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The Anger Amazes Me, But Proves the Point

2008-07-19T08:01:00.002-06:00

Last weekend I wrote a little article suggesting that perception, not necessarily actuality, moves the markets. In the article I quoted -- yes, quoted, not made up or voiced my opinion -- some positive facts about the economy taken from front page articles in Investors Business Daily. At first I was stunned by some of the responses which, among other things suggested that I was "smokin crack," was an elitist who "hung out with the likes of [the President], and that my head might be "screwed on backwards" if I didn't agree with the emailer's opinions. It really makes me wonder whether these people ever learned civility and manners. I have no problem with disagreements and readily confess that I am not always right. I am, however, ashamed for those who use name calling as a way to attempt to bully others into sharing their opinions. Name calling generally seems to be an emotional approach when someone disagrees but has no reasoned basis or facts to martial in support of their position. Name calling is nothing but divisive and has no power of persuasion, nor does it make any positive contribution to a dialog.

My bottom line in last weekend's article which was directed to trading was: "...if we can gauge the perception of traders, their current psychological bent, we are more likely to be able to give ourselves an edge in our trading. In general, and in the short to mid-term, it is the psychological, not necessarily the logical, that moves markets." Another way to say it is that the markets move on emotion at least in the short term.

Well, emotion is what I saw in some of the responses. One critic even chose humiliating sexual names for the President and Vice President of the United States. No matter what your political persuasion, I believe the Office of the President deserves to be treated with respect and dignity. How in the world referring to a President of the United States as slang for female genitalia moves the ball forward is beyond me from any reasoned perspective. However, these statements are clear and unequivocal examples of emotional responses triggered by that person's perception. It isn't logical, it isn't reasoned, and it isn't a fact. It is a response founded in emotion arising from a mistaken belief that I was trying to take a political stance. The attackers' positions spewed from a perception that I disagreed with their political values. I don't smoke crack, am not an elitist friend of "the likes of [the President]," and can see my face and chest at the same time in the mirror so it is probably not screwed on backward. Those are facts, but they are the direct opposite of the perception upon which the name-callers based their writings. They emoted based upon perception, and made no apparent effort to confirm that their perceptions were based on any facts.

The emotional responses in the Blog are rarely accompanied by supporting fact. They usually seem to be shouts of opinion. The same is true of emotional trading. Traders operating on emotion buy because they "like" a company and hold a stock when the price is falling because "it'll come back." I've heard more than one trader say he is hanging onto a particular falling stock because "it has been good to me." That doesn't seem to be a particularly clever way to cut losses, for example, but it is a way people's perceptions (right or wrong) control their trading. Because they may have made money in a stock before becomes the standard. "It has been good to me before." The truth is that my opinion is essentially irrelevant as to what a stock price will do. Because I think a stock will go up doesn't make it so. As a successful trader, I need something other than emotion to trigger my entries and my exits.

That is my point about the markets. They, like our name-calling friends, tend to overreact emotionally to their perceptions. It is precisely that human phenomenon of emotional reaction to market entries and exits that often results in losses for those traders. The traders who can achieve discipline and awareness of "mob" psychology are the ones who are more likely to have gained the edge and succeed.

The hot reactors are fodder for the market professionals. Trade like the emotional name-calling writers write and the pro will get their money every time. Ready, fire, aim is the emotional approach. It is fine and natural to be aware of and perhaps even defensive about one's perceptions, but, in trading, the thoughtful approach may work a lot better. By that, I mean that I would suggest a trader examine the fundamentals of a stock to be generally aware of what and how the company is doing and, in important addition, look at the reward to risk potential, and then set a specific entry and exit strategy before entering a position. Stopping the process when we perceive that it is a good company and our opinion is the stock will go up will probably not save the day. As you can see with an approach like that, our emotions may play a part but they do not control the trade.

One personal opinion that I want to share is that I believe humanity has a better chance with civility. Often the other guy, no matter what his political affiliation, has good ideas too. If we reject someone's ideas simply because they are from a different political party (or other difference), it is we who are likely to be the fool.

Emotional decision making strikes me as something similar to an angry bull charging a man with a sword; it may be what anger prompts him to do, but it isn't very smart.

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

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Perceptions

2008-07-12T08:51:00.001-06:00

Suppose you were watching the TV news last week and learned:

- Personal income jumped 1.9% last month
- Disposable income was up 5.7%, the sharpest gain in 33 years
- In the last 20 years, the average lifespan has increased by 3 full years
- As a nation we have never been healthier
- Real pre-tax income per worker hit an all-time record and was up 11% since the current president took office
- Americans net worth is $15.3 trillion more than it was seven years ago
- Since 2000 nonfarm business productivity has expanded 21%
- 9.2 million jobs have been created since 2001
- 80% of poor households have air conditioning and 97% own color TV sets

Those facts certainly would paint a pretty rosy picture, certainly nothing like the economy we have really been hearing about on the news. No wonder the markets have made it to official bear territory and no wonder the indexes saw one of the very worst June's. What a different world it would be if those were the facts. While this setting may be a far cry from today's reality, it would be interesting to see how those factors might influence market direction.

Oh wait, according to two articles on the front page of Investors Business Daily on Monday, June 30, 2008, respectively entitled "Do Foreboding Headlines Reflect Real Trends or Media Mind-Set?" by Terry Jones and "Rebates Fuel Spending, But Consumer Outlook Tough" by Scott Stoddard, those are the true facts. The list above represents selected facts that help describe current conditions, but though quite positive, are having little apparent effect on market conditions and movement.

The answer, at least in part, is people's perception as opposed to actuality. In listening to the news on network TV and in reading various publications, the perception seems to be that the sky is falling. Clearly, oil prices are heading out of sight and many of the financial institutions are in trouble as a result of their relationship to the sub-prime mortgage crisis, and many people may lose homes for the same reasons. As far as most of the network news I watch goes, that's the whole story. The perception is that things are in terrible shape.

As is often the case, the markets at least in the shorter term react or overreact with emotion to perceptions. Here, I would suggest, the perception is that the economy is in the tank, almost doomed; the outlook is bleak. The reality, I would suggest, is not quite so bad as the perception. Just look at the positive facts listed above, and things seem a little more balanced at least. I don't mean that high oil prices are good for our economy nor do I think that the sub-prime crisis shouldn't have a significant affect, I only mean to say that on the whole things are better than they are portrayed day to day. If the perception (whether right or wrong) is that things are bad then market action is not only likely to be bearish, it is likely to be more bearish than the facts actually warrant.

All this is to say that if we can gauge the perception of traders, their current psychological bent, we are more likely to be able to give ourselves an edge in our trading. In general, and in the short to mid-term, it is the psychological, not necessarily the logical, that moves markets. The psychological reactions in the market are, in many cases, driven by perception rather than reality.

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

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How Many Positions to Hold

2008-07-05T09:20:00.001-06:00

Last weekend, in response to a subscriber's question, I discussed the issue of how much money a trader needs in a trading account. As is often the case with trading, the answer is "it depends" on the individual and his or her goals, needs, risk tolerance, time available to trade, and so on. That same subscriber had also asked how many positions to hold in order to have a good mix of issues. Again, the answer is completely dependent upon the individual.

