DATING THE STOCK MARKET: 10 Key Mindsets You Need to Excel as a Trader

Author

Preface

In 1981, fresh out of the University of Waterloo, with a BSc in chemistry, I landed a job at Dow Chemical, in Sarnia, Ontario, Canada. One of the first things I did was open a trading account and began to dabble in the markets. I started receiving weekly charts in the mail and then moved onto monthly charts. At this stage, trading was something I did occasionally. I had some success, a few lucky breaks, and no clue what I was doing.

I left Dow in 1988, and returned to the University of Waterloo to obtain a PhD in polymer chemistry. From there, I ended up at Bayer, in Leverkusen, Germany, where I purchased a computer and some charting software, and started to monitor and trade the markets on a more frequent basis. At this point, I was reading Technical Analysis of Stocks & Commodities, yet still had not developed a defined method to get in and out of the markets.

In 1997, after 3 years in Germany, I returned to Canada and began my career as a polymer chemist with NOVA Chemicals, in Calgary, Alberta. I attended numerous trading workshops and purchased many courses, yet I soon tired of them and continued to search for something that would work for me. In 2007, I knew something was missing and that I should be doing better as a trader than I was, so I joined ProCoach. It was through this coaching program that I became aware of my first mindset shift, which started to move me toward becoming a better trader.

While I learned many things along the way, another quantum leap came when I completed a very simple trading exercise outlined in one of the many trading psychology books that I had read. That was my 3rd mindset shift, and while it seems simple to do, for some strange reason, most readers of that book do not do the exercise. Yet it had a profound effect on me, so I trust you will do the exercise.

For myself, the last major shift occurred when I developed a better understanding of the randomness of markets, through a Monte Carlo Simulator that I developed. This is described in Chapter 7. The other 7 key mindsets have been placed in an order in which I think are appropriate concerning your development.

As the author, it is difficult to know if you just need to learn about one key mindset shift or all ten. When you are doing well as a trader and are just looking for that one extra idea to move you to the next level, then you can incorporate them into your trading and see what happens. When you improve, great, keep using them. When there is no change, or worse, you regress, then re-evaluate your situation and move on to the next mindset change. Traders face many challenges, and it is unlikely that you will find all the answers you require in one book, seminar, or workshop.

One of the challenges you may have in trading is that you have not aligned a feeling or emotional event in your life to trading. Simply put, you have nothing to compare trading to. You likely did not start trading stocks until you were over the age of 18. More likely, you started trading the markets after you landed your first job and had some money left over.

Once you start to trade, you will experience varied emotions and feelings, from pure ecstasy to the fear of a loss. As you are likely unprepared for this emotional roller coaster ride, I have used dating as an analogy to trading. I am assuming that you have experienced many of these emotions and feelings at some point in your life while dating. As many of the emotions and feelings you went through while dating will be similar to those you experience while trading, by associating dating and trading, it is my expectation that you will learn how to incorporate these emotions and feelings into your trading and, ultimately, become a master trader.

1.0Creation Versus Consumption

"No one is ready for a thing until he believes he can acquire it.

The state of mind must be belief, not mere hope or wish."

– Napoleon Hill, Author

1.1You’re So Hot

Think back to when you became interested in starting a romantic relationship— how someone drew your interest, made your heart throb and your mind go crazy. What was your game plan? Did you admire from afar or did you make a move?

In the dating world, once they muster up the courage, typically guys will ask girls out. Girls, on the other hand, are more subtle in their approach. They will normally drop indirect hints to alert the guy that they are interested in them. While this approach may take longer, especially for guys who just aren’t there yet, the ultimate result is the same—the guy will either ask the girl out or he will not. In either case, one or both individuals involved will either be elated or broken-hearted, and possibly embarrassed.

Bear with me as I attempt to get you to look at stock trading like the above dating scenario. Consider the stock chart as the girl putting out signals that the trader, the guy in the dating analogy, needs to interpret. When a trader finds the signals enticing, there is a good chance that they will purchase the stock. This commitment is similar to a guy asking a girl out on a first date. Once a bond is formed, the trader’s passion has been aroused. In the beginning, just as in dating, the trader does not know where the relationship is headed. They just know that, for the moment, they have a connection with the stock.

As time progresses, the stock either advances, and you sell at a profit, or it goes against your expectations, and you sell at a loss. When a stock goes up and you sell at a profit, this would be comparable to dating someone for a while and then realizing that you have irreconcilable differences, so you part as friends. On the other hand, when things go bad in a trade, they usually go bad quite quickly, and you are out of the trade shortly after initiating it. Consider a relationship in which you realized (perhaps within the first hour of the first date) that this relationship was not going anywhere, and you desired to end the night as soon as possible.

Let’s look and see how you can relate a stock chart to the emotions you feel during two dating experiences (Figure 1.1). In January 2017, you are in a relationship and it is going well. Unfortunately, in mid-February, the relationship breaks down, and you find yourself once again looking for your soul mate. Between March and July 2017, you are actively looking for someone but to no avail. Then, in July, a person of interest comes into your life, and a first date is arranged. You go on your first date in mid-July and enjoy yourself immensely. The relationship continues to do well up until early December. In December, you notice that the emotional charge, which you had in the beginning, is starting to wane, and there are several issues with the relationship. By early January, you realize that it is time to part ways, and with a final kiss, you say goodbye.

