MarketFN.com

What's Your Trading Focus?

2010-02-06T07:46:00.001-07:00

Every once in a while it's probably not a bad idea to take inventory of our trading related skills. As I began to do so for myself I also recalled inventories with which various coaching students came to me and inventories of students at seminars. I am convinced that what we choose as our focus or focuses in trading can make or break us. There are many ways to succeed in trading and certainly many more ways to fail. I suspect that the way we prioritize the skills in our own inventory ultimately is what makes the difference.

When I write about a trading skills inventory, I mean those skills that we possess that might be included in the "how" of our trading. Last week, for example, I wrote about a specific type of order, the limit order, as an illustration of one part of the trader's inventory. Though not necessarily a complete list and definitely in no particular order, the following might be included in a trader's personal skills inventory:

a. knowledge of and ability to use various orders
b. technical knowledge and abilities
c. understanding and using fundamentals
d. utilizing reward to risk potential
e. finding candidates to trade
f. entry decisions and strategies
g. exit strategy
h. devotion to continuing education
i. ability to discipline one's trading
j. money management
k. having a plan in general and for each trade
l. knowledge of and ability to use various strategies

You may add other skills in your own trading inventory. Whatever the case, may I suggest you take a few moments and look over the list above. Perhaps it might be beneficial to see which of those skills you possess and how you utilize them in your trading. Once you have considered that, it might be helpful for you to prioritize them in the order you perceive their importance to successful trading. Once that list is completed, compare it to a list arranged in the order you have prioritized these skills in your own actual trading.

Often, the two lists, the one as you see the best prioritization for success and the other the prioritization you actually have been using may differ significantly. A change in those priorities could well make a difference in your trading.

Though subscribers who have read either of my books, "Smart Investors Money Machine" or "Trade Your Way to Wealth," may already have an inkling of the order of my list of priorities, I'll discuss them a bit in next weekend's article.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

To comment on Bill's article click on the "comments" link below.

Why a Limit Order?

2010-01-30T07:48:00.001-07:00

Whether knowingly or not, many retail traders enter market orders to buy stock and that can sometimes be quite dangerous. A market order to buy simply instructs the broker to buy shares at whatever the market price may be at the time the order is filled. Ordinarily, there may be no problem, but every once in a while, there could be. Witness the following scenario.

Once upon a time a small pharmaceutical company issued a new release dealing with the effectiveness and use of its new drug to treat a specific form of cancer. The news media interpreted the release as indicating that the drug was a cure for the cancer and used that as the headline for their stories. A woman who occasionally bought stock for investment decided that shares of the pharmaceutical stock would be a good addition to her portfolio and saw that the stock had been trading around $20 a share and placed an order with her broker to buy 1000 shares "at the market." Of course, on the news of a cure for cancer, the stock price rocketed. By the time her order reached the market and took its place in line of buy orders the stock price was rising. When her order was filled, the price had increased four-fold to $80 a share where her order was filled.

The woman had expected to pay around $20 a share, but because the stock ran so quickly and there were so many orders, it had moved $60 a share before her market order was filled. That, however, is not the end of the story. The news media has misinterpreted the company's press release. In fact, the press release was basically a rehash of some old news about their confidence of success an early phase review by the FDA and a belief that the drug could be helpful in the treatment of (not cure) the specific cancer. The news story was corrected promptly and the stock fell to $18 a share. All this happened within a single day. The investor thought she was going to buy 1000 shares at $20 for an investment of $20,000. Her market order resulted in her buying those 1000 shares at $80,000 for a total investment of $80,000. The stock then dropped to $18 and she was upside down to the tune of $62,000.

I have no idea whether that story is true or not but is the concept that has convinced me to always use limit orders when buying. Of course the dramatic price moves in the story are highly unlikely though certainly not impossible. Nevertheless it would not be so unusual to see sharp price moves before getting filled, particularly if the investor phones his order to a broker and the broker delays even a little in forwarding the order. In any case I opt for better safe than sorry.

In my own trading, I always buy on a limit order. The limit order instructs the broker to buy, but at no more than a specified price per share. So in our example above, had the lady placed a buy limit order to buy 1000 shares at a limit of $21, she simply would not have been filled on the run-up since the price was already higher than her limit of $21.

There are many orders available to traders and knowledge of their purpose and use can be extremely advantageous to traders. In my book, "Trade Your Way to Wealth," for example, I discuss seven different orders and explain their use in detail. Using orders to your advantage can definitely improve one's trading and make it easier as well.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Trading as Life

2010-01-22T16:10:00.001-07:00

Recently, I received what I considered to be a very insightful email. I found it so interesting for reasons I'll discuss at the end of the article that I asked the author's permission to share it with you. In the interests of space, I have editorially deleted some small surplusage. Here is what she wrote:

"Since I have been trading, I have come to see the stock market more and more as a parallel to life. Especially in the last year, I've had almost a reflex reaction to interpreting events in my life as similes and metaphors to my trading... and I can't seem to get it to stop. ;)
Take this weekend for example, I was fortunate enough to be invited to the Green Bay/Cardinals playoffs. [editor's note: the Cardinals won in overtime 51-45] In the first 10 minutes of the quarter, the Cards scored 2 touchdowns. I immediately thought of the linear regression line that I use to track and monitor my equity curve on my trading system. and I said to myself..."this wont last" .. I envisioned this quick "get ahead" as a parabolic move up from the mean, and knew that there had to be a retracement, or at least a consolidation of some sort. I turned to my friend, and while his eyes glazed over, I explained to him that this couldn't last because it was beyond the mean, and not only that , but this would cause an overconfident shift in sentiment from being the losers to being the winners, and that was a setup for the next event to be a loss.
I then went on to predict, in that same first quarter, that I expected that the Packers would catch up , and tie the score, and that we would go into overtime. Seriously I said this, and I have witnesses.! Needless to say, the game unfolded as expected. The Packers scored (the retracement) the mean between these two competing forces was restored to equilibrium.. I hadn't predicted or really thought about what would happen next, after the score was tied, but I should have known that something unexpected, would be the final denouement to this story.. But of course, that crazy Cards defensive recovery of the Packers ball in the final minutes was exactly as it should have been. An unpredictable event, an outlier if you will, and one that the Packers didn't see coming... Are you hearing stock market again..? Does this sound familiar? It sure did to me. Think news, think 9-11, think computer breakdown. The Packers stops were just not in place for that final play
These parallels just seem to keep popping up wherever I go. I have noticed that my relationships in life seem to follow the same sequences and can be couched in the same terms as market behavior.. Sometimes there are big moves in relationships that are positive, and in my life , that are happy and joyous,( trending up) only to be followed by periods of calm ( sideways) or total reversals of experience..bad moments, days weeks or even years, in the opposite direction ( trending down) . The rhythm still applies....
Life, unlike the market however, is short, and finite. I have learned that if you can learn to follow the same concepts as in your trading , trying to maximize your life as I try maximize my equity curves, it might just be the path to make your life happier, and more rewarding. Whenever possible, find the happiest, stimulating and most fulfilling part of your experiences and go there.. Ride that trend as long as you can and keep the people around you who help make that happen. Know that this will, eventually, give way to a quieter period and accept that too. Assess the risk for each situation going in and act accordingly. Have a plan.
And if you ever find yourself in a downtrend, don't resist,.go short.. ride that one out too. You may not have a choice. If you resist, it will only cause you pain, and at least in my life, it seems to be a given, that, like the market, somewhere down below, there will be support, a place of rest, a place for a reversal of fortune. Cover your short there, and go long again..If you are very lucky, like me, you will find yourself a V- bottom which could bring you back up to where you started or even beyond.
Right now , I'm in a big bull uptrend and loving every minute."