One of the most important, if not the most important, factors to examine in answering how many positions a trader should have is how many can that individual manage. I often have as many as 30 positions working at one time, but I certainly would not recommend that high a number for the vast majority of traders. Trading is what I do, so I am devoting a significant amount of my time to monitoring, entering, exiting, and adjusting positions. Clearly, that is a much different scenario from someone who can only look at the markets on the weekend or at night. I once had a student who traded for a living and only had one position at a time. I have lost contact with her, but the last I had heard, she was a successful trader.

Many factors influence how many positions a trader can manage at one time. They include the trader's level of knowledge, the strategies he is employing, and the time he can devote to his trading. Obviously, in terms of monitoring, it is one thing to buy a stock and place a trailing stop and quite another to trade near the money naked puts which might require relatively quick action to adjust, close, or roll the position. In Appendix D of my book, "Trade Your Way to Wealth", I set out 15 strategies and compare things like the level of monitoring required for each as well as things like relative risk, capital required, time frame, desired market direction, and expected time frame.

Depending upon capital, a true buy and hold investor who has a full time job could hold a fairly large number of positions while that same person who pursued a different strategy like swing trading long options would probably hold a smaller number of positions. As I have written in the past, these are considerations the individual investor should address when creating his individual personal business plan. The conclusions may well differ for each trader, but it is an important decision. Trying to manage too many positions can result in missing something on one or another -- believe me, I speak from experience. In my early years of trading, I was so excited about what I was doing that I did make the mistake of having more positions than I could effectively track and I burned myself. That episode taught me to limit the positions to a number I can manage and I have been faithful to the concept ever since.

In the coaching sessions, I sometimes encounter students who have not considered a limitation on the number of positions and find it difficult to keep up with themselves. I try to suggest that they establish a comfort zone both in terms of risk and in terms of manageability. It is my personal belief that traders should confine themselves to strategies and amounts of risk that permit them to sleep comfortably at night. Inability to manage positions whether it be from lack of knowledge, lack of experience, or just too many positions to manage does not lead to relaxed trading in my estimation and that, in turn, can lead to emotional and bad trading decisions that we all want to avoid.

I hope you are enjoying a wonderful 4th of July weekend!

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

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Some Thought Provoking Questions

2008-06-28T08:01:00.001-06:00

After the article in the last Newsletter, I received some interesting questions on the blog. One full time trader asked a couple of questions I frequently hear from both full time and part time traders. The first question is how much money does a full time trader need to trade? I should add that this question is also an important one for part time traders as well. As with so many issues in trading, there is no general definitive answer. It is a question I often address in the one-on-one coaching sessions in conjunction with money management and expectation issues. Since we are all different, the question can only be answered for the individual.

For example, if an individual is wealthy and has no need for additional income, his answer is likely to differ substantially from the full time trader who is actually trading for his livelihood and needs regular income to pay the bills. For the full time trader who is earning his livelihood through trading, there are several issues he must confront. One way to look at it is to determine how much money he actually requires for living expenses each month or each year and then make a reasonable and conservative approximation of the return he expects taking into account that some positions will, undoubtedly, be losers. If the trader needs $40,000 a year as a minimum for living expenses and predicts that he can reasonably generate a 10% net return a year, he will need a $400,000 trading account just to fulfill his cost of living requirements. Great care must be taken in evaluating potential return and there is a great danger that a trader may overestimate the returns he will generate. In most cases, a belief that he can achieve a return much greater than the S&P, for example, is probably not realistic. The trader must also be aware that he could break even or lose money trading over the course of any given period of time so some cushion should also be maintained.

Recently, a friend who is approaching retirement told me he was quitting his job and going to trade for a living. He was earning about $65,000 a year at his job and has no pension. I asked him how much money he had to trade and when he told me around $250,000, I encouraged him to keep the day job. In order to equal the $65K a year, he would have to achieve better than a 25% a year return and while that is possible, it is highly unlikely in my estimation, especially for an inexperienced trader. Thankfully, he took my advice and is trading on the side.

The part time trader who has another job also needs to consider how much trading money he needs. Under funding can be a big problem because too large a percentage of the trading capital may be needed to enter a given trade. Consideration must also be given to the strategies being utilized since it is likely that someone who just trades stock may need a lot more in the account than someone who is trading options. In my book, "Trade Your Way to Wealth", I emphasize that trading is a business and I devote a great deal of time to the specific and detailed considerations an individual must make in setting up their personal trading business plan. Formulating that plan is as critical to good successful trading as is a foundation to a good house. Remember the childhood story about the pigs who built houses of various materials from straw to brick and what happened to each when the wind came? Spending serious time creating your plan as outlined in "Trade Your Way to Wealth" can assist (though it is no guarantee) in the effort to build a solid trading business. Failure to expend the time and effort to create that plan almost certainly will lead to a "straw house" business that is much less likely to weather the storms of trading.

The other question the trader asked me to address was diversification and "how many issues are a good mix." I'll try to take a look at that next week.

Both of these questions are quite commonly addressed in my coaching sessions and I have seen that some traders tend to gloss over them. I suggest each is worthy of your study, consideration, and incorporation in your trading plan if you are serious about trying to improve your trading results.

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

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Managing Trading Account Money

2008-06-21T09:31:00.001-06:00

A couple of weeks ago, a subscriber wrote asking how someone who trades for a living manages money in their trading account. The subscriber was interested in whether profits are plowed back into the account or taken out or exactly how the money is managed. One of the most essential points of my book, "Trade Your Way to Wealth", is the importance of an individualized plan. In the book, I emphasize the importance of personalizing your plan and set out in depth guidelines to assist the reader in the construction of his or her own plan.

Since each of us has differing amounts of money, different risk tolerance, different levels of knowledge, prefer different strategies, has different amounts of time to devote to trading, and so on, I believe it is important to create a trading business (whether full time or part time) that meets the specific needs of each individual.

It is the same for those, like me, who trade for their living. I use a specific plan that is designed for me and might not be appropriate for many others. For example, unlike most subscribers, I don't have a job other than trading. I do devote time to individual coaching, speaking engagements, and writing things like these articles, but my real job is trading. Therefore, when it comes time to answer the question will I trade full time or part time, the answer for me is full time.

I can give you an idea of how I go about handling money in my own trading account, but just because I trade for my living does not mean or even suggest that others who trade for their livings are going to do the same thing or even anything similar. First, I want to note that I believe money management is a critical element to successful trading and I devoted time to that concept in "Trade Your Way to Wealth" as well as in archived articles here. There are many ways to manage trading money as I have set out in those writings, but, for me, at least, the important point is to have a money management plan that keeps a trader in the game. Betting it all on one position, for example, may be a money management plan, but it may not be a very good one. If you "bet it all on black" and black doesn't hit, you are no longer in the game. I've seen people do exactly that expecting to hit a home run only to lose it all. So, the first thing I do with my own trading account is have a money management plan.

