MarketFN.com: February 2008

Saturday, February 23, 2008

Passion for Trading

I am convinced that one of the elements of successful trading is passion for the activity. I just got back from speaking at Traders Expo in New York and realize that whenever I attend an event like that I come back really pumped up about trading all over again. I am happy to report that my speech was very well attended (standing room only) and apparently well received since I was mobbed afterwards with requests about where the attendees could get "Trade Your Way to Wealth" (amazon.com).

Many of the presentations I attended were nothing short of excellent and I always come away with something valuable. One of the speakers was a well known trading coach who related many positive experiences with successful students but who does not trade herself. One of the attendees asked why she didn't trade herself if she was so good at it. Her answer was that it was not her passion. Her passion is helping traders get even better and she is well paid ($7,500 for a two day private session). Though she is a good trader she just doesn't enjoy it as much as she enjoys the coaching.

Tenacity and persistence were concepts frequently advanced as qualities of good traders. In my mind, a trader is unlikely to have either unless they are also passionate about their trading. Interestingly, the point was made again, as I have often preached, that good traders get their own education. They go out and get the books and do the reading and attend the classes and get the coaching because they want to learn.

Nearly every speaker advocated the need for a plan and for discipline in trading. One speaker was even selling the template for a plan for $120. (I include the ingredients for your own plan in "Trade Your Way to Wealth" at no extra charge, but the point, of course, is to have a plan). The old saying is: "plan your trade and trade your plan." Passion to succeed leads the good traders to follow that mantra.

Another exceptional speaker, Dr. Ari Kiev, a psychiatrist, advanced the importance of setting a goal. Those who set a goal have a much better chance of achieving success in their trading than those who don't. I suspect the efforts to attain the goal also serve to fuel the passion for trading and the passion, in turn, helps achieve the goal. Pretty nice circle to ride around, I'd say.

In my view, it all begins (and maybe ends well) with self-education and, without the passion, it seems that no one is likely to expend the effort necessary to get the education. I suspect that you, the reader, already do have some passion about trading or you would not have bothered to read this article in the first place. My best advice is to follow your passion, whether it be trading or something else. If you do, your chances of success are great.

On a related subject, I intend to write more over the next weeks concerning picking stocks and entries and exits. In order to do that, I expect I will include some articles on at least basic technical analysis. Technical analysis is not as mystical as some fear and it does provide a great method to discipline trades and money management as well as suggest entries and exits.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved

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Friday, February 15, 2008

Things That Are Important to Traders - Part II - Picking a Stock

In the article last weekend, I talked about understanding how even a trade that loses can be a good trade. That was intended to reinforce the concept that cutting losses can be critically important to successful trading. This weekend, I want to discuss stock picking a little.

Of all the questions I am asked about trading, the most frequent is probably: "How do you pick a stock." That is what seems to concern most retail traders the most and many spend untold hours trying to find just the right one. I once had a student who had suffered severe losses in the downdraft that began in 2000 and when he came to me he was afraid to make any trade at all. He was consumed with the effort to structure a method by which he could select the perfect stock so he would have no chance of losing. Though there is a strategy that I discuss in "Trade Your Way to Wealth" that protects against loss, I don't think there can ever be a stock that assures success. No matter how hard we try and no matter what fundamental analysis we undergo and no matter what marvelous mathematical formulae we construct to find the perfect stock, there is always the chance that 10 minutes after we buy it there will be some world event or some news announcement by the company that will result in the price dropping.

I believe that one of our jobs as traders is to make things as easy on ourselves as possible. Many retail traders just buy stocks. If that is all they are going to do, they should at least give themselves an edge. Buying stocks in a falling market can be similar to trying to catch a falling torch. It is a good way to get burned. When markets are falling, most stocks are falling with it. Trying to predict when a market (much less an individual stock) will turn is pretty risky business. If all a trader wants to do is buy stock, consider buying when the markets are turning and/or trending up. If the markets are falling, go fishing or play golf. They will turn up again and then our trader can go back to buying.

In my estimation, we need to spend less time hunting for the perfect vehicle and more time in developing a sensible exit strategy. No gain is ultimately realized until we exit the play. Exit, then, becomes a key element in successful trading. If we develop an exit strategy that removes us from a losing position with only a small loss but keeps us in a winning position as long as our gains are increasing, I believe we can be successful traders.

Is there such a strategy? Probably there are many. One example would be the use of a moving average. We could decide, for example, that we would enter a bullish position when a stock price crossed above a moving average. Such an event signals bullishness. The time frame would depend upon our personal business plan, but it could be a 5 day, a 20 day, a 50 day, or whatever the trader chooses. As long as the stock remained above that moving average, we could hold the position, but we would exit if the price fell below the moving average. Now, the stock price movement is making both the entry and exit decision for us. We have found a basic method to remove our emotion (the enemy of traders) from the decision process. In trending markets, this method can be pretty effective though one runs the risk of whipsaws in sideways markets. Some traders choose to use MACD crossovers as entries/exits; others may move stops using candlesticks or exit on breaks through trends. The point is that utilizing an exit strategy that provides the discipline and removes the emotion can help us become more successful traders.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved

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Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft

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Saturday, February 09, 2008

Things That Are Important to Traders - Part I - Can a Good Trade Result in a Loss?