I don't know whether or not you would agree with me, but the writer's message seems quite insightful and covers some very important ground. I would disagree only with the beginning statement that the market is a parallel to life. Rather, I would suggest it is a part of rather than a parallel to life. Trading and negotiating is something all of us do every day whether it be in the market or otherwise and is heavily influenced if not controlled at times by our emotions.

As an example, the email notes how relationships progress with ups, downs, and sideways periods. The ups, both in markets and in relationships can produce euphoria and a feeling that the good times will go on forever. Of course, that is rarely the case. Both in the markets and in relationships, there are downturns and even occasional catastrophes. I have had traders come to me for coaching after suffering large losses because they were afraid to trade again. I have seen formerly active traders quit trading completely following a series of losses and I have seen traders with big gains "bet it all on black" and lose everything. The question becomes how will we handle the reversals and how will we handle the positives. Certainly there is nothing wrong with enjoying things when they go our way, but in the markets, at least, we need be ready to exit before we are hurt too badly. The same may be true of a relationship. On the other hand, when things are going great, we may have too high an expectancy that they will remain that way forever. We can't help having emotions, but in the market setting, it is important that we do not permit them to rule us.

As the author of the email noted, we can do better with a plan. By that, I don't mean that we can expect every plan to work every time. I only mean that if we have a plan of action then when things go against us we may be able to cut losses more effectively when a position turns against us than we might if we just followed the impetuous action of an inner emotional dialogue. So, too, with a plan we might do better letting profits run than if we permit ourselves to take profits emotionally.

Bottom line, trading is life. It takes work to be successful. It requires an understanding that we do have emotions that can affect our behavior and, in trading, it can be quite important to discipline out as much of the emotion as possible.

Thanks to the author of the email I quoted for allowing me to bring her insights to you.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

A Secret about Successful Trading

2010-01-15T15:31:00.000-07:00

Over the years, I have observed a whole lot of traders looking for the secret that, once revealed, will lead to riches. The search often seems to be directed to a way to find the perfect candidate or a "can't miss" strategy known only to some chosen few. I remember a husband and wife who studied with me back in my seminar days who I believed were convinced that I was holding some secret back from them. In fact, one day, the husband got me in private and asked what the secret really was. I laughed, thinking there was no secret, but now I know there definitely is a secret that can really help.

As I mentioned in the article last week, I'll be speaking at the Scottsdale/Trading Group next Wednesday, January 20th at 7:00 P.M. In thinking about my upcoming presentation, I decided I'd talk about the elements of what I believe is the secret to successful trading. If you live in the Scottsdale/Phoenix area, I hope you get a chance to attend.

However, even if you aren't coming to that presentation, there is no reason why I shouldn't reveal the secret as I perceive it to you as well. I must caution, however, that there is no guarantee that the secret will work, but I believe that use of the secret be a piece of very valuable information. Nevertheless I am sure that many will be disappointed as I disclose this secret because, like many secrets, once known it looks obvious and easy.

Secrets often are simply a revelation of something that may be quite apparent with a little thought anyway. Consider, for example, the illusions of a magician. Seeing the lady sawed in half may be astonishing until we are shown how it is done and then it is obvious and easy though maybe a bit clever in concept.

I know, I know -- enough! What is the secret. For me, the secret is that the successful trader always returns to basics. She has a plan for money management, a minimum requirement for potential reward to risk, an exit strategy, discipline, and study. That's the secret. In my estimation, those things are critically important to sustained good trading and are often overlooked, by-passed, or forgotten in the quest for some non-existent secret holy grail. That's it. That's my secret. Basics in trading are absolutely invaluable and are far more important than specific strategies or algorithmic systems.

I hope you forgive me for the tease about revealing some hidden secret. I do believe this is an important secret but wonder how many readers were hoping or anticipating I was going to write something much different when I wrote that I was going to reveal a secret of trading.

Incidentally, the Scottsdale/Phoenix Trading Group to whom I'll be speaking on Wednesday the 20th will meet at The Inn at Pima, 7330 N. Pima Rd., Scottsdale. It would be a good idea to let them know you are coming and please introduce yourself.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Past and Future

2010-01-08T18:49:00.000-07:00

Happy New Year!

Every once in a while, I wonder who is included in the "they" of the "they say" school of reinforcing a statement. You know, "they say" the market has been due for a retracement. Or "they say" that 2010 is going to be a good year for the market. In fact, they say the past is destined to repeat itself. That is why we may rely on certain chart formations like a head and shoulders or a double bottom to signal an entry (bearish with a head and shoulders, bullish off a double bottom). However, we need to remember that the formula is fallible. Not every double bottom is followed by a move up or every head and shoulders where the neckline is broken will be followed by a further decline.

While what they say about the past repeating itself may be true, we can never tell when the repeat may occur. That is one of the reasons I always try to approach statements about good results in the past with caution. I make that preface before I set out the results of my paid subscription services for the percentage of closed trades that were winners in 2009. It was a good year for me. In terms of percentage of winners of closed trades in 2009, the following were my results:

Trend Trader 92%
$10 Trader 80%
Option Trader 77%

The specific trades appear on the Trade Tables for each of the services. Does that mean that I will do as well in 2010? Of course not. Well, the past several years have also been pretty decent in terms of percentage of closed trades that were winners, so does that mean I'll do as well in 2010? Of course not. I could do better, or not as well. Past performance, as they say, does not guarantee future results.

What works in the markets, I am convinced, are those things I write about and speak about regularly. They are the basic foundation upon which we try to build good trading plans and good trades. Things like cutting losses, letting profits run, managing money, having an exit strategy and actually following it, etc. Most of us have heard or read about these fundamentals, but as I have seen with seminar attendees and sometimes with personal mentoring students it is a failure to understand and adhere to the basics that results in disappointing trading.

Incidentally, for those of you who may be local to the Scottsdale/Phoenix area, I will be speaking to the Scottsdale/Phoenix Trading Group on the evening of Wednesday, January 20, 2010. Please say "hi" if you're there. Also, I will do some additional private coaching again in 2010. I try to limit that to one student a month so if you ever have an interest, please let me know as early as possible.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Food for Thought from the Sports World

2009-12-19T08:07:00.000-07:00

Those of us who have grown up and lived in America have been exposed to many wonderful things. Among them, in my opinion, has been the opportunity to participate in and watch sports. Many valuable lessons have been learned and taught on baseball diamonds, football fields, basketball courts, and boxing rings. Though much of what we have learned may be transferable to our trading, perhaps, unfortunately, some of those lessons as embodied in various cliches are counter-productive.