The subscriber who wrote seemed most interested in what full time traders do with their profits and I can only answer for myself. I have several brokerage accounts, but only one that I identify as a true "trading" account. Among the things I do in that account is trade options and one of the issues with trading options is how large can a trade be. If I am trading something like the "Q's" (QQQQ) (representing the Nasdaq 100 index) or the "Diamonds" (DIA) (representing the Dow) I might be able to take large positions because there is a great deal of open interest. However, if I am trading options in some less liquid options, I need to make sure that my position is not so large as to affect the market or spread in that option. For that reason, I place a limit on the amount of money I keep in the trading account. By some standards, it is a fairly large amount, but it only represents a portion of my liquid assets. I will transfer funds out of the trading account to do things like pay some bills or enter other investments when the account gets above a specific level so I do not reinvest all the profits back through that specific trading account. In another account that I think of as longer term investments (not buy and hold since I always have an exit strategy even if I'm guessing the asset will be a longer term hold) I generally do reinvest profits less living expenses as they are realized. I also use dividend reinvestment plans in that account to accumulate larger positions without commission over time. Of course, the funds in that account are also generally relatively liquid and are available for other large investments like real estate or for emergencies.

As I indicated, that is my own method and is only an illustration of what one trader does. What each trader does with his or her money is the product of their own plan. It may be similar or differ radically from what I do. Trading plans and money management like choosing strategies truly are personal to the trader. I was happy to read the subscriber's question since it is evident that he is giving thought to the issue of what to do with profits. It shows that he is looking for at least a part of a plan and that, to my mind, is a good thing. Once again, I believe a trader can increase the chance of success by taking the time and expending the effort to create a plan that fits his or her individual circumstances.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
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Identifying the Emotion in Trading

2008-06-14T07:51:00.002-06:00

Most of us have learned that emotions can be a serious enemy of successful trading. Unfortunately, all too often, trades are entered and exited solely because of emotion. Thoughts like "if I buy XYZ, I'll make a bundle," or "XYZ went down 50 cents today, I better get out" are examples of entering for greed and exiting for fear without any pre-planning or underlying discipline. I have often thought and am personally convinced that in the short to medium term at least the markets are ruled by the psychological rather than the logical. In my book, "Trade Your Way to Wealth", I place great emphasis on the need for discipline and the need and content of a plan. It is my contention that a trader can give himself or herself a better edge if they will follow the old adage of "plan your trade and trade your plan." To me that means map out the whole trade including the complete exit strategy before you ever enter. In that way, we can lessen the emotional pull and give ourselves a better chance.

After I sent out an alert recently, I received an email from a subscriber who advised that the stock I was trading was on his brokers "restricted list" that required a customer to call in and that made the subscriber "nervous about the trade." That email raised several important issues about trading. The first thing that jumped out for me was that I don't believe anyone should enter a position that makes them "nervous." When someone says he is nervous about a trade, it tells me that emotion is already operating in high gear -- the trader is afraid of losing and that fear is already in control. The nervousness is easily avoided. Either don't trade, or at least don't make that particular trade. The real question is how to remove the nervousness from the equation. The best way, in my view, is to have an exit strategy in place before ever entering the trade; know ahead of time where you are going to cut your loss before you get into the position. Every trade can lose so discipline the trade to cut the loss where you have made the determination ahead of time.

The next issue the email raised for me is who is the subscriber listening to and why? He was concerned because his broker had the stock I was discussing on some list that prevented the trader from making the trade on the internet and required him to make a phone call to place the trade. I'm not sure that the simple fact of having to make the call and talking to a live broker was the problem for this fellow or whether it was because he perceived some other negative from the requirement. One way to find out, of course, is to call and ask the broker why they have that stock on the "must call" list. It may simply be because it was a cheap stock. One of my brokerages requires me to enter a special PIN when trading the real cheapies, for example.

As I pointed out to the subscriber in my response to his email, many times analysts differ on their opinion regarding a stock. Where several analysts are covering a stock, it is quite common to have differing views sometimes as wide ranging as from strong buy to strong sell and anywhere in between. There is a disagreement every time an order is filled since the buyer expects the price to go up and the seller doesn't. That is why it is important for the individual investor to educate himself and make his own reasoned decision regarding entry to or exit from any position. There is, as I have often written, no holy grail of trading. No commentator, analyst, broker, or system is going to be right all the time. Trading is a business that is inherently risky. As I describe in "Trade Your Way to Wealth", understand the risk, exercise sound money management, be aware of reward to risk ratios, have an exit strategy and plan your trade. If you don't do at least those things, you have every right to be and should be nervous about all trades.

For the record, I closed the trade that made my subscriber nervous in just 6 days and realized a before commission gain of 3%. Of course, it isn't always that way. The key is to prevent your emotions from ruling the trade.

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

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A Little More on "Entitlements"

2008-06-07T07:28:00.002-06:00

I think I received more comments last week about the Social Security issue than on any other article I have ever written for the Newsletter. As might have been predicted, the commentaries ran a very wide gamut. Most of the comments were very thoughtful and offered suggestions that could improve the system and the returns on investment. One commentator seemed to suggest that there was no problem so no fix was necessary. Others advocated some very substantial reforms. One writer suggested that the retirement benefits Congress receives should be blended into Social Security so the people (as in "we the people") and members of Congress would be playing on the same field when it came to retirement benefits. That idea didn't seem unreasonable to me. Why should members of Congress get a better retirement deal than the general populace? Is that at all fair?

When discussing my thought that mandatory financial education may help people ultimately fund their own retirement, I was surprised by the negativity of many of the comments. One person said simply that people are too stupid to understand. I agree that some proportion of the populace may not put the effort into absorbing the information, but I don't think that is a reason to deny the education to others in the public schools who would benefit. Some people are not cut out to learn algebra, but that doesn't mean it shouldn't be taught, does it? Other commentators pointed out that many people are unwilling to learn while still others suggested that people with families had priorities more pressing than preparing for their retirement.

Obviously, each of those comments has at least some merit. Is the answer, then, to just forget the idea of adding to the financial or investing knowledge of the general populace? Yes, families may have difficulty putting aside money to invest, yet many seem to have little trouble buying on credit where they pay annual interest rates of more than 20% on their credit balances. It is tough to put anything away for retirement if you have maxed out credit cards and are paying 22% on the balance. If those families had had the benefit of some financial education, might they have avoided the credit card trap, sacrificed a bit and waited until they had cash to buy the luxuries rather than put it on the credit card for instant gratification? God forbid -- that isn't the American way. With the sacrifice of a little patience, those families would have the 20%+ of whatever the credit card balance would have been to invest. Would that help? It certainly couldn't hurt could it?

