The Problem with Market Commentaries

A recent note from a subscriber alerted me to discuss what I am trying to do with the Newsletter articles and why I am doing it. The subscriber chastised me for failing to comment on the financial meltdown in last weekend's article and suggested that I did not write about those developments as every other Newsletter writer to whom he subscribed did. He took it as a sign that I wasn't paying attention to the market. While I understand his issue, it comes from a misunderstanding of what I am trying to do with the Newsletter articles and my beliefs about market commentaries in general.

I do watch the markets quite closely because I make my living trading. It is a rare day when I am not monitoring movements and looking for entries. However, I do not intend to make the Newsletter articles a regular weekly commentary on the markets. I reserve my market comments for paid subscribers in my weekly Summaries to them and generally try to make the weekly Newsletter articles relevant to trading principles, methods, or strategies. In the Newsletter articles, I try to talk about things I believe are important to traders in general and that might advance their trading knowledge and, perhaps, show some approaches that have worked for me over the years.

The subscriber pointed out that all the other market Newsletters he read did discuss the current financial plight in the U.S. As I suggested in my response, I am not writing a market commentary and have no intention of following the herd. What can one say other than things looked bad and bearish plays continued to be in order. No one, absolutely no one knows what the future will be so attempts by commentators to predict the future are nothing but pure speculation. We can come up with all sorts of rational, logical guesses about what the markets are going to do, but they are just that -- guesses. Just consider the jolt the news that Lehman Brothers was in trouble and the news of its subsequent bankruptcy caused. Until that news precipitated the further news that our whole financial system was on the verge of collapse, the markets may have seemed OK, if not great. I did have a subscriber a few weeks ago who commented that he expected another big failure after Bear Stearns, but he made no prediction of which financial institution it would be. In any event, no matter what the talking heads on TV may say and no matter what market commentators may predict, we must keep in mind that it is nothing more than speculation. If any of us knew tomorrow's news, we would be instantly wealthy beyond belief -- we could buy the winning PowerBall ticket.

One thing I will say with respect to the financial crisis is that I am absolutely sick of politicians. As usual, even in these dire financial times, they have directed their attention to posturing and finger pointing. Everyone but the guy speaking at the moment is accused of being at fault. How about being intellectually honest for once and taking some of the blame themselves. How about working together to serve the people rather than working to blame the other guy? I know it isn't just the politicians who created the mess, but, for sure, they helped. When are we the people going to rise up and demand that the politicians represent us rather than themselves. I know I have mentioned politics and that mere mention usually brings out a lot of political comment, but I would appreciate it if readers would restrain themselves from writing political diatribes or defenses of their particular party or candidate since we really do want to limit the commentary to specific trading issues.

Well, that is my "market commentary" this week. Going back to the issues of prediction, all of us have no choice but to trade in the present. The past, of course, is gone, and try as we might, we cannot know the future until it becomes the present. When we make a trade, it is now. Without insider information, we have about a 50/50 chance of success on any particular trade no matter what we think or believe or bet will happen. In my view, that is why it is critically important to successful trading to have entry and exit strategies in place before we ever enter a trade. In that way, whatever may happen, we have set up a position in which we cut our losses and let our profits run. That method and money management will take us farther as traders than the thought that we can predict the future. Remember, we can have 50% winning trades (or even less) and still be successful if we manage our money properly and have a disciplined strategy to cut losses and let profits run.

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

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Pursuing a Trading Education

As many readers are probably aware, I am a great believer in advancing my trading knowledge and advocate ongoing trading education for anyone who wants to become and remain a successful trader. During the last week, I had a short dialog with a subscriber on the blog who adamantly takes the position that he is going to learn for himself. Good for him! That is what I did and that is what most traders must do. However, the subscriber further explained he wants nothing to do with books, seminars, coaching, DVDs, or services that are sold. I am not sure what that means except that he is going to the school of REALLY hard knocks. I have no idea how much money this person has to risk, but with an attitude that he can do it without assistance from those who have gone before, my bet is he won't have it long. It's a little like deciding to be a doctor, but not be willing to put out the cash and effort to attend medical school -- potentially hard on the patient -- and in this case, the subscriber is his own patient.

I remember when I first became interested in trading. I at least bought a book and that piqued my interest which led me to attend a free "come-on" seminar where I knew I would be solicited to pay for a more comprehensive seminar. I went to the free seminar fully determined not to pay for the seminar being sold. Thankfully, I re-thought my decision and did pay for a two and a half day seminar. I made back the cost of that seminar within a week using information I had gained at the seminar and from that time forward never hesitated to pay for my education. It was far less costly than trying to get everything for free. Though I speak at events on occasion (usually without pay) I no longer give seminars so I am trying to sell nothing when I say that the many I attended have helped me succeed as a trader. Without them, I might possibly have been out of the trading business years ago.

In my own case, I read every trading book I could get my hands on, watched umpteen VHS and DVDs, and still attend seminars with some regularity. I read several trading books a year. In short, I make sure I devote substantial time each year to enhancing my knowledge. I know several would-be traders who, like the subscriber, absolutely refuse to pay for any educational information regarding trading. Not a single one of them has been successful and most lose their trading money within the first six months. Education only makes good sense and why shouldn't the educator be paid? Should you buy a stock, for example, if you don't know how you might limit or remove risk? Would it be helpful to know a strategy that will make you money if the market or the stock moves in either direction, just so long as it moves? Though not currently the case, would it be helpful to know strategies that provide a nice return in a flat market? How likely is someone to stumble upon these things as a new trader unwilling to read a book, go to a class or watch a DVD?

