Are You A Balanced Trader?
The Dynamic Wealth Report
March 1, 2010
I stood on top of a little grassy hill. The sun was shining brightly. A
slight breeze and a cold beer in my hand gave a bit of chill. Looking
through my sunglasses, I watched a huge crowd surround the 7th hole tee
box.
Up walked a group of three professional golfers. They looked over the
course and referred to their notebooks.
After a few minutes of surveying the terrain, the first golfer set up. His swing was smooth and fluid. The thwack of the club hitting the golf
ball was unmistakable. The pearly white golf ball landed right on the
green. It was a beautiful swing and a beautiful shot…
Last weekend was the Phoenix Open. The weather was perfect… at least for
the first few days. The grounds were in great shape.
And the fans were out in force.
For those of you who don’t regularly follow golf, the PGA Scottsdale
event is the largest spectator golf event in the world. More than
500,000 people attend the event every year.
And the course is right up the road from my office.
I love seeing the pros play in person. It’s much more exciting than
watching them on TV. While I went to the tournament to get away from
work, what I saw reminded me a lot about trading the stock market.
Golf is an amazingly mental game… as is trading the market. You need to
have incredible control of your mind and emotions. No one will dispute
that.
But I also realized something else.
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Every golfer on the course was very well balanced. The next time you
watch a pro golfer play competitively, watch their swing closely. You’ll
notice they don’t try to kill the ball... they also don’t lightly hack
at the thing. Their swing is a study in balance…
Their stance is balanced. They have a balanced backswing. Their swing is
balanced… as is their follow-through. And the pros are balanced as they
watch the golf ball rocket down the fairway.
Everyone knows how important balance is in life. Ask any life coach,
therapist, or advisor and they’ll all agree… balance in life is a key to
happiness.
You’re encouraged to eat a balanced diet. You need a balanced work/life
arrangement. And everyone should have a balanced budget (unless you’re
the government).
Let me add one more area to have balance in… your trading.
What do I mean by that?
Let’s take a look at the research process many investors follow. When an
average investor looks for a trade, they often focus on fundamentals.
They’ll look at revenue growth and product cycles. They’ll analyze the
competition and study financial statements. They’ll know by heart P/E
ratios, dividend yields, gross margins, and earnings.
Once they know the company inside and out, they then place a trade.
Sometimes it works out… and sometimes it doesn’t.
Unfortunately, their research was unbalanced.
I believe a thorough analysis of the fundamentals is important… But like
a golfer’s back-swing, it’s only one part of a bigger picture.
You can study a company and their numbers to your heart’s content.
But you’ll miss out on what the market’s telling you. You’ll miss out on
the bigger picture. The direction a market takes overall is very
important to the results of each and every trade you make.
You can pick the best company in the world… but if you buy it at the
wrong time, you’ll lose money every time. Just think back to the market
peak in 2007… regardless of what you bought, you were bound to lose
money.
That’s why successful traders use a balanced approach to market
research.
The easiest way to balance your approach to market research is by using
both fundamental and technical analysis.
It sounds complicated, but it really isn’t. Build upon the fundamental
research you already do every day. In addition to looking at the company,
check out the chart action.
Learn how trends start. Understand what the charts look like when the
market moves. Study moving averages, crossovers, trend lines, and
support and resistance.
Expand your research from just fundamentals by including technicals.
You’ll become a more balanced trader.
Before long, you’ll start seeing situations where one type of analysis
looks strong… and another looks weak. The fundamentals may be perfect,
but the technicals are ugly. By not investing, you’ll save yourself
thousands of dollars… and lots of heartache.
Remember, in life balance is important. Combine fundamental research and
technical analysis to get a better picture of your trades… and before
long, I guarantee you’ll be a better trader… Unfortunately, I can’t say
the same for your golf swing!
• Automotive Industry (Up 14%)
Last year the automotive industry was one of the hardest hit. Two
different major companies in the US needed an emergency bailout from the
federal government. Now the automotive group is one of the top
performers for the first few months of the year. Who knows how long this
will last?
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