I believe it was Yogi Berra, the Hall of Fame New York Yankees catcher who once inspiringly said: "It ain't over until it's over." Similar sayings like: "It's not over until the fat lady sings" or "never give up" abound. Parenthetically I should note that the fat lady usually sings before the game, but that's beside my point. We have been trained from early childhood to strive to win and to understand that losing is not a good thing. Leo Deroucher, another baseball giant, once said: "Show me a good loser and I'll show you an idiot." Please don't get me wrong, I make no argument that anyone should strive to lose. I only mean to suggest that some losses in trading are absolutely inevitable.

If we followed the "it ain't over until it's over" philosophy in trading, we might just find ourselves committing a cardinal sin of letting losses run. My point is that we get to decide when it is over in our trades and sometimes making it be over before losses mount is, by far, the best approach. All we need to be successful is to trade in a manner that our winners total more than our losers. We can achieve that through practice, through attention to smart exits, through money management, and through entry only when the reward to risk ratio appears to justify the trade.

"Never give up hope" is another cliche to which we have all been exposed. In the trading world, it is sometimes callously said that "hope" rhymes with "dope" and the winner is the one who takes the early loss rather than hanging on to a losing position with the hope that it will come back.

Michael Jordan the supreme basketball player said: "I've missed more than 9000 shots in my career. I've lost almost 300 games. Twenty-six times I've been trusted to take the game winning shot and missed. I've fouled over and over and over again in my life. And that is why I succeed." It is much the same with the successful trader. She knows there will be losses, but she also knows that patience, practice, and keeping herself in the game (not necessarily in a single trade) can yield fabulous rewards over time.

Maybe Vince Lombardi, famed coach of the Green Bay Packers said it best when he said: "It's not whether you get knocked down, it's whether you get up."

To those of you who have made such kind comments about my books, "Smart Investors Money Machine" and "Trade Your Way to Wealth," my most sincere thanks and the hope that you have found something valuable to help you on your financial way.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

A Few Random Thoughts About Trading

2009-12-12T08:46:00.001-07:00

At times, it is a struggle to come up with a new and specific subject for an article every week. As I was thinking about what I should write this weekend, it occurred to me that trading is a part of life and in life we see ourselves do many things without a conscious intention.

Supermarkets are great examples that use our natural tendencies to add to their sales. As we go to a check-out, look around at all the last minute things we can buy just by reaching out a hand. Tabloids with enticing headlines abound. Have you ever been tempted to read that article about the boy who was abducted by aliens only to return with an astonishingly high IQ or the article about the celebrity who is having affairs around the world. Even if that doesn't get us to buy, there are many who pick up the paper just to glance at the tantalizing article. So, too, are there tempting bars of candy and the all so necessary breath mint.

As we know, these displays set us up for the "impulse" buy. We may not need it, but the suggestion may lead us to buy it. Have you ever noticed that in your trading or investing? A friend or a broker might suggest a stock, for example, and we just buy it. We do no fundamental analysis and certainly may fail to look at a chart to see whether there is an opportune entry or, probably even more importantly, whether there is a handy exit. While an impulse buy of a candy bar may not be terribly devastating, an impulse buy of stock might be.

Just like at the supermarket, if we think about things and do even a little analysis, we may pass on the stock as we would on the tabloid. We might see that the stock price is pretty far from a logical exit or that the reward to risk potential may not be what we ordinarily plan.

Generally, the wiser supermarket shopper makes a list and doesn't go shopping on an empty stomach. They have a plan and the plan has eliminated much of the impulse buying since a growling stomach isn't suggesting additions to the cart and the list has set pre-determined choices based upon the shoppers needs.

Perhaps the trader would be wise to follow some of those cues. Having a plan in the first place would help eliminate candidates that fail to meet the trader's requirements. As an example, a trader who is interested in entering a bullish trade might demand that any potential entry be above the 50 day moving average and he might discipline himself to understand that he need not be invested in bullish positions when a market is decidedly bearish. I've found that most of my selection process with stock and options is one of elimination rather than selection and only when I no longer find a reason to eliminate am I ready to add to the portfolio.

I hope you have a wonderful weekend.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Basics

2009-12-05T09:05:00.000-07:00

As far as I am concerned, successful trading can be very simple, but, by that, I don't mean to suggest that it is easy. I am constantly amazed by the trading talks I've heard and the concepts avowed that involve endless complexities.

It is my opinion that far too many traders fail or at least fail to succeed because they try to make their trading too complex. I agree that it is important to have rules by which to trade because that introduces discipline to the trading, but I don't believe those rules need to be particularly complex. In fact, with the prior history of coaching students who later come to me I have frequently seen their previous trading go from pretty good to not so hot as they began to add layer upon layer of complexity. My advice in those situations often is to keep your trading simple but if you want more complexity go study nuclear physics.

Unfortunately keeping it simple can be very hard to do. I know of traders, for example, who have developed a very successful trading methodology, but they persist in day trading different strategies that break even or lose money because they feel they need to be doing something else. Someone once suggested that they followed that pattern because it seemed so easy just to make money with a simple strategy that worked and they felt some element of guilt so they expended more effort even though it was not financially productive. Logically, of course, that makes little sense, but psychologically there is probably something to it. When we step back and think about it, after all, the markets well may be more about the psychological than the logical.

I guess it would only be fair to ask me what I mean by making trading simple. In "Trade Your Way to Wealth" I've discussed in depth the creation of an individual's personal trading plan. It includes money management. One thing that each trader should do in my view is have some specific plan of how much to assign to each trade. There are several ways to do that as discussed in "Trade Your Way to Wealth" and the works of other authors. None is terribly complex, but it is important to pick one. After the method of money management is decided a trader might establish a minimum reward to risk that must appear before any trade will be entered. Finally, an exit and entry strategy should be chosen and, in my estimation, in that order. For example, a trader with a longer time horizon might decide that he will use a 50 day moving average as both initial entry and initial exit. If the share price crosses above the 50 day MA he might decide to buy the stock and will use a cross below the same 50 day as the exit. He might continue the trade for a short or very long time, but the method of exit is in place; a cross below the moving average.

Is such a strategy the best? No one can ever tell until a trade is finished, but it is simple and it can be effective. One problem with moving average entries and exits is that one can get whipsawed when a stock is trading in a relatively tight range. Another is that the exit becomes pretty far away if using a fairly long term moving average like the 50, but once there has been a move in the right direction the trader can then use Part B of his plan and move stops up to attempt to protect additional profit.

