Money

& Investing

Are You Cleaning Your Baseball Bats? How to Eliminate Trading Mistakes

By Leo Fasciocco

There is an old saying that a wise man learns from his mistakes.

No trader or investor is perfect when it comes to trading stocks. The name of the game to improve your investment return is to learn to eliminate your mistakes. If you do that, your returns should climb.

Pete Rose, who played for the Cincinnati Reds, Philadelphia Phillies and Montreal Expos from 1963 to 1986, was one of the best baseball hitters. “Charley Hustle”, as he was called, is the all-time major league leader in hits, with 4,256. He won 3 batting titles and made 17 all-star games.

After each game, Rose had a habit of cleaning his bats. Why did he do that? Just to have a clean bat? No! He did that, so he could study the marks where the ball had hit the bat.

This helped him to see how far he may have been off the “sweet spot” on the bat. With his knowledge of hitting, he could tell what mistakes he might be making in his swing. Thus, he could make an adjustment or correct an error that crept into his swing. 

Investors, you might say, need to “clean their bats too”.

How?

By keeping a detailed record of all trades and anything that may have gone wrong. After that, they need to write down what could have been done to make the trade correctly or to avoid the mistake entirely.

The past three months, from mid-October 2007 to mid-January 2008, the stock market, as measured by the Dow industrials, has dropped roughly 2,100 points from the peak at 14,198. That’s a decline of 14.7 percent (see Dow industrial chart). Growth stocks often fall twice as much as the major averages. So, some issues may be down 25 percent to 35 percent.

What you should do is, for every trade opened and closed, make a notation as to what happened, what went right or what went wrong. You might find that some losing trades were due to any of the following:

1. Stock market in down trend -- fighting the tape
2. Stock falling on bad news from company
3. Stock gapping lower on earnings report
4. Stock falling on broker downgrading
5. An error in your research that doesn't anticipate the fall of a stock
6. Stock dropping on bad industry news
7. Stock entered late, then reversing
8. Stock’s price fading right after buy
9. Stock dropping -- on vacation; not following the action
10. Stock falling on catastrophic event

It’s important to track these mistakes, especially if they tend to repeat themselves. Keep a notebook on them. Then, seek to eliminate them. Only a fool makes the same mistake over and over.

 Some suggested corrections for the previously listed mistakes:

1. Be extremely cautious buying stocks during a market down trend.
2. Track company news closely. Use the eSignal headline counter and news.
3. Check dates when earnings will be reported; be alert.
4. Watch stocks for any heavy selling with no news.
5. Double-check your research; don’t rush it.
6. Try to follow trends in an industry.
7. Use stop buy or eSignal alerts to enter positions in a timely manner.
8. Watch a stock closely after entry; have a stop loss price (see GENZ chart).
9. Put in stops or exit positions and relax and enjoy the sun.
10. Be diversified; never let one stock sink the boat.

Pete Rose was also known as a “switch hitter”. That means that he hit right-handed against left-handed pitchers and left-handed against right-handed pitchers. That was so he could see the pitch better and increase his chances of getting a hit.

So, too, investors should consider being “switch hitters” -- if they have the talent. That means being able to go long or short when stock market conditions or a stock's particular action dictate it.
 
Remember, too: “A wise man learns from the experience of others.”

One should study the trading styles of well known and successful investors. It can be very valuable training. Some good books to read and learn from are these: Market Wizards -- Interviews with Top Traders by Jack Schwager, The Battle for Investment Survival by Gerald M. Loeb and How to Make Money in Stocks by William J. O’Neil.

Mr. Fasciocco’s is publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several national publications. To get a free trial temporary subscription to the Ticker Tape Digest Pro Report, which comes out daily with a stock market video show, go to www.tickertapedigest.com and insert username: freetrial and password: stocks. Mr. Fasciocco can be reached at: leo2@tickertapedigest.com