One writer suggested Social Security only be paid to those who "need it" and should be paid for by those who don't need it. I thought the system of "from those according to their abilities to those according to their needs" was a financial and political system that had proven itself unworkable. The philosophical question is whether those of us who do are financially responsible for those who don't. Most would agree, that those of us who do may, indeed, have some responsibility for those who can't, but why for those who just don't? Even if one agrees with the concept that those who "need" Social Security should get it and it should be paid by those who "don't need" it, I am curious as to who will make the decision of who "needs" and who doesn't.

I guess that one of the more common and striking views to me is how many folks believed that the general populace should not be permitted to manage their own retirement money because of their perceived incompetence. If that is really so, why should they be permitted to manage any of their money? How is it that they can manage the remainder of their money but not their retirement money? If they are incompetent to manage one part of their money how can they be competent to manage any other part? Logically, should they be allowed to manage any of their money at all? Would anyone who argues that people are too incompetent to manage their own retirement money also contend that the government should also manage the rest of their money?

Finally, whether we get Social Security or not, doesn't it really come down to the fact that we are responsible for our own retirement. As many of the comments pointed out, Social Security is not expected to provide a retirement; rather, it is a supplement. Since that is quite true, at least in practicality, would greater efforts at financial education, both within the schools and by the individuals not be desirable?

Next week -- freedom of religion. Just kidding. I'll be back to talking about issues more directly related to investing and trading. Thanks for all your comments concerning Social Security.

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

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Social Security - Where from Here?

2008-05-31T09:59:00.001-06:00

Among my random thoughts last weekend I mentioned Social Security and was not surprised to receive a couple of comments on the subject. I guess I was surprised that I didn't get more comments. All of us are in one category or another -- we are either receiving the 'benefits' or we are paying for them. The simple fact is that Social Security clearly seems to be a failing program if not an already failed program. I guess my question to you is whether it is a program that should simply be abandoned or do you see a cure? As with so many things administered by the government there is a great cost simply in terms of paying for the bureaucracy that was created to maintain and administer the program. Those costs aside, investments have been somewhat less than sterling and it seems that some politicians all too often have attempted to divert or "borrow" from the funds. It has been no secret that Social Security will be out of money in the not too distant future. Back in the '80's, at least according to his diary, President Reagan recognized the approaching problem and was urging Congress to work to repair the situation. Now today, more than a quarter of a century later, little has been done other than raise tax payments and defer full eligibility for entitlement to benefits. Take in more, pay out less has seemed to be the solution so far. You are probably aware of at least parts of the approaches favored by the current presidential candidates, but if you aren't, there is a pretty comprehensive article on the front page of the Investor's Business Daily on May 27, 2008.

According to the IBD article, Senator Obama says that letting people invest a portion of their Social Security taxes is a way to "gamble away people's retirement on Wall Street." I disagree. After all, it is the people's money in the first place, isn't it? While some might inevitably invest badly, do they not still have the right to invest their own money as they choose or must they invest as the government says? It is the people who permitted the government to take their money in the first place to "invest" it for their social security. What kind of a job has the government done? I agree that our population in general is not well-educated regarding investments and investing, but I think it is high time that money management, risk awareness, debt control, and investment instruction become part of our public education (and private education) curriculum. Had that been done back in the '80s, those students would now have a much better foundation and be more competent to prepare for their own retirement. Is it time to start that now? I definitely believe it is. Otherwise, do we just keep raising taxes and/or lowering benefits until the taxpayer finally revolts or the benefits become completely meaningless? What do you think? Do you have any solutions?

While you are certainly at liberty to criticize my thoughts, I would suggest it might be more productive, if you disagree with me, to offer your own positive solutions. Criticism of the proposals of others in government has been the standard political fare for decades with no positive solutions offered and, quite obviously, that has solved absolutely nothing. I believe solutions rather than rhetoric are more necessary now than ever.

A wise subscriber last week questioned what would happen to the employers' contribution to Social Security if people were permitted to invest some of their social security money on their own. How about placing that money directly into an individual retirement account for each employee that is invested in interest bearing government bonds? That portion of an individual's retirement would then be reasonably safe and there would be an assurance that it would grow through interest payments. The employee's portion of the tax could be invested in a regulated employee account and, just like the current Social Security, the funds would not be available until a pre-determined retirement age.

I believe this is an important subject and I'd like to see your thoughts on the subject. I don't pretend to have the answers, I only have some thoughts like those I expressed above. The real point, I think, is that we better get a real dialog going in this country and find a solution or at least a direction other than simply continuing to feed a very hungry bureaucracy.

For those interested in a coaching session, I only have 3 left for the remainder of the year. Check the link if you are interested.

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

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Random Thoughts for Traders on a Holiday Weekend

2008-05-24T08:40:00.003-06:00

As an advocate of discipline in trading, I am a firm believer in having a precise exit strategy in place before I ever enter a trade. I try to do that in my own trading and believe it is important to actually exit according to that plan rather than relying on that little voice in my head that tells me: "Don't worry, hang in there, it'll come back." One of my random thoughts this weekend is whether everyone has that little voice. In talking with traders and students over the years, I suspect almost everyone has heard that voice and maybe even heard the same advice. It can be awfully easy to listen to that voice and stay in a play just a little longer than originally planned. Maybe the voice is right. Maybe it will come back. I'm sure many would argue that you should stay in because the market goes up and the market goes down and, after all, it is best to buy and hold. On the other hand, could it be that it won't come back? If it is coming back, when? Since I have absolutely no ability to predict the future with certainty (and neither does anyone else as far as I know), what effect does my believing that "it'll come back" have on the price movement of the stock? Obviously saying "it'll come back" does not make it so. Trading, quite simply, is done in the present. That, I guess, is one of the main reasons why I set up my exit strategy before I enter a play and exit when it is hit -- almost always, at least.

Another of my random thoughts this weekend is why don't people make the effort to take over the management of their own money? Why, for example, was there such a furor over the idea that as at least a partial replacement for social security, people be in charge of investing their own retirement money? Really, now, how has the government done investing the social security trust monies? If we are going to have retirements, who is going to provide the money? Social Security? Corporate pensions -- how many people coming to retirement thought they would have a pension and now don't? My thought, and you certainly may disagree, is that everyone should be in charge of their own investments. That means that they may need to invest some time first in educating themselves and it could take time away from watching the "Bachelorette" or some other reality TV show. Is it worth the effort? It was for me. I had no savings, no pension, no appreciable 401k, but took the time to learn about risk and money management and strategies and it has done me very well. If I didn't do it, who was going to do it for me? So I did it. The apprehension about learning trading and investing is, quite frankly, much worse than the learning itself. We have been led to believe investing, trading, stock and 'oh my gosh,' options are too complex and well beyond our abilities. Frankly, I believe that is nonsense or an excuse not to learn. I wrote "Trade Your Way to Wealth" in an effort to show readers many different strategies that could make them money. None of the strategies is particularly complex and money can be made with any or all of them. I tried to use clear simple language and teach basic strategies using stock, stock and options, and options in order to try to make understanding easy. Building on sound basic foundations, almost anyone can take a book like "Trade Your Way to Wealth" and gain an understanding of how risk can be managed, limited, reduced, or in some cases even eliminated while employing strategies potentially leading to high profits. Almost any of us can learn ways to trade or invest successfully providing we are willing to commit to learning. Why do so many of us simply refuse to do it and expect it to come from somewhere else?