Anyway, there is an example of simplicity. 1. Money management plan 2. Reward to risk requirement 3. Initial exit/entry strategy 4. Method to move exit strategy in direction of move. Now, off to nuclear physics class.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

What You Want from Your Trading

2009-11-28T08:05:00.001-07:00

Before I launch into the subject of this weekend's article, I hope all of you had a fantastic Thanksgiving. Traditionally, the holiday is a time to give thanks for what we have and to reflect about our lives. In that spirit of reflection, I thought it might be a good idea to reflect on what we want from our trading.

Obviously, on the most basic level, we want to make money from trading. I suggest, however, that there are considerations well beyond the basic. Dr. Ari Kiev, a psychiatrist, an advisor to traders and a prolific author of trading books suggests that more self-examination is something that would benefit us ("Trading to Win," Wiley, 1998, p.7). I couldn't agree more. Few traders seem to take the time to determine what they really want and how they might go about it.

It seems to me that one thing almost everyone would like is more regular income. Before we can amass great fortunes, we need to pay the bills each month so it makes sense to me to consider utilizing trading strategies that provide regular streams of income. I devoted a whole book, my recently released "Smart Investors Money Machine," (Wiley, 2009) to precisely that concept. The book sets out at least 16 different strategies through which a trader or investor can create income flow beyond what he or she may earn through their employment.

I haven't been employed for years yet I am fortunate to live a comfortable life and am able to enjoy many of the things life has to offer with relatively little stress. One of the major reasons is that I have developed a number of streams of income and while no single one may be considered particularly large, together they provide more than enough to cover my costs of living. It is only after those costs are covered that we can look to increasing our net worth.

In my own case, I assign a portion of my assets to income production and the remainder to efforts to appreciate capital. Once I know expenses will be covered, I can be relatively relaxed and patient in my efforts to accumulate more capital. I would suggest that may be an important approach for many traders. As I have written before, patience is a critically important factor in successful trading. One of the impediments to trading I often have seen is the rush to make money. Recently I heard a speaker discuss a strategy he was using and as part of that strategy, he was taking profits at a specific target even if the move was continuing in a favorable direction. I call that cutting profits. The speaker admitted it was part of his personality in that he did not want to stay too long in any position. I look at things a little differently and would prefer not to stay too little time in any position that is continuing to add money to my account as time goes by.

The speaker to whom I refer may be an example of the trader who hasn't conducted a self-examination at least to the level where he recognizes that he is violating a cardinal rule of successful trading. He is not letting profits run. The idea of exiting a trade quickly just to be finished with it quickly does not appeal to me. It is hard enough to find really good trades, and makes little sense to get out of one that is still producing just because I want a trade to finish quickly. It's like capping an oil well that is still a strong producer in favor of drilling a new well in the hope that it will be productive.

Self-examination might lead such traders to a conclusion that they might improve the bottom line simply by staying with a trade until it is no longer productive. All of that is to say that if one knows precisely, not just generally what one wants, the results may improve. As Dr. Kiev suggests, setting a goal (and then putting it in the background) is often very helpful in getting where we want to be. My own suggestion is that we first consider how we intend to get to the goal once set. For many, I suspect that is the production of regular income.

In "Smart Investors Money Machine" I include many ways to add streams of income from simple concepts like investing for dividends to writing covered calls to selling naked puts or creating iron condors or investing in MLPs or bonds, annuities or even reverse mortgages for those older than 62. Each of these strategies is explained in detail and the reader is shown how each might be employed depending upon the trader or investor's age, station in life, and resources. These strategies can really help. I know; they've definitely helped me. In addition to helping me pay the bills they have provided income that permits me the luxury to be patient in my own trading.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Changes Over the Last Several Years

2009-11-21T08:20:00.001-07:00

Option traders are about to see an important and long overdue change. Option symbols are finally changing so that it will be easier for traders to identify the option they are seeking or trading. At the initiative of the Options Clearing Corporation option symbols will become much more straightforward and easy to understand. The old symbols have been used for the past 25 years and gradually will be replaced by the new symbols that are more intuitive and more easily deciphered. For example, the April 2010 $35 calls on XYZ may formerly have been XYZDG but now will be XYZAPR1035Call showing the stock symbol, expiration date, strike and option type. Though longer, these new symbols seem much more self explanatory.

Knowing these changes in option symbols were about to be implemented got me to thinking about other changes in trading over my lifetime and particularly in just over the decade in which I have been trading for a living. One very dramatic change has been in commission structures. I remember paying a couple hundred dollars in commissions when I made my first trade almost too long ago to recall. Once, in a seminar in the early 2000's I mentioned a stock trade I had made where I paid a $12.50 commission to buy 1000 shares of stock. An older man in the front row was completely disbelieving, blurting: "You did not. No way you only paid a $12.50 commission." He had been trading for years and was accustomed to the high commissions charged by the full service brokers. I had to show him my confirmation before he would believe me and he was irate with his own broker because he had made the same trade and paid more than $150.

Option trading for retail traders was quite rare before the '90s. Commissions and illiquidity made options difficult to trade for the littler guy and quotes were both untimely and hard to find. I recall when I began trading for my living I was still using newspaper option quotes as my starting point.

As with so much of our lives, home computers have made a huge difference in our trading. I recall beginning to make online trades enjoying very reduced commissions and utilizing quotes that were only 15 minutes delayed. Real time quotes were still expensive to obtain and the 15 minute delay was remarkable. Now, of course, many online brokers provide real time quotes free of charge and charting services have real time charts for very little cost.

Charting, too, has been revolutionized. Though I never did my charts by hand, I did use what would now be considered some pretty primitive charts. Today charting has become so sophisticated that almost any indicator can be attached to and used in conjunction with the charts.

Clearly, technology has made much more available and in many instances at a very reduced cost. I'm sure the readers could add many innovations to the few mentioned here.

The problem continues, however, that so many traders continue to be overall losers. Technology and the other changes have not changed that problem except, perhaps, to add more traders. What I believe we all must keep in mind is that it is we, not the technology, who trade. We must deal with our own psychology when money is at risk. We must understand how to discipline our trades, when to cut losses and how to let profits run. These are issues about which I have regularly written and about which I regularly teach in my coaching sessions.

Enjoy the advancements. Understand, though, that people made money in the markets long before the advancements and people still lose money in spite of them. That might teach us that there is more to learn and that learning through reading, through seminars and DVDs, and through a coach or mentor may well exceed the technological advancements in importance.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

What's Your Trading Personality?

2009-11-14T09:17:00.000-07:00

In my most recent book, "Smart Investors Money Machine," I discuss a variety of ways people can add streams of income to their lives. I use examples of a single unattached male, a family with children, and a couple at retirement to show how various strategies might be employed by them at differing life stages with differing needs and varying time constraints to add what can be important streams of income in each situation.

One of the important considerations for any of us is to arrive at an understanding of our own trading personality. As I have emphasized so many times both in these articles and in "Trade Your Way to Wealth," a critical need is a trading business plan and as or even before such a plan is developed, the trader would be well advised to do a little self-analysis to determine his or her trading personality characteristics. Obvious factors such as how much time one is willing and able to make available for study and trading are critical, but, in my view, one needs to take a deeper look in order to increase the favorable odds or gain an edge.