My guess is that most traders would say that making money is the most important thing to them in their trading. Naturally, that is the ultimate goal of all traders and investors, but there certainly are many other things that are extremely important yet may be overlooked in the quest for the ultimate goal.

Let me offer this thought for your consideration: the most important thing for a trader is to make good trades and not every good trade makes a profit. How could a trade be good yet not be profitable? Let's take a look at an example of a trade that a hypothetical investor may have made using some real numbers. On December 10th, after hitting a resistance on the 9th, Mcdonald's Corp (MCD) gapped up at the open and stayed well above the previous day's close on higher volume, all of which could have been interpreted as bullish. Suppose our hypothetical investor bought the stock at the close that day of the gap (12/10/07) for $61.90. The following day, the stock moved up again on even stronger volume to close at $63.13. The trade looked pretty good at that point, but the following day, after opening up, MCD fell to close at $61.66. From there it continued to fall into January when it got into the low $50s. In looking at the chart, there had been support around $60 so it seems like an exit on the break below support may have been a good decision. In that case, the investor may have lost $1.90 a share, but isn't that better than hanging on for another $10 a share drop. In that instance, the trader could have taken the loss (cut your losses) and if he still liked the stock, waited until it formed another support and re-entered. In fact, the stock made a double bottom toward the end of January and our hypothetical trader could then have re-entered around $51. As I write (2/5/08), the stock is near $54. By cutting the loss, the trader would have initially lost $1.90 and with re-entry on a bounce off new support, would now be up $3.00 on the new entry. Which is better -- being up $1.10 overall or down $7.90.

I understand I will hear the argument that this is Mcdonalds (MCD), "it'll come back." It may. Of course, the same argument was made with Enron. GE reached over $60 a share in 2000. It now trades in the $30's. When is it coming back? CSCO was over $69 in 2000; it is now in the mid $20's. When will it come back? Only you can answer the question whether it would be better to take the early loss and whether taking that loss makes for a good trade. Personally, I prefer to make the good trade, even if it results in a small loss, so I can move my money into another position that is going my way rather than holding on for dear life as a stock plummets and hoping or praying it does come back. Sometimes, they just don't come back and even if they do, how long do you want to wait just to hope to get back to even? It is important to remember that in order to just break even on a stock that drops 50%, it must move up 100%.

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Technorati tags: stock trading stock market investing trend trading swing trading option trading stock options stock option trading Bill Kraft

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Saturday, February 02, 2008

Targets and Exits

I sometimes get emails from subscribers who want to know whether I set targets on positions I enter and, if so, how I establish the target. If the question means do I set a target that once hit will result in my exiting the position, the answer is no. For example, suppose I am in a bullish position in XYZ that I entered at $20 and a target was set at $25. If the target is hit, what is to say that the price will not continue to go up? If I exited at the target and the price went to $40, didn't I just cut my profits? The objective for successful traders is to cut losses, not profits, and to let profits run. How can I let a profit run if I sell the stock when it hits a target?

Targets do have a place in my approach. I use them to calculate an initial potential reward to risk ratio. Using the same XYZ example, above, I know where my initial exit will be when I enter a position. I want it to be close to my entry price and I want it to be clear. The clarity can come from a break through a support level, for example. Resistance can supply the target. Suppose I buy XYZ at $20 and my pre-determined exit if the play goes south on me is $19. Resistance in this example is at $25 so, in a sense, that is a target. Now I can see that my potential reward to risk ratio at entry is 5:1. Pretty decent reward to risk, but does that mean I should exit if the stock hits $25? Not for me. I don't want to remove the possibility that the price can continue up so instead of exiting at the target, I would move my stop up behind the price and as it got closer to the "target" (resistance in the example) I would just move the stop tighter. If I get stopped out on a move back from resistance, that's fine. I would have my profit and would not have cut my profit. If the stock moves up through the target, I would still be in the position and could continue to move the stop up behind the move.

In my opinion, exits are much more important than targets. We only realize our profit or loss when we exit the position. If we exit properly, we do what we should -- cut our losses and let our profits run. Unfortunately, many retail traders are unsuccessful because they do just the opposite--cut their profits and let their losses run.

I want to thank the many subscribers who have bought my book, "Trade Your Way to Wealth." Last Sunday after only a week or so on the market, it hit #3 on the best seller list at Amazon for stock and option trading books. I hope those of you who have received your copies are enjoying the book and finding the information helpful. I tried to distill a lot of my own learning and experience into something readers would find valuable in their own trading without the necessity of re-inventing the wheel. Thanks.