only ten times our odds of having 50% heads and 50% tails are not very good. However if we flip the coin one thousand times we are likely to come much closer to obtaining 50% heads and 50% tails.

The same logic applies to our real-time trading. If we have a large sample of real trades then our results should come closer to our expectations than if we only have one or two trades. The active system will approach our expectations much quicker than the system that trades infrequently.

If we have 50 or more trades per month with a good system we might reasonably expect to be profitable every month. However if we have a system that is only producing two or three trades per month then our monthly results will less predictable and inconsistent.

The infrequent trading system might be expected to produce a profit every year but it would not be realistic to expect it to show a profit every month because the sample size in a month will be very small.

----------------------------------

This article is part of a larger work of the same title. The author - Chuck LeBeau - also co-wrote the book "Computer Analysis of the Futures Market." Chuck traded the markets for many years. He specialized in trading system development and related research.

To order a copy of Chuck's book, please go to The RightLine Bookstore.

A simple yet powerful tool, the Risk Control Calculator helps you manage risk by recommending a maximum number of shares to purchase. Available to all RightLine subscribers. For access, go to http://www.rightline.net and login to the Member's area.

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