Since this subject can be both broad and deep, I'll just try to give a few examples of trading personalities I have seen along with some suggestions as to how the trader with such traits may help himself improve in the trading arena. One of the more common traits seems to be an effort at achieving trading perfection. Classically, people who have been trained as engineers tend toward this approach. Through training and experience they seem to tend to seek every last piece of information before entering a trade. Obviously, if one could actually gather and process all information relative to a trade before making an entry, an edge would likely exist. Clearly if one were designing a bridge or the structure of a building he would need and want every available piece of knowledge and information in order to insure the integrity of the structure. However, in trading, it is rarely, if ever, possible to know all relevant facts.

Suppose one were to undertake a relatively complete fundamental analysis of a company in order to decide upon a trade. Even if literally every available fact were gathered and incorporated into the decision, that would not preclude a new fact from changing the whole picture just as the buy order were placed. The CEO, for example, could be indicted or new onerous law passed, or a competitor could announce a fantastic new product that would be an overwhelming advancement (remember what the auto did to the horse and buggy or vacuum cleaners to rug beaters or computers to typewriters?). A new news item can literally wipe away attempts at perfectionism in investment analysis.

In addition, those whose trading personalities tend toward perfectionism are frequently plagued by paralysis of analysis. There are just so many pieces of information to try to gather and analyze, one may never get to a level of comfort that permits entry into a trade.

For folks with this element of perfectionism in their trading personality, I would suggest a bit of change in focus. Instead of looking for the perfect trade, look instead to trades that offer a strong reward to risk potential, perhaps on the order of 2.5 to 1 or better. Look for trades that offer a close and convenient exit just in case you are wrong on direction (as you inevitably will be on occasion). Understand that there really is not perfection in trading and that it is a different animal than designing a bridge. Trading involves infinite variables.

Not far from the perfectionist is the trader who seeks ever greater confirmation before entering a trade. He may see an entry, but then awaits confirmation of the entry and then looks for confirmation of the confirmation. Believe me, I am not against confirmation, but, like anything, if taken to extremes it can be harmful. The problem with confirmation is that the longer one waits, the farther the trade has moved and the more of the trade the trader often misses. In addition, the exit in the event the trade goes the wrong way gets farther and farther away before entry is made thus increasing losses in losing trades and reducing gains in winning trades. My suggestion for these folks is to concentrate on having a disciplined close exit at the time of entry. If that method is employed and the trade goes south, the loss will be small and contained and the trader can move to the next trade. Again, reward to risk potential should be a major consideration in my view.

Lastly, for this week, at least, is the ready, fire, aim trader. This personality is almost diametrically opposed to the perfectionist trader and jumps on a trade with little basis, technical or fundamental, and no plan other than some unsubstantiated hope he will make money. Often this person buys because a friend owns a stock that has done well or because it has been touted by a broker. The trader has neither an entry nor an exit strategy and just jumps on board, all too often as the stock is about to turn the other way. Here, I believe the trader needs to learn and exercise discipline. He needs to have an exit plan in place before entry and he needs an overall plan for his trading. Without those in place, he is quite likely to wind up without trading money quite quickly.

Obviously, these examples are relatively extreme, but they are also relatively prevalent to one degree or another. The key is to understand yourself and your own foibles. We all have them and they can definitely impede good trading. I think it was Pogo who said something like: "We have met the enemy and they are us." It is so true that we are most often our own worst enemy in trading and the first step is to discover what we are doing to undermine our own success. Once found, we can take steps to improve.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Costs of Trading

2009-11-07T04:22:00.001-07:00

Last weekend I wrote an article about trader education and how important I considered it to be. Obviously, as with any education, there are costs to be incurred. As I noted in "Smart Investors Money Machine" education is becoming increasingly expensive. One kindergarten I checked out, for example, charges $3,500 a semester. Coaching and trading seminars can certainly rival the cost of kindergarten, but rather than playing with paste and crayons, the would-be trader may be readying herself to risk tens to hundreds of thousands, or even millions. Any education has a cost whether it be in books, DVDs, instructors time and facility costs, or whether it be through self-learning by putting money at risk without really knowing what one is doing in the markets. As I often tell students, trading can be simple, but it definitely isn't easy.

In response to the article last week, I received a request from a reader to discuss other costs of trading beyond those directly resulting from paying for education. One of the first and most obvious costs are commissions. If one is an active trader or a trader who is trading a relatively small account, commissions can become a very important consideration. Suppose a trader is paying $10 in commissions to enter a 100 share stock position when the shares of stock are trading at $5 a share and that he sells those shares after the stock has a $1 a share profit. He now pays another $10 commission to exit the trade. Before commission, he has a $100 profit, but that profit is reduced to $80 by commissions. He has lost 20% of his potential profit just through commissions. To view it another way, the same $5 stock must move up 4% just to break even in this small trade example. While a $10 commission sounds small (and it is compared to what commissions used to be) they can be a very important factor to someone who is making fairly small trades.

Very active traders like me may make literally hundreds of trades in a year. Suppose I make 500 (250 entries and 250 exits) option trades in a year and pay a commission of $12.50 to enter a 10 contract position and another $12.50 to exit the position. Over the course of the year, I would have $6,250 in commissions. On a $100,000 account, I would need to make at least 6.25% profit just to break even. When we think what CDs are paying, we can see that commissions can be an important consideration in our trades.

Many investors buy open end mutual funds and may face large charges from the fund company. For example, when researching for my book, "Trade Your Way to Wealth," I found one mutual bond fund that charged 13.5% as an "investment advisor fee" on income and added another 1% as a "custodian fee." Unless an investor reads the Prospectus and understands what he is reading, he may have no idea of the exorbitant costs of investing in some mutual funds.

Yet another cost often found in trading is the spread. Option traders are familiar with this cost. Any option is quoted with a "bid" price and an "ask" price. The "ask" is the price at which someone (usually the market maker) is willing to sell and the "bid" is what someone (usually the same market maker) is willing to pay. If we saw an option quoted at $1.00 x $1.25, it would tell us we could buy the option at $1.25 a share (option contracts usually are for 100 shares per contract) and that we could sell the option for $1. Suppose we bought 10 contracts at $1.25 (that's 100 shares x 10 contracts = 1,000 shares x $1.25 per share) for a total of $1,250 and for some reason, we had to sell immediately. We would sell at the $1.00 bid and get $1,000 and would have lost the spread or, in our example, lost $250 just as a result of the spread. Wise option traders will know that they might be able to get "in between" that spread so the loss from the spread might not be quite so dramatic, but there would be some loss even then because getting "in between" the spread only means some savings, not that there is no spread.