The next random thought for the weekend is why do so many people always go after the home run in trading? I've seen so many over the years who are in a highly profitable position only to see the profits fade and ultimately turn into a loss all the while waiting for the big hit. Though 'ten baggers' do occasionally occur, why not generate profits in smaller increments as well. I've heard it said that no one can get rich selling covered calls, for example. I disagree. As a purely hypothetical example, suppose we could make 2% a month selling covered calls, the compounding effect can lead to some pretty hefty sums over time. Let's say you could net 1.5% per month selling those unexciting covered calls. That would be an 18% gain in a year. Using the rule of 72 and compounding at 18%, it would take about 4 years to double your money. $10,000 could grow to $160,000 in 12 years or $100,000 to $1.6 million in 16 years. As one instructor told me, one of the great ways to make money in the markets is the same way you eat an elephant -- one bite at a time.

My final, though not so random, thought for this weekend is that you have a wonderful one and a great Memorial Day.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
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Certainty

2008-05-17T08:26:00.002-06:00

Ever since I began trading I have encountered many statements seemingly made with great certainty. I have heard people say that a specific stock price is going to jump up on the earnings announcement. It didn't. I have heard people say that the only way to make money in the markets is to buy and hold. It isn't. I have heard people say that no trader can make money trading. That's just not so. Maybe the one saying that takes the cake is "It's going to come back."

The truth is that little, if anything, is certain in the markets. A few things that seem to be pretty close to certain are:

Some trades will lose

Every trader or investor will make some emotional market decision(s)

It is difficult to remove emotion from trading decisions

No strategy is perfect

The more knowledge and experience a trader gains, the greater chance he gives himself to be successful

Sometime you will cut your profits and sometime you will let your losses run even though you know you should do the opposite

I have an unconfirmed suspicion that those whose personalities work in terms of beliefs in market certainties like "it'll come back," or "there is only one way to make money in the markets and that's to ....," or "there is no way anyone can make money trading" are less likely to be successful than those who simply accept that there are no real certainties. Of course, I am speculating and many may disagree, but I am guessing that those who pronounce "certainties" may be too rigid to accept the vagaries of market movement and may have difficulty in seeing alternative ways to deal with situations. Again, it is just my speculation, but I believe that those who are less rigid, who are able to reverse positions or who are willing to adjust strategies when they encounter a changing or unpredicted situation are more likely to succeed in the long run.

A "buy and hold" investor, for example, is bullish by nature. Essentially, their argument is that if they buy stock in a fundamentally sound company, the stock price will go up over time. Over what time is not ordinarily defined, but from a long term historical perspective, the argument is sound though it certainly has many exceptions. For example, if we look at the Nasdaq Composite (COMPQX) we see that it is up relatively substantially since its low in 2002, yet it is nowhere near its high in 2000 and it is currently trading at approximately the same level as it did 10 years ago in 1998. The results, therefore, for a "buy and hold" investor would be quite different depending upon when they made the decision to buy.

Would it be worth the trouble to learn to trade the market in both directions? An investor could have traded bullish strategies on the COMPQX as it rose from 1994 to 2000 and then traded bearish strategies from the break in 2000 until 2002 or 2003 and then climbed aboard the bull again into 2007. The whole move up from 1994 to 2000 was approximately 4300 points; the move down from 2000 to 2003 was about 3750 points and the move up from there to the present about 1200 points. While the bullish buyer in 1994 would have about an 1800 point gain today, the trader who used strategies to trade both directions, even if he captured only 50% of the moves would be up over 4600 points over the same time. Certainty that buying and holding is the only way to go could have been costly in that scenario.

Please understand that I do accept buy and hold as a very viable strategy. I just believe there are many other strategies, including ones to benefit from bearish moves, that might be worthwhile for each of us to consider. In "Trade Your Way to Wealth," my recent book, I examine a number of these strategies and emphasize the importance of money management and risk control. Understanding and using these concepts may very well add to your trading abilities if you are willing to accept the proposition that certainty in the markets is, most often, illusory.

by Bill Kraft, Editor
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Do Traders Really Die Broke?

2008-05-10T09:03:00.001-06:00

Last week, in response to my invitation to submit market sayings, one anonymous commentator who identified himself as one who had spent 16 years on the floor of the NYSE suggested a saying he attributed to folks who worked there. The saying is: "Traders die broke." Of course, I've heard the saying before as well as its companion: "Traders drive Fords, investors drive Cadillacs." Since I am a trader, and since I have a book out entitled "Trade Your Way to Wealth," the saying is of definite interest.

Incidentally, I DO have a Ford (along with 4 other vehicles and 5 homes) so I am speculating on how it will come about that I will die broke because I am a trader. First, I should note that trading does involve risk and the trader who trades as a gambler is, I agree, quite likely to die broke. Trading, however, can be done with limited, measured, or, at times, even no risk depending upon the strategy utilized. Since I have long been concerned with people who trade with little or no awareness to the real risks they are undertaking, I wrote "Trade Your Way to Wealth: Earn Big Profits with No Risk, Low Risk,and Measured Risk Strategies." I also write these Newsletter articles with the hope that readers will incorporate things like business plans, money management, exit strategies, and risk awareness and control into their own investing and trading.

In general, it is probably fair to say that the lower the risk, the lower the potential reward. A trader who uses no risk or very low risk collars, for example, may not make as much as fast as someone who chooses a very high risk strategy like simply buying a stock with no exit for example. However, the high risk trader stands a greater risk of dying broke than the risk aware or risk controlled trader. A trader can take wild swings hoping to hit the home run (that seems to be what most do) or he can use an approach with a lesser measured risk and attempt to generate wealth in a safer manner. Personally, I chose the latter. Success comes in trading the market much like the way one would eat an elephant, one bite at a time. The wild swinging trader may, indeed, hit the home run, but in my experience coaching and speaking with traders, it is the wild swinger who is most likely to go broke. Even if they do connect for the home run, they seem to take yet another wild swing with the proceeds of the first success and let it go down the drain.

It is important to understand who we are listening to. When someone who worked the floor of the NYSE (assuming not as a janitor) says "traders die broke," who is this person? Is it the broker who recommended you hold Enron to the bitter end? Is it the person who was urging you to continue to buy tech stocks coming into the 2000 crash, or is it one of the brilliant minds at one of the big firms that recently have had to write off billions of dollars because of the stupidity of their investments in the sub-prime markets?

When did the saying arise? Was it at a time when a trader had no chance to make a buck on a spread because commissions were so outrageous, or was it in more recent times when commissions were much more manageable? After all, it would be awfully difficult making any money writing covered calls if you had to pay a $200 commission on a single contract. Today, it can be done with a $5, $10, or $15 commission, giving the trader at least a better chance.

