I Wish I Could (Always Know Which Stocks Are Going To Blast Off)

On Monday, June 11th, I bought stock in Aluminum Corp China (ACH) at $34.23 a share and by around noon on Friday that week, it had jumped $7.88 a share. That move represented a 23% increase in just four days. Of course, I was moving my stop up behind the move in an effort to protect profit yet stay in the play as long as the stock was climbing. Obviously, this trade made me very happy and it reminded me of an email I had received from a subscriber several months ago.

In the email, the subscriber noted that my $10 Trader service had a high percentage of wins, but he was disturbed that many of the plays had only made a 15 or 20 or 40 cents a share profit. He wanted to know why I didn't send alerts on trades where I was going to make more than that per share. I laughed out loud when I read the question. Clearly, if I knew which stocks were going to make me more money, I would invest in them. The fact is that the 20 or 40 cent gains on cheap stocks often represented returns of 5% to 15% in anywhere from a few days to a couple of weeks.

When teaching classes, I frequently ask new students what they consider to be a good annual return and the answer often is 10%. The fellow who wrote was disappointed that I was only making that much in a month or less on many winning trades. Naturally, I would prefer to have all winners and have each winner provide a bonanza, but that is simply unrealistic. I (and almost every trader I have ever met) do have losers and not every winner is a big hit.

I suspect the subscriber was looking for a home run every time. He was seeking the holy grail of "get rich quick." My experience teaches that those who believe they can get rich quick in the markets are more than likely doomed to failure. One of the keys to successful trading in my estimation is to stay in the game. Manage your money so that no unsuccessful play will take you out of the trading business. Do not expect the huge win on every play; work to achieve profit. It is fine to have several small winners. The big gains will come at times as with my ACH trade, but they can't be realized unless you are still in the game. That is one reason why money management and cutting losses is so important. You may want to review my earlier article on money management in the archives and see how a trader who uses a proper reward to risk ratio and who manages his money appropriately can still be profitable even when less than half of his trades are winners.

The bottom line, I believe, is that trading, in order to be successful, must be approached with reasonable expectations. Try to "get rich steady" rather than "get rich quick."

Bill Kraft, Editor
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Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft Eric Aafedt

What Stock and Option Trading Strategies to Use

As anyone who has been following my articles for some time knows, I am an advocate of trading education. We work hard to earn our money and we also need to work hard to learn how to make our money work for us. If we spend the time it takes to learn how to have our money make money for us, we may create a much better quality of life for ourselves and our families. Few are willing to take the time, but for those who do, the rewards can be fantastic.

There are many strategies available to the trader that offer various degrees of risk and involve many levels of complexity. The real issue is what strategy or strategies are right for you.

The markets (or an individual stock) can only do three things: they can go up, they can go down, or they can go sideways. Depending upon your personality, you can choose to play all three directions, any two, or only one. If you are bullish by nature, you may choose to play only when markets are rising and stay on the sidelines when they are flat or dropping. Historically, markets have risen about 2/3 of the time so the bullish only trader can expect to be in the market a great deal of the time if historical trends hold true. On the other hand, if you are bearish by nature, you may only want to be involved when the markets are falling. My experience has indicated that a trader can make more money faster in a falling market, but that only occurs during a relatively small proportion of the time.

If you want to play the markets all the time, you need no more than three strategies: one for a bullish market, one for a bearish market, and one for a flat market. I don't mean to suggest that you shouldn't study and learn more than three strategies; I mean that you can make money if you only use three strategies that you have learned well and practiced. If the market is bullish, for example, you could choose to buy stocks with the intention of selling when the price goes up. You could also buy call options, or you could enter bullish put spreads for a credit, or sell naked puts, or you could enter bullish call spreads for a debit. Any of those strategies could make you money in an uptrending market or stock. Each has a different risk and each has a different potential reward.

In a bearish situation, you could sell stock short, or buy puts or enter a bearish call credit spread or a bearish debit put spread. If the market or stock is neutral or moving sideways, you could consider something like an iron condor.

Each strategy can provide profit. In some cases, the profit may be limited as in the case of spreads, but the risk also would be limited. In some cases, the risk may be limited but the profit theoretically unlimited as in buying call options. In some cases, the potential reward may be limited but the risk unlimited as in the case of selling naked calls. Your job is to find the strategy that meets your personal goals.

In my estimation, trading is not a get rich quick endeavor though it can be a get rich steady method. Like anything else, success requires a foundation in the basics. Algebra would be almost impossible to learn without a foundation in basic math. As the three little pigs learned, building a house of straw may not be the wisest course. In trading, the foundation must be built through study. Learn all you can about any strategy that interests you and then practice it by paper trading. Only after you have paper traded the strategy successfully should you put any of your hard earned money at risk.

Your rewards will depend on the effort you expend.

Bill Kraft, Editor
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Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft Eric Aafedt

What I Think Doesn't Matter

When it comes to the market or to a specific trade, what I think does not matter. It probably doesn't matter what you think either. Just because you or I or an analyst or a network broadcaster thinks the market or a stock is going to go up doesn't make it so. In a fascinating book, The Black Swan, author Taleb, points out the impact of the highly improbable and demonstrates, in part, the importance of what we don't know. We may have a grasp of all the fundamental information that exists at the moment and may find the perfect technical entry into a stock position, but that does not guarantee or assure that the stock will move as we expect. The next moment could bring news that results in movement directly opposite to what we predicted.

Anything can happen and none of us can predict what it will be. When we buy a stock, we are predicting that the price will go up. Many times we will be right. The company may have solid fundamentals and be climbing an uptrend. We are the beneficiary of a successful prediction when we buy the stock and it continues to follow the trend up. Suppose the company was engaged in a diamond mining operation just below the surface and that there was an abundance of diamonds. Neither the government nor labor posed any problems and the price of diamonds had been rising steadily. Our company had no debt. Sounds like a great company and it could be a scenario for a strong stock price move. As the stock price climbs, we applaud ourselves for such a marvelous prediction. We may even brag to our friends about what a successful investor we have become. Suddenly, seismic activity becomes apparent in the area of the mine and within days, a volcano erupts destroying the mine and covering the diamonds in molten lava. Now, how good was our prediction.

If you think the example I dreamed up is far fetched, how many investors predicted the events of 9/11 and if you did, did you also predict the date it would occur? The highly improbable does occur and when it occurs, it usually has an effect. How do we avoid those circumstances? We probably can't. What we do need to recognize is that all trades will not go your way --period. Mathematical trading systems, for example, ordinarily do not take into account the improbable (at least beyond two or three standard deviations) and the psychological so it seems that the creation of an infallible system is far beyond our current abilities. No matter what anyone tries to do, some trades are destined to be losers.

We need to accept that some trades will lose. We should not beat ourselves up because a stock went the other way. What we can do is manage our trades and manage our trading money so that we are able to stay in the game and so that our gains exceed our losses. I have written about Money Management and Reward to Risk ratios in the past and refer you to those archived articles to refresh your knowledge if you are interested. Those two concepts, reward to risk ratios plus proper money management are as important as any in trading. To my mind, they are much more important than trying to find a specific asset to buy or sell. Since we know we must suffer losses, let's work to keep them to a minimum and, once done, use a reward to risk plan that will help us enable to profit overall even if we only enjoy winning trades 50% of the time (or even less).

Bill Kraft, Editor
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Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft Eric Aafedt