Yet another similar issue is known as slippage. Slippage often occurs when the investor or trader places market orders. Suppose we see that a stock is trading at $25 a share and we place a market order to buy 200 shares at the market. By the time our order gets executed, the price might be $25.30. That is the price we wind up paying so instead of making a $5,000 plus commission investment as we thought we might, we have paid $5,060 plus commission. One way to avoid the slippage on entry is to place a limit order. If we placed a buy limit order of $25 a share, we know we would not pay more than $25 a share plus commission, but we might not get the stock; the price might have gone up and we missed the trade. The market order to buy would have assured us that we would buy the shares, but we really don't know at what price. Suppose the stock was trading at $25 as we placed the order, but before our order got to the floor trading was halted for some news announcement and the announcement turned out to be very positive sounding and the stock then re-opened at $50 a share. Now our market order would be filled at $50 instead of where we were thinking. Then suppose there was a subsequent announcement that clarified the earlier announcement and made it clear that it was not as positive as earlier presumed. Then the stock fell back to $25. Now, because of our market order, we bought at $50 and shortly thereafter owned that same stock trading back down at $25. While that may be an extreme example of slippage, things like that have happened and do happen.

Hopefully, readers will recognize that there are many potential costs attendant to trading and one of the best ways to ultimately reduce them is to be aware and pay for the education necessary to learn how to control them.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Education

2009-10-31T07:20:00.000-06:00

I was talking with an investor the other day and he mentioned how odd it is that so many people come to trading with no education or training and without knowledge specific to trading yet expect to do well. There are few endeavors in which we can expect success without knowing what we are doing, but, oddly enough, it seems that many evidently believe that trading is something they can do without gaining the knowledge first. Sadly, I have been contacted by quite a few folks in that category. They have called or sought help or coaching, but only after losses had mounted to high levels.

A few weeks ago, I wrote about my coaching sessions and mentioned the cost. One reader thought my price was way out of line. Certainly, he is entitled to his opinion. The fact is, almost all traders wind up paying for their trading education one way or the other. Many prospective students have called only after having lost literally hundreds of thousands of dollars. They call to try to find ways to stop the bleeding. Compared to such losses, the cost of a day or two of coaching is minuscule. The cost of a day's coaching can be equated to the size of a relatively modest trade. Nevertheless, it seems like many new and inexperienced traders choose to pay for their trading education through the school of hard knocks, and the losses are regularly greater than the cost of getting an education up front.

I am a believer in preparation first and action thereafter. Ready, fire, aim is definitely the wrong way to go when entering the trading arena. I don't mean to suggest that everyone should hire a coach before trading. There are a wide variety of ways in which to get a trading education other than by losing money and learning the really hard way. Many books are available to guide the trader. Among them, my own "Trade Your Way to Wealth" and Dr. Alexander Elder's "Trading for a Living" can start a would-be trader on their way. DVDs and live seminars are available and many brokerages include excellent education on their websites. The Options Industry Council and the CBOE are among many of the organizations that offer wonderful educational opportunities. In my view, people should avail themselves of these resources first and only after gaining some education should they even think about beginning to trade.

As I have written before, after first gaining some education one can then gain some experience without putting real money at risk by paper trading. I know paper trading isn't the same as trading real money because the same emotions are not involved, but paper trading does permit the trader to learn a strategy before exposing his emotions to real money trading.

Trading is a very high risk endeavor. Good sense would seem to dictate that we learn to appreciate the risks specific to what we are doing before we actually undertake them. Few do, and those who don't can be expected to have an exceedingly short trading life expectancy.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

The Rewards of Patience

2009-10-24T07:55:00.000-06:00

One of the more common problems I see with traders at all levels is impatience. It can be an insidious problem and is fueled by both fear and greed. Traders are afraid that they will miss a good one if they don't have a position going at all times and that means that our greedy side may miss out on a good move.

Those emotions may lead to forcing a trade. In other words making an entry that is not ideal. The entry may be too far from an exit in the event the trader is mistaken on desired direction or it may fail to incorporate an adequate reward to risk ratio. Impatience can lead to jumping the gun as in the case of trying to catch a falling knife. That situation arises when a trader is trying to predict a bottom on a falling stock before the stock, itself, has signalled a turn. Sometimes a trader gets lucky and does catch a bottom, but more often, it seems, he catches the painful point of the knife as the trend continues down taking the newly acquired stock along with it.

The only way I know to avoid impatience is to set rules for ourselves. Unless the rules are followed and the specific criteria met, we don't enter a trade. That should be part of every trader's approach. In both "Smart Investors Money Machine" and "Trade Your Way to Wealth" I emphasize the importance of creating and following a plan that is unique to the individual trader. It is one significant way in which we can give ourselves an edge and without an edge we are not likely to do very well in the market.

As a child, I remember my mother teasing me with the old saying: "Patience is a virtue, possess it if you can. Sometimes found in women, but never found in men." Now please don't jump on me for being sexist, but I have to say there is at least a modicum of truth to that old saw. In seminars and coaching sessions, I have seen that women seem to be better at exercising patience and following rules of trading. Many (not all) men, on the other hand, seem to have more difficulty waiting for the really good entry. So, too, do they seem to have more trouble remaining in a position that is going in their direction and tend to pull the plug prematurely thereby failing to let profits run.

I think it is important for all of us to remember that we don't have to have a trade in place at all times and just because we turn on the computer does not mean that we have to make a trade. The point of trading is to try to make money, not to constantly play the game. There are many times when we may not find a great entry or a satisfactory reward to risk ratio. Those times require the exercise of patience if we are to do well in the long run. I want an edge, not constant action. If it is action we desire, there is plenty of that at the tables in Vegas, but there the edge is always with the house.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

What Stock to Buy?

2009-10-17T07:13:00.001-06:00

In the article last weekend, I discussed some considerations traders may want to ponder when deciding upon a vehicle to trade. We looked at the idea of using ETFs to trade whole markets or sectors as opposed to trading single stocks and noted the probable differences in relative volatilities among those choices as well as certain comparative risk issues. In this article, I am going to focus on some ideas related to choosing individual stocks to trade.

Undoubtedly there are a myriad of ways to select a stock to trade. We may have heard someone touting a particular stock at a cocktail party, or we may have received a cold call from a broker, or gotten a recommendation from our own broker. We may subscribe to a service or we might have some scan or scans of our own.

While we might establish some ranking of the various ways to select a stock, each has at least some merit. Although my general experience with cocktail party or barbershop tips is that they are rarely to be followed, there are times when they might put us onto something good. The problem with many of those is that it is already late in the move; perhaps too late to jump on board. One of the major problems I have with broker suggestions is that they are often completely unrelated to what I would consider to be a good entry, i.e. one that has a palatable reward to risk ratio. The other problem I have with many brokers and their advice is that they may call and say to buy, but it is a much rarer case when they call to suggest it is time to exit.