Finally, I do agree that traders may die broke if they trade like gamblers, do not discipline their trades or do not know how to discipline them; if they fail to incorporate principles of sound money management, or fail to enter positions with an exit strategy. On the other hand, I believe traders who apply discipline, money and risk management, and don't constantly swing for the fences do have a decent chance of doing well provided they expend the effort to educate themselves -- at least as a trader who has done those things successfully so far, I hope so.

by Bill Kraft, Editor
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More Market Sayings

2008-05-03T07:54:00.002-06:00

Last weekend I wrote about some market cliches so we could think about their efficacy. While these sayings have become conventional wisdom, the real question for us as traders and investors is are they complete and do they work; do they produce the intended result? This week, I would like to examine a couple more with the same objective in mind. One of my favorites is: "You can't go broke makin' a profit." I always say that to myself after I have gotten out of a position only to see it take off after I exited.

"You can't go broke makin' a profit" is only true if our profits are greater than our losses. The problem with the concept is that it doesn't recognize the importance of letting profits run. No doubt it is better to take profit than suffer a loss, but the real key is when to take the profit. Should we pull the plug and exit a play as soon as it turns profitable? Once there is a profit, what should we do to avoid letting it turn into a loss? How long or far should we let the profit run before we close out? Again, as we examine the statement, it can result in the formation of an exit strategy. It seems to me that we can follow the direction of the cliche by recognizing the importance of keeping a profit so we might want to trail a stop once our position is in the profit column or we may set an exit based on the crossing of a moving average or maybe follow Japanese candlesticks, but whatever we choose, we need to have a strategy first to preserve the profit and second to let it run or at least try to avoid exiting too early.

Another well-known market saying is: "buy on the rumor, sell on the news." I think this one is pretty valuable with minor modification. Buying on the rumor probably works pretty well as long as we hear the rumor and hear it fairly early in the game. Hearing the rumor shortly before the news comes out may not work so well. The theory behind the saying is that the rumor generates excitement and excitement causes movement in the price of the stock. Generally, once the news comes out, the excitement is over. There is no more anticipation because we now have the information; we know the news. Once that happens, the run-up is often over as well and we may see a downturn. I suspect the better saying is: "buy on the rumor if you believe there is a reasonable time before the news comes out and sell right before the news is announced." That pre-supposes we know when the news is going to be announced. In some cases, we may know when the news will be announced, in others, it can only be a guess. In either event, once again, we should have our exit strategy in place before we buy.

Is the trend really your friend and do you earn on the turn? If you're not sick of these cliches by now, we may take a look at those two down the road.

Thank you to the many of you who have bought my book, "Trade Your Way to Wealth." I appreciate your kind comments on the book and genuinely hope it advances your trading knowledge and helps you become an even better trader and investor.

by Bill Kraft, Editor
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Market Cliches

2008-04-26T07:38:00.002-06:00

When I first was drawn to trading I was a little intimidated by parts of the new language (e.g. diagonalized calendar spread or strangles or going naked) and I was a little amused by some of the cliches. Sayings like "you can't go broke making a profit," or "the trend is your friend" easily reinforced some conventional wisdom with something I could easily remember. Some of these sayings have become so well known that I have wondered how often and in what ways they may be applied. Are they 'truths' of the market? Are they infallible? Is there some other side? Do they really work? I'm going to take a look at a couple of these cliches in this article and give you my own thoughts. Mostly, these are just my opinions and I would encourage you to form your own. Just doing a little thinking about the meaning of some of the cliches might give us some new insight.

The first saying that might be worth looking at is the idea that "buy and hold" is the best (and as at least one subscriber noted) and perhaps the only way to succeed in the markets. I devoted a little space in my book, "Trade Your Way to Wealth," to an analysis of "buy and hold," and, suffice it to say I don't see how the strategy "buy and hold" answers the question: "Hold 'til when?" " Buy and hold" is a strategy based on the historical fact that markets go up over time and if one holds a position in a stock, it is probably going to increase in value over time. Depending on the specific stock and depending on the time frame, that may or may not be true. What the strategy really lacks, in my view, is an exit. Is the exit "buy and hold" hold until death? What else is it? When do you get out of a losing position if your strategy is to buy and hold? How does that thought correlate with the next important cliche: "Cut your losses and let your profits run."

It seems to me that if you are going to buy and hold (does that mean buy to hold?) you have no way of cutting your losses. Though your profits may run, they may also disappear, and even turn to losses if there is no exit strategy. I personally am a believer in cutting losses and letting profits run. Hardly anyone would disagree with the general principles in that cliche. The problem I have seen is that so many retail traders don't have a clue how to cut losses or how to let profits run. It does suggest the need for some plan on the trader's part that will define when, or under what circumstances, the trade will be closed. There are many ways that creating an exit strategy can be accomplished and it is up to the individual to chose the strategy that best fits his own trading needs and personality. One trader may decide to use a cross above a moving average as a reason to enter and a cross beneath the average to be a reason to exit thereby making the moving average the strategy. Would that help cut losses? Sure it would in most cases. That strategy could also let profits run because there would be no exit unless and until the stock price dropped down through the moving average. A different trader may choose to move stops behind his position either on a trailing basis or at a specific stop price that he could regularly move behind his position. I discuss this concept in "Trade Your Way to Wealth" and believe it is an important concept for every trader to incorporate into his personal trading plan. I don't mean to suggest any specific exit strategy is better than some other one, but I do mean to suggest that I think is better to have some disciplined exit strategy in place than to have none at all.

I hope that is food for a little thought. Down the road, I think I'd like to take a look at "buy on the rumor and sell on the news" and maybe "you can't go broke making a profit." Maybe even think about "the trend is your friend" or "you earn on the turn". Let me know if you are aware of some market saying that we might have some fun thinking about.

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Trading Is About You

2008-04-19T09:21:00.000-06:00

What strategies you select when trading the markets is entirely up to you. In my view, you should choose strategies that fit your needs, your risk tolerance, and your personality. Are you someone willing to take high risk in exchange for the chance to reap a high reward, or are you someone who would prefer to emphasize safety of your capital in exchange for a limited (though still potentially good) return? Do you have a lot of capital or not so much to trade? What time frame is most appealing to you? What level of knowledge do you possess? What have you done and what are you doing to increase your trading knowledge?

In my book, "Trade Your Way to Wealth," I discuss 15 strategies in detail. With respect to each strategy, I outline the relative risk, the potential reward, the relative initial capital requirements, the expected time frame, what protection may exist, the level of monitoring required, and the market direction to which each can be applied. In Appendix D, each of these factors is set out in tabular form so readers have a quick reference to see how a particular strategy may fit their own trading personality.

As an example, in "Trade Your Way to Wealth," I note that buying stock has risk that is limited only by the purchase price (it can go to zero), has unlimited potential, requires a high amount of capital, has no protection built in, requires a high amount of monitoring and is designed for a bullish market. Contrast that to selling naked puts where the risk is limited to the purchase price of the stock if assigned less the credit the trader receives when the trade is entered (so the risk can be less than buying stock without getting the credit to open the position). The time frame for selling naked puts is usually fairly short and the trade is entered with money coming in rather than going out. Which is better is for you to decide.