I realize I'm probably preaching to the choir here, but when I see folks like the subscriber who evidently resents authors or lecturers and begrudges them payment for passing on their knowledge, I feel a need to reiterate that successful trading requires work and study, it does not come from bull sessions with other unsuccessful traders. Serious trading, in my view, requires a foundation of knowledge first and then the acquisition of experience. Trading real money before obtaining the basic knowledge seems like a perfect recipe for failure.

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

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A Trading Anecdote

As you read this, I am sitting on a lanai in Kauai overlooking magnificent Hanalei Bay. I'm not trying to make anyone envious, I only want to point out the great surroundings I am enjoying because I probably couldn't be doing what I am doing now unless I was in the trading business. Last weekend I wrote about what I consider to be the advisability of treating trading as a business and how I believe it can increase the likelihood of success as compared to those who treat trading as a hobby or as a gambling venture. Nothing guarantees success in trading or, for that matter, any business, but the investor's approach can make a real difference.

One of my early coaching students came to me after having lost a huge sum of money when the tech bubble burst and the markets turned down. Tears literally ran down his cheeks when he described his losses and his hands shook when he spoke about trading. In spite of this, the student claimed he wanted to be a full time trader. We spoke about the necessity of getting his obvious emotions out of the way and substituting discipline in their place. I suggested that the first step would be the creation of a trading business and he was all for the idea. We then began to go through the business plan elements I discuss in "Trade Your Way to Wealth" in order to help this fellow develop a plan that might fit his personality, risk tolerance, and needs. Our discussions began well and he started to develop his plan. We then came to the question of what his business hours would be. I believe it is important for traders to set out time that they will specifically devote to their trading business just as it was important for me when I was in the law business to devote hours to the practice. I also believe it is important to have time for oneself that is not devoted to the business. Time to shake out cobwebs, time to enjoy other things in life can be very important as well. My student absolutely refused to set hours for himself. I explained that the hours he set originally always could be changed because his business plan was never to be set in stone; it was always a work in progress. Nevertheless he flatly refused. He came up with a myriad of excuses even though he had no other fixed time obligations since he had quit his job several years before when he began trading (and before he lost the bundle). It was only after more discussions with him that I began to realize that refusing to set business hours was an excuse for his unwillingness to continue to trade. I addressed that situation with him and suggested that trading might not be for him. He disagreed vehemently so I asked him when he had last made a trade. He had not made a trade in more than 2 years. I suggested we find a stock that looked bullish in a bullish sector (the market at the time was going up) and buy a single share. He began to shake and to cry. He was unable to buy a single share of a $15 stock. He told me he had to wait until the system he was working on was perfected. Though he didn't use these words, he was working to create the holy grail. I suggested he might be better off marketing his system, but now, several years later, he is still working on the system and he still has not made a single trade as far as I know. This poor fellow is an example of the need to know ourselves. Some people are not cut out to be traders and if he ever was he isn't now.

While a plan is very important to trading, my old student taught me that something needs to come before the plan. Honest self evaluation is critical. Anyone can be a happy trader when they are making money, but first we need to know whether we can face the prospect of loss and whether we can handle actual loss since there will be losses. In the business sense, can we look at a loss and understand that it is a cost of doing business or is it going to be devastating? If the prospect of a loss is daunting, trading probably isn't for you. If you understand that losses will occur and that risk is ever present but can be managed with discipline, and if the idea of trading interests you, then maybe you can start working on your plan.

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

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Treating Trading as a Business

How do you think of your trading and investing? Is it a hobby? Is it gambling? Is it something you do when Uncle Fred gives you a tip or when you see something exciting about a company on television? Have you devoted time to learning strategies or do you just buy a stock when you "think" or "feel" it is going to go up? Do you have any exit strategy? Are you a buy and hold investor, and if you are, until when will you hold? Do you make your own investment decisions or do you rely completely on someone else? Have you defined certain times that you will devote to your trading or investing?

The bottom line is it is your money and you can do whatever you want with it. As hard as people work to make money, it never fails to astonish me how little time and effort so many are willing to devote to becoming good at investing. It seems like a lot of people I've spoken to about investing over the years do treat it as a hobby or as a gamble. In the sense that all trading involves risk there is some gamble to it, but if done properly, the trader can try to give himself an edge and he certainly can manage risk if he is willing to make the effort. It is beyond me why so many people seem to make no effort to learn or understand investing or even their own investments when the truth is that they are risking hard earned money and have the opportunity to enhance their quality of life and potentially their retirement through sound investment practices.

If you were to open a business, it is likely that you would have done your due diligence. You would have studied the business, formulated a plan, determined where the risks lay, estimated the likelihood and size of potential successes, and decided when and how much time you would devote to the enterprise. Why? Because you wouldn't want to lose your investment and you would want to work to make the business profitable. How is trading any different? It isn't. The investor who treats his investing or trading as a business has an important leg up on most others. It does mean some work as does the creation and development of any business, but the rewards can be fantastic.

In my first book, "Trade Your Way to Wealth", I emphasized the importance of making your trading a business. I set out, in detail, a way to create your own specific business plan and discussed specific elements to include in that plan. I explored risk awareness and risk aversion and concepts of money management. All of these things can help you work to become successful. Who has a better chance to be a successful investor -- the person who has made it a point to learn at least the fundamentals of investing and who has created his own plan or the person who heard something about a company and buys the stock? Anyone can be lucky with an individual stock pick, but it is the knowledgeable trader who cuts losses, applies appropriate strategies, and exercises money management skills who is more likely to prevail in the long run.

Next weekend, I'll discuss a few simple principles that have helped some of my students improve their trading skills.

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

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