I edit three alert subscription services, Trend Trader, Option Trader, and $10 Trader. My publisher adds the Success Trading Group, a Covered Call service, and a Dividend Trader service. In the case of my own services, I am usually actually making the play I discuss in the alert shortly after I send the alert to subscribers and I send additional alerts when I place a stop loss order, exit the trade, or, in the case of Option Trader, when I adjust the trade. The idea with these services is definitely not to recommend a trade, but rather to draw the subscribers' attention to a particular vehicle and show how I may utilize specific strategies. The simple fact that I am making a specific trade, alone, is not a sufficient reason for someone else to make the same trade. Their goals, risk tolerance, available cash, etc. are likely to be different from my own situation so they need to make their own analysis in light of their own personal circumstances and plan.

The key for traders, in using any of these methods of selection, including their own scans, is to recognize that it is just a beginning. A trader must then make an analysis and decisions on his own about whether the candidate fits their plan. As I discuss in detail in "Trade Your Way to Wealth", once a candidate is identified the trader, among other things, must determine for himself or herself whether there is a sufficient reward to risk ratio, what their exit strategy will be if an entry is made, where a first target may lie, what capital to invest, how risk will be managed, and what strategy to employ. In "Smart Investors Money Machine", for example, I discuss a variety of strategies that might be considered, all of which are specifically designed to create a regular cash flow (sometimes weekly, sometimes monthly, or maybe quarterly). Other strategies discussed in "Trade Your Way to Wealth" may be used to attempt to capture gains in up, down, or sideways moves. The point is that merely selecting a candidate, whether through a tip, an advisory service, or one's own selection methodology is only a first step in identifying a trade. The successful trader makes several other very important decisions before ever pulling the trigger.

When I'm asked how I find a specific stock to trade I often reply that is one of the least of my worries. My first concern always is where will my initial exit be in the event I am mistaken on direction. Once the initial exit and exit strategy are determined, I want to see where the first level of potential reward appears to be. Those factors are more critical for me than what stock I use. I should hasten to add that though I am aware of fundamentals when trading, technicals form the discipline for my trades and I try to let them control my actions.

Of course, the trader can choose to trade individual stocks as many do. Movement in them may well be farther and faster than in whole market or sectors and that can be a good or a bad thing depending upon the position taken.

Issues of risk control and monitoring are critically important no matter what the investor chooses to trade. In a DVD entitled "Trading for Keeps" that I was invited to do in Chicago, I cover a number of issues related to those subjects including some important principles of disciplined trading, trend line and stop loss use, and protecting positions and portfolios. You can purchase a copy by following the link in this paragraph.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

What Should I Trade?

2009-10-10T08:17:00.000-06:00

The question I am most frequently asked is: how do I find candidates to trade? There are numerous considerations that can be taken into account, but as I am constantly writing and preaching, the first consideration is the trader's individual plan and trading personality. What might be a great candidate for me might be a terrible choice for you and vice versa. In this article, I'll try to offer some suggestions that could help a trader decide on what approach an individual trader might prefer in seeking candidates. In looking at some of the possibilities, I think it is important to understand that almost any choice involves a compromise of one sort or another.

Though not usually the first choice of many newer traders and investors, one of the first candidates to consider is to trade a whole market. ETFs (Exchange Traded Funds) are available that permit investments in whole markets like the Dow 30 (DIA) or the S&P 500 (SPY) or the Nasdaq 100 (QQQQ). In general it is somewhat easier to trade a whole market than it is to trade an individual stock because the whole market is not subject to quite the same risks as the individual stock. The price of a single stock, for example, could be dramatically influenced by news that a competitor is introducing a new product, or by news of an SEC investigation, or by postponement of an earnings announcement, or by the arrest of a corporate officer, or by the announcement of the acquisition of a big new customer, etc. While events like those may have a huge influence on the price of the individual stock, it likely would have a much lesser influence on the market as a whole. In essence what I am saying is that one could expect less volatility in a market than in an individual stock under many circumstances. As a corollary, under most conditions, it is probably somewhat easier (not necessarily easy) to follow market direction than individual stock direction for many of the same reasons. On the flip side, movement may not be as fast or far in whole market trades as in individual stocks and, of course, that can be good or bad depending upon one's position.

If the trader is seeking a little more movement, a little more volatility yet wants to avoid single stock risk, another alternative is to trade sectors. Again, sectors can be traded using ETFs that essentially are baskets of stocks. The investor can choose an ETF for any given sector and essentially own an interest in all or a chosen group of stocks in a given sector. Much has been written about a phenomenon known as sector rotation. Basically the theory suggests that money flows from sector to sector with some gaining favor while others may be losing support. As an example, as of the time I am writing this article, over the past month a couple of the hottest sectors have been Information Technology and Hotel/Motel REITS (real estate investment trusts) while some of the less favored were Residential Construction and Health Care Plans. Seeing that, a trader could choose to make a bearish play on the Residential Construction sector or a bullish play on Information Technology until he or she saw a change in momentum. Once again, at least some of the risk of individual stock ownership is removed though certainly less so than if the trader was in a "whole market" ETF. In many cases, volatility or price movement could be expected to be somewhere between that of individual issues and whole market ETFs.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Quick Fixes

2009-10-03T07:31:00.000-06:00

Many traders lose. That is no secret. The important question is why so few actually succeed. I have had quite a bit of experience teaching trading classes and working with individual coaching students over the years and I thought it might be useful to discuss some of the observations I have made, particularly in the coaching arena.

In my experience it is unfortunate that most students do not seek help from a trading coach until losses have reached significant levels. It is not at all unusual for prospective students to call telling me that they have lost 30% or 50% or more of their portfolios. It seems sad that losses have to reach such depths before help is sought. Recently a student commented to me that it is so odd that in almost all other endeavors in life we get training and education first but in trading and investing the norm seems to be to wait until losses have piled up before looking for help.

Undoubtedly, one of the reasons a lot of losing traders wait so long to seek a coach is that they perceive the cost to be so high. In my own case, I charge $3,000 for a single 6 to 7 hour day and $5,000 for a two day session. At times, special discounts are applied that can reduce that cost. I am aware of some coaches who charge more than twice that amount. Yes, I can agree that $3,000 is a lot of money, but if we really look at it in comparison to trading, it is probably equivalent to one or two trades. When compared to someone who has lost half of a $250,000 or even a $1,000,000 portfolio it is minuscule. As has often been said, we pay for our trading education one way or the other.

In any event, what can coaching actually do for a trading student? In my own case, when a prospective student contacts me I usually start with a brief conversation on the phone so we can begin to get to know one another. I try to find out what they've been doing and what led them to contact me. I try to make a determination whether or not I think I might be able to help them and suggest what I might have to offer in their specific situation. I always suggest that they think about it after our conversation to make sure it is something they believe could be helpful to them. Assuming they follow up and decide to go forward, we schedule a date and place and I then send them something I title "New Student Information" along with a form of agreement that essentially says that I will not be responsible for their losses.

