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TRADER'S NOTEBOOK


Stocky Horror Picture Show

10/27/04 03:23:07 PM PST
by Dr. Charles B. Schaap

It's the invasion of the money snatchers!

Halloween is here again, and it's a good reminder of the horrors of trading. In many ways, Halloween should be the official holiday of traders — traders are always getting tricked or treated to profits. Not only that, traders are used to getting scared to financial death on a regular basis.

Like Halloween, the market is full of Dracula specialists ready to suck the capital out of trading accounts. There are wolf-men market makers who howl at the moon and slash prices overnight. There are the merciless mummies who walk the floor of the exchange, feasting on lost souls who wander into bull and bear trap doors. And then there are the scariest monsters of all — the ghouls on CNBC who stir their bubbling cauldron of expert opinions.

Spooky October

Halloween is also the month of stock market massacres. October conjures up dark images of Black Mondays and dead Halloween-cat bounces. Of the 10 biggest one-day crashes in the market, a blood-curdling five have occurred in October! For example, in 1987, the grim reaper paid a visit to Wall Street, and the market lost one-quarter of its value in just a few bone-chilling hours.

Fear takes no holiday in the stock market. The market has triple witches and man-eating SPDRs. Every day, there are Freddys and Jasons waiting for traders to wander up to the attic trading room in their nightgowns. Traders become haunted by the ghastly ghosts of trading errors past and scared by the skeletons of their bone-headed decisions. It's enough to make online traders shake in their reboots. Unfortunately, there are no magic potions or spells to cure a trader's fears.

When faced with dreadful risk, losing traders will see the Phantom of the Opera and head for the exits. But winning traders know they must look beneath the mask of uncertainty in order to find the face of opportunity. They must trust in their knowledge and experience and face the monsters in their minds.

Traders do not learn by running from fear, or by following the tips and advice of others who have their own stock market ghosts. Traders only learn by conquering fear, thinking for themselves, and learning from their own mistakes. Thanks to silver bullets, wooden stakes, and paper trading, traders can defeat all monsters if they have the will.

Maybe not so spooky

While October can be filled with many frightful nights, courageous traders know that the bulk of major stock market buying opportunities also appear in October. These buying opportunities usually lead to great market rallies that extend into April or May of the following year. For the patient trader who isn't afraid of cloaks and daggers, a falling knife can be handled safely once it lands.

Figure 1 shows what happened to the Standard & Poor's 500 last year. After making a high of 1040 in mid-September, the S&P 500 fell 50 points to drop below its 50-day moving average. By the beginning of October, it had fallen 5%. Based on history, many might have concluded that October would end up with profits six feet under. But instead, the market rallied past Halloween fears and rose 155 points by mid-February. This year, Halloween may be the time to fill your trick-or-treat basket with new stocks.

Figure 1: October can bring good news. At least that's what we saw in 2003. The S&P 500 fell below its 50-period EMA and rallied up until the end of February.

Many traders have found that their best trades actually occurred when they feared the markets the most. All the ghouls of fear and self-doubt appear when traders least expect them and can least afford them. But winning traders refuse to be vexed by the VIX (volatility index). Traders learn to control their fear with a trading plan and a protective stop. And the VIX teaches us that the best trades develop when fear is at its highest.

Where most people see monsters, traders see opportunity. For traders, every day is like Halloween. Thus, it is the perfect holiday to remind them of the scary lives they lead, and that the true monsters of the market lie within their own minds. If traders have faith in themselves and face their fears, they can make some monster profits and force any market Dracula back into his coffin.

Charles Bradshaw Schaap is a freelance writer, active trader, and technical analyst for StockMarketStore.com.

Chart courtesy of StockCharts.com

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.





Dr. Charles B. Schaap


E-mail address: traderdoc@stockmarketstore.com


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