Stocks and markets can only move up, down, or sideways so an investor or trader need use no more than 3 strategies. The key is to know which ones suit you best. Do you like a strategy where you can make money just as long as the stock price moves, no matter whether the direction is up or down? How about a trade where your upside may be limited but your capital is largely or even completely protected? Would you like to have a greater percentage of profit potential at a lesser cost than stock ownership? How about a limited risk way to make money when the markets are dropping? Are you familiar with these strategies, or do you just buy stock with the intent of selling it when the price goes up? Could it be worth your while to take a little time to learn and understand these strategies?

In my opinion, these strategies are worthy of study if you are serious about making money in the markets. First, however, it is important for each of us to evaluate what we are seeking in the markets. Are we looking for income? In Trend Trader and $10 Trader, for example, I hold some positions that are specifically designed to produce regular income, sometimes free of federal tax. Other positions in those services are entered in an effort to profit from a price movement. Are we more interested in growth or capital appreciation than income? Obviously, our strategies would differ depending upon the answers to those questions. At the outset, I would suggest that we need to ask ourselves those questions. The answers will guide us toward strategies that will best accomplish those ends.

Once we recognize where we want to go, we can then decide what strategy or strategies will meet our personal needs best in getting there. Are we looking for the safer, lower risk path or are we willing to take greater risks to expose ourselves to higher potential rewards. Can we look at the markets every day, or only on the weekends? Might we need to adjust a position as a strategy plays out as in the case of some spreads? If that is the case, we need to be sure that we have both the knowledge and the time to look at the position as often as it requires and to make adjustments when needed.

As always, in my book and in these articles, I hearken back to the importance of creating your own trading plan, using strategies that suit you personally, and assuming risks that let you sleep at night. It is your money. The emphasis needs to be on you and your knowledge and management. Trading is serious business and involves risk. I sincerely believe each of us needs to treat it that way.

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Thoughts About Seminars

2008-04-12T09:02:00.001-06:00

In the article last weekend, I wrote about education with some emphasis on coaching. I promised to write a little about seminars this week, so here goes. First, let me say that I am a fan of seminars. Much of my trading education came from attending seminars and they probably came second only to reading for me. Not only did I attend many, but also I actually ran a seminar company for a few years so I have a great deal of familiarity with the pros and cons.

Seminars come in several varieties. Brokerage firms like OptionsXpress, for example, may put on seminars lasting two or three days where their own trainers as well as entities like the CBOE and outside vendors make presentations. These programs usually are relatively inexpensive and can be very worthwhile though sometimes the outside vendors overdo the sales pitches during their presentations. In general, though, while you can expect a small sales pitch (why not, they are not being paid to do the seminar), you can get an awful lot of valuable information as well. In addition, some brokers also offer free webinars that are quite valuable and are aimed at differing levels of knowledge.

Some software vendors like Worden Brothers also provide live seminars to teach the use of their products. Right now, they are in the process of releasing a new version of Blocks, a charting service, and are traveling the country giving free demonstrations. These seminars, in my view, are quite valuable.

Recently, I spoke at Traders Expo in New York. Traders Expo is a several day affair attended by many vendors and traders. Seminars are offered all day at these events. The vast majority are free though some of the best known speakers charge a fee for attendance at their talks. Traders Expo makes a small charge for attendance, but my experience teaches that the value received is far in excess of the costs paid. Traders Expo, in my estimation, is a wonderful opportunity for all levels of trader to enhance their knowledge in many different areas, whether it be stock, options, forex, or futures, at a very low cost. Maybe we'll meet each other at one down the road.

There are also a number of companies that are in the business and offer seminars at a price. Often those companies will advertise what I call a "come-on" seminar on a televised infomercial or on the radio. That seminar is ordinarily free and some trading principle is taught, but the primary purpose is to sell another seminar. Often, the seminar that is being sold is relatively expensive and pressure to buy can be high. That is not to say that these seminars are not worth it. In fact, when I started my trading career, after some reading, I attended one of these seminars (it cost $3,400 for my wife and I some 10 years ago) and it literally changed my life. I would be remiss not to credit that first seminar instructor, Doug Sutton, for pointing me in a great direction. Doug is now associated with a pay for seminar company known as BetterTrades.com along with two other super instructors I had, Ryan Litchfield and Darlene Nelson. If you ever use these folks, please make sure you tell them I mentioned them. I get nothing for plugging them, but I would like them to know how much I appreciate what they did for me.

Normally the paid-for seminars are a day or two and are devoted to an in-depth treatment of a specific topic. I have attended seminars put on by a number of companies and have never failed to have a positive learning experience. While many of these companies also put on webinars, I personally prefer attendance at a live seminar since those events seem to generate an energy that is absent on webinars. One also has the chance to exchange ideas with other traders and learn what some are doing right or wrong.

One serious, but necessary draw back of the paid seminar is the seemingly endless pitch for the next seminar. I have attended the "come on" seminar for what is perhaps the largest company in the field and can attest to a very hard sell approach. I have been told that their seminars are filled with hard sell for the next seminar in the series. Of course, these folks are in the business of selling seminars so they have little choice but to promote their other offerings. It is a matter of balance and approach. I understand and appreciate the need to do some selling, but I am really put off by the "arm-twisting" hard sell approach.

In that same regard, I should note that taking a whole series of seminars can be quite costly. I have been told that taking the whole series offered by one of the very large providers can total $18,000. Though the number is high, it does not necessarily mean it isn't worth it. Obtaining a good thorough education on how to profit in the markets can certainly be worth the money, but we must keep in mind that just attending does not assure profits. Ultimately, it is the work you do that will make the difference. At some point, private coaching, which may even be less costly, may make more sense since it is directed to the trader personally and not to a group.

Education is key. Read, study, watch DVDs, watch webinars, attend free seminars, attend paid seminars and then practice what you learn before putting real money at risk. In this game, the ball is always in your court.

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Planning Your Trading Education

2008-04-05T07:33:00.001-06:00

I am absolutely convinced that one of the most important factors in achieving success in trading is to have a trading business plan. I am so convinced that I devoted a complete chapter in my book, "Trade Your Way to Wealth," to the creation and content of a personalized trading plan for traders and investors. In my estimation, every trader should include a plan to educate himself or herself. A well-known trading coach I recently heard speak noted that: "Traders get their own education." I suspect one of the major reasons for that phenomenon is that schools rarely have offered courses on how to make money.

In any event, though my primary source of income and my primary focus is on trading, I have been involved in many areas of trader education. I have done that for a variety of reasons in addition to the obvious pursuit of additional income. When I first achieved some trading success, I was very excited about what I was doing and I told everyone who would listen and then invited them to my home to show them what I was doing. That quickly got out of hand and I had little trading time left for myself so I started a seminar company figuring that if I charged them, they wouldn't come. I was wrong. They did come and the seminar business was a success. I even did a two-day DVD of the basic training class. Though the seminars made a lot of money, they were time consuming for me and I preferred to trade so I stopped doing the seminars.