Now I will explain the LAC.TO trade I did in 2017 (Figure 1.2). I became interested in this stock when it signaled a breakout, on July 24, 2017, using my new 8-day high scan. I purchased the stock on July 25, at the July 24 closing price. I sold three times on the way up, as detailed on the chart, and then the remaining 200 shares were sold on a lower low, which occurred in early January 2018. The run-up, which occurred in early 2017, was potentially an indication that traders were starting to get interested in this stock, prior to an approximate five-month waiting period where they showed little interest. Once interest started to peak in late July, LAC.TO had a good run before giving up much of its gains. This is the main reason why it is important to get out of your positions when they start to weaken. Like a short-term relationship, once they start breaking down, it is best to part ways and move on.

Figure 1.1Weekly chart of LAC.TO displaying the emotions of a trade

Full colour chart available at DatingTheMarket.com, chart courtesy of StockCharts.com

Figure 1.2Trade execution for LAC.TO

Full colour chart available at DatingTheMarket.com, chart courtesy of StockCharts.com

You have likely experienced the emotional high of a newfound relationship. Although filled with some trepidation, first dates are typically a lot of fun as they are full of excitement and possibilities. Even for relationships that end shortly after they begin, you can still experience some level of joy. Sometimes, however, the relationship is mediocre right from the beginning, and you wonder what you saw in the person in the first place. Similarly, both scenarios play out in the stock market as well.

In the next section, you will discover how completing a trade, instead of always searching for stocks that have great potential, will make you a more profitable trader.

1.2Enjoying the Challenge of Finding Stocks That Beat the Market

In my day job, I am a scientist. I spend much of my time identifying new ways to improve what the company currently has, as well as developing new ideas to provide innovative products. When I started to trade online, I looked for a website that I could use to scan the market with simple code (a set of instructions to tell the online software what I am looking for), to help me find setups that historically had produced good results. Once I identified patterns that produced good results, I would persistently work away at developing a code to find these patterns. After spending days coding the software to find the setup that I was looking for, I would trade it for a short period of time before getting bored with it. Then I would find another trade setup that looked equally as compelling, and start to develop a code to find that setup. In early 2012, I had 86 different trade setups that I had developed, and while they all had the potential to work, in hindsight, I likely did not spend enough time with any of them to properly understand them, to trade them, and to also become aware of the small nuances that each pattern and setup provided.

Figure 1.3 illustrates a pattern that I call a strong push with a week or two of rest. The setup is defined as follows: First there needs to be a strong week [defined as (High-Low)>1.25 x ATR(14)] that occurs on above average volume. This is then followed by a week or two in which the close is less than or equal to the high of the strong week, and the bar height is equal to or less than the 14-period average true range [ATR(14)]. The entry point is defined by a break above the high of the setup. For CMMC.TO (Figure 1.3), the buy point was $1.07, and occurred on August 18, 2017. This is shown by the oval above the consolidation area in Figure 1.3. On September 5, 2,000 shares were sold at $1.37, and another 1,500 shares were sold on December 5, at $1.44. The remaining 1,500 shares were sold at $1.42 on January 17, 2018, on a break below the low, which occurred during the week of January 12, 2018.

The theory behind the setup seems logical. There is a large move on high volume, followed by one or two weeks where investors digested the information. During this period, there is a short consolidation, which reduces risk. Once the stock breaks above the consolidation pattern, the exit point is just below the low of the consolidation pattern. In the case of CMMC.TO, this pattern worked well; however, this is not always the case.

Figure 1.3Two weeks of rest, followed by a breakout

Full colour chart available at DatingTheMarket.com, chart courtesy of StockCharts.com

I truly enjoyed finding stocks that made large moves, and developing codes to find these stocks. I found this challenging and interesting. The more stocks that I looked at, the more ideas I came up with, and this became a bit of a game. I was spending more time developing code to find specific setups than I was trading.

The first step that I took to improve my trading was when I joined StockCharts, which is a website that carries both Canadian and U.S. data. It has scanning and charting capabilities and allows me to see 30 charts on one screen which speeds up my reviews. StockCharts allows me to scan for stocks anywhere in the world, provided I have a computer and an internet connection. Unfortunately, StockCharts does not have backtesting capabilities, so I needed to research for an offline technical analysis software program.

By mid-2012, I had multiple requirements for my future software. The cost needed to be less than $750, and it was essential that it be easy to code, have good backtesting capabilities, have Canadian and U.S. data, have the opportunity of obtaining data for free, and have good reviews. Ultimately, I ended up purchasing AmiBroker, in May 2013.

Even with these new tools, I started doing the same thing, which was developing new systems as I saw more and more setups.

Before making a move to becoming a more consistent trader, I needed to recognize that I was in a creating mode and not a consumption mode, and this is what I will discuss next.

1.3Creation is Enjoyable; Consumption Is Repetitive

You may find that the repetitive action of looking over numerous stock charts, looking for those few stocks that are worth trading, is extremely monotonous. Welcome to the consumption part of trading. The more interesting part, at least for myself, is designing strategies and testing codes, and then backtesting them. This is the creation part of trading, and the part that I thoroughly enjoy. Creation could also involve how I exit a trade, as I tend to get out using multiple methods, as the market presents various opportunities to me. Unfortunately, it’s the consumption or repetitive part of trading that makes the money, not the creation or investigative