After that, I have tried to use my subscription services as a training tool and, the majority of the time, send alerts on trades I am actually making myself with a short explanation of factors that influenced my decisions to enter or exit trades. Ultimately, that led to an offer to write "Trade Your Way to Wealth" which has been very well-received and which I hope provides a strong vehicle to educate traders from new to modestly advanced.

Over the years, I have also regularly conducted mentoring or coaching sessions with individual students or husband and wives together.

I have personally read almost everything I could get my hands on, attended innumerable seminars, and watched countless videos and DVDs. In my opinion, I could not have succeeded without this effort. Was it expensive? I suppose it depends on your definition of expensive. I think trial and error trading is much more expensive than the cost of my own trading education. However, I have seen many traders complain that a $60 or $125 book is too expensive. In my opinion, however, if I learn one thing from a $125 or $150 book that saves me $1,000 or more on a single trade or teaches me how to set up a risk free trade, the cost was cheap. Expensive is taking that $1,000 or $5,000 or greater loss.

Just as I believe a business plan is a necessity for the successful trader, I also believe that the trader should plan his or her trading education. Reading trading books is a great start as is attending seminars. Individual coaching also definitely should be considered once real money trading has begun. You probably can't beat intense one on one sessions to sharpen your trading knowledge and discover new or better approaches. However, the individual coaching is probably not the best thing for the brand new trader.

I know from the coaching I do that the learning is intense and the new trader will be exposed to just too much to absorb in a short time. Things like knowledge of trading vocabulary and preference for strategies or market direction should be in place before the individual coach is selected and hired unless the trader already has a great deal of money. Individual coaching is costly, but that doesn't mean it isn't worth it. One well-known trading coach charges $7,500 for a two day private session. Is that too much? I don't think so if she can help you focus your trading, improve your ability to let profits run, teach you how to remove emotion from your trading, or provide you with new insights into your own trading personality. I think it is more important to focus on what improvements you can make with some help rather than on what you pay. Knowledge you gain may change your life as it did mine. Even today, after a decade of trading, I try to devote some time each day to study. This field is one in which we never stop learning, but like so many other fields of endeavor, it seems that a trip back to basics is almost always worthwhile.

The coaching I do is on a very limited basis. I try to take no more than 7 two-day students a year since I really do devote the bulk of my time to trading. Teaching, however, does help keep me sharp and I can and do trade during coaching sessions. While I don't charge quite as much as the lady I mentioned in the previous paragraph, I do not come cheap. If you have any interest, you can check out the brief link here in the Newsletter, but it is not important that you hire me. What is important is that you do expend effort to educate yourself. I suggest you give some real thought to planning your education. Consider how you learn best. Do you prefer to read, or are you one who prefers to listen to someone teach? Are you a visual learner? Direct your efforts where you believe you will get the most benefit. It may be reading, watching DVDs, attending seminars, and/or spending time with a trading coach. Effective learning can only be achieved through the methods that work for you. Just as my personal business plan may not be for you, the way I went about my studies may be different from the way you go about yours. I think the key to successful learning is to learn the way that you find easiest and most enjoyable for you. If it is drudgery, it probably won't work so think about how you can best gain knowledge. Seek to study within your own framework giving consideration to the time you are able and willing to devote, the methodology that works best for you, and the goals you seek to achieve. After all, it is about improving your own trading.

Next week, I plan to write a little about seminars (that I no longer give) to discuss the value I see and some of the drawbacks attendees may encounter. In the meantime, good trading!

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Finding a Stock

2008-03-29T07:52:00.001-06:00

Perhaps the question I am asked most often is how do I find what stock to trade. Quite honestly, I don't think that is the most important question a successful trader can ask, but it is clearly one that is on the minds of many retail traders. First, I should say that there are many ways to find trading candidates and that the specific methodology should be chosen by each trader individually and become a part of his or her business plan. In my book, "Trade Your Way to Wealth," I set out, in detail a way to construct a business plan and I sincerely believe that having such a plan is much more important than the specific method a trader may chose to select a particular candidate to trade.

That having been said, there are a few basics that may be helpful in narrowing the search for candidates to trade. Narrowing, after all, is a key ingredient to ultimate selection of the specific trading vehicle. Do you want to trade a whole market, for example, or are you interested in finding a specific stock or option to trade? Trading the whole market can be accomplished with various Exchange Traded Funds (ETFs) and removes some of the risk inherent in trading a single stock. Generally speaking, trading the whole market may also level off volatility, but will result in a trade-off as does almost every decision one will make when trading. A single stock may offer greater volatility or movement than a market and, therefore, may have a greater potential for a higher reward, but, at the same time may provide higher risk as well. It is unlikely that a market will go to zero but many stocks have done exactly that or at least lost an enormous percentage of their value. The recent troubles of Bear Stearns bear witness to that phenomenon.

Clearly, it is important to know what the market is doing even if one is going to search for a specific stock. A trader is really playing against the odds if he is buying stock in a continuing bear market. Fact is, a bear market is a bear market because most stocks are going down. A bullish play in a bear market is contrarian and while contrarian plays certainly can do very well, picking a bottom can be very hard to do. A bullish play in a bearish market may succeed, but it is less likely to do so than in a bull market. If the overall market is bearish, why not look for bearish candidates. If the trader does not like to short stocks or employ other bearish strategies, why not stand aside until the bull returns? Bearish plays (and I discuss a bunch in "Trade Your Way to Wealth") can be very profitable and sometimes very quickly, but they are not for everyone. Some people will not make a bearish trade because their overall philosophy is bullish; others avoid the bear plays because they do not know how to profit from a bear move. Any reason an individual may have to avoid bearish plays in a bearish market can be fine, but that does not mean it is necessarily a good idea to try the bullish plays in a falling market. Waiting for the upturn is perfectly acceptable.

I prefer to make bullish plays in bullish markets and bearish plays in bearish markets. If I am going to make a bullish play in a bearish market, I would at least like the stock I am buying to be in a bullish sector even if the market is bearish. It is quite rare for all sectors to be bearish even in a bear market so if one is bound and determined to make a bullish play in a bearish market, why not look for stocks in sectors that are bullish. Obviously, the reverse holds true as well. If one likes bearish trades better than bullish trades and the market is bullish, how about looking at a bearish sector to find a candidate for a bearish trade.

The fact is that it is impossible to be right all the time in the markets. Almost everyone who trades will have losing trades. The successful traders are the ones who give themselves an edge, who take what the market will give them rather than try to fight the markets, who know how to manage risk, and who continue to educate themselves. Over the years, I have coached some traders and still do on rare occasion. One of the things I have noticed in my own trading and in my coaching experience is that those who can exercise discipline and trade in the present rather than worrying about the past or trying to predict the future are the ones who are most likely to be successful. Learning ways to give yourself an edge, even a slight edge, is key. Just look at the casinos in Vegas. They don't make money because they are right on every bet; they make money because they make sure the odds, however slight, are in their favor.

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