The answers to the few questions on the New Student Information form help me learn a little more about a student's background. I'm trying to begin to determine what the individual's biases might be so I can see what obstacles they might have to overcome. For example, it is almost a joke in the industry, that people who are trained as engineers often have a great deal of difficulty achieving success as traders. Engineers are trained to gather every fact possible before proceeding and then often seek perfection in the trade. This approach can be problematic in that (a) it is not possible to know every fact that is relevant to a trade, and (b) even if we did, the facts would quite likely change to some degree by the time we actually entered the trade or shortly thereafter. Please, understand that I am not trying to pick on engineers. I am only using this as an example and do not mean to suggest that no engineer could ever be a good trader. Just one anecdote: I once drew a rough sketch in a class to illustrate how the time value of an option diminishes ever more rapidly as the option nears expiration. It was a hand drawn rough sketch and meant as an illustration only. During the break when I came back into the room, an engineer had a protractor and was measuring the slope on my drawing. We made a big joke about it in the class, but had I not walked in on him, protractor in action, he may have tried to apply the specific math to later trades.

In any event, after asking background questions, the New Student Information form seeks things like what the student has studied with respect to his trading, whether he has a plan, and, if so, what it is. I ask what strategies the trader has been using and how they have worked out. Finally, I want to know what they expect from the session with me.

Inevitably, the answers provide us with definite direction and often pinpoint problems with the traders method. While many times the trader puts his finger precisely on the problem even before we have met, it is clear that he has been unable to provide the solution. Oftentimes it is as simple as the fact that the trader has a plan but he doesn't follow it or that he has an exit strategy but doesn't pay any attention to his own exit. Sometimes focus is misplaced and the trader may be fixated on creating watch lists while the whole idea is not to create a watchlist, but rather to find the entry in a trade. The point here is that there is rarely a quick fix. If there were, the trader would already have accomplished it for himself and would have no need for me. I always try to go back to basics and identify precisely how the unsuccessful trader is failing to cut losses and/or let profits run. From there we try to look at ways the trader can improve his abilities to follow his own plan once created and not let the emotions of the heat of trading overrule his pre-determined decisions. Recognizing the problem is only the first step and even though a problem may be apparent to me it often is not apparent to the student and even if it is, the solution may not be easy. The fixes are not necessarily quick, but once the problem is identified and potential solutions discussed, the student can go forward to work through their problems.

Good trading may be simple, but it definitely is not easy.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

What's Your Perspective?

2009-09-26T07:37:00.000-06:00

I've been writing these articles for quite a long time, now (maybe too long) and I have received many, many comments. Some have been very thoughtful, others very kind, and some just plain annoying, but, in retrospect, they have taught me a lot about the widely varied perspectives of the readers. I know, for example, that if I write anything with even the slightest political overtones I can expect high praise and ultimate damnation. I've seen that I can rile up the readership with any discussion of social security and I certainly am not going to discuss health care. I once entitled an article "More Than One Way to Skin a Cat" and got a couple of the nastiest comments I ever hope to receive. I guess those few readers took it a little too literally and thought I was going to write a set of instructions. Actually, using language from Mark Twain's A Connecticut Yankee in King Arthur's Court, I only meant there were many ways to accomplish a task.

Last weekend, there were a couple of apparently divergent comments on the blog that got me to thinking about the different perspectives readers have as they read these articles. The first comment suggested I publish all my trades and that they be audited. Better for business the writer believed. While I am sure it was very well meaning, it indicated to me that the commentator was probably both suspicious and unbelieving. He didn't just want to see everything I was doing, he wanted it audited. I'll return to that perspective shortly.

The other commentator (whom I do not know) reported that he has been in the trading business for 33 years and referred to my articles as "a breath of fresh air," and went on to elaborate how important the concept about which I had written was to successful trading.

So, as I see it, we had two very different perspectives. The old pro affirmed that I had at least attempted to write about an important and useful concept. The other writer, whose experience is unknown to me, was looking for some higher proof of credibility. I don't blame him for searching for the credible in a sea of information and misinformation. I guess what I want to say is that the suspicious fellow need only test the information for himself. That is something I have been advocating for years. Paper trade the strategy. See if it works; if it doesn't then you can be assured I am full of bean soup. If it does work, maybe you have been given some valuable information. If it is valuable, use it.

Motive, too, is important. I, quite frankly, have several motives in writing these articles. Though the disbelievers will automatically reject the first motive, it is that I really do want to help people succeed. Secondarily, I would like it if you bought my books or signed up for one of my paid subscription services, but I will tell you that whether or not you buy a book or sign up for a subscription service will have almost no effect on my life. Of course, I do receive some modest income from each of those endeavors, but if they were my livelihood I would probably starve to death. The same is true of income from the few coaching sessions I do each year. I do them because they are fun; they are challenging, and they help keep me sharp in my own trading. Whether I do them or not has no influence on my life or lifestyle other than to require me to devote 10 or 15 days a year to try to help someone else solve their own trading problems.

So, bottom line, whatever you do is up to you. You can choose to believe or disbelieve. It doesn't matter to me except when I am called dishonest. You can come from a trusting or distrusting perspective, but in the end, it is you who must determine, on your own and for yourself, what is or is not worthy. It seems, though, that if you are really serious about your own trading you should not reject things out of hand or make some demand that my life be audited for you. Instead, how about reading the concepts, see if they make common sense, apply them in situations where you are not putting money at risk (like paper trading), see whether or not they work, and if they do, use them; if they don't work, reject them. The responsibility can only lie with you.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Sine Metu

2009-09-19T07:49:00.000-06:00

I hope the little series of articles over the last three weekends provided some ways in which traders can cut losses and let profits run. The fellow who initially suggested I provide some information on the subject suggested it would be a cop-out to say that there are probably as many ways to cut losses or let profits run as there are traders, but as you could probably see if you read the articles, there are a wide variety of ways in which a trader can accomplish the goals. Much is dependent upon the creation of a plan that is specific to your own needs. In both books, "Trade Your Way to Wealth" and "Smart Investors Money Machine" I talk about the need for such a plan and in different ways show how an individual can construct a plan specific to his or her needs, age, station in life, goals, family situation, and financial status.

Discipline is a first key. Most would-be traders, I find, are unwilling to even engage in the discipline of learning how to create a plan let alone working on its creation. It's my guess that their likelihood of sustained success falls somewhere between slim and none and leans to the "none" side. Creating the plan, however, is only the first needed act of discipline.

As many of you may know, I just had the privilege of traveling through Ireland, an absolutely beautiful country. During our stay, we took the opportunity to tour the Jameson Irish Whiskey Distillery. In addition to learning how Irish whiskey is distilled, we learned how Mr. Jameson went to riches, then to rags as a result of world events totally beyond his control, but recovered to regain his riches. As a result, he was awarded a crest and a motto. The motto is: sine metu. It means without fear. That is how Mr. Jameson managed his ultimate success and the ongoing success of this now internationally renowned company.

Sine metu is a motto that all traders should take into account in my book. If we trade through fear, undoubtedly we will make bad trades. We will cut profits because we may be afraid of a pull back instead of having an exit strategy such as those I discussed in the last article in the recent series or we will let losses run because we are afraid to take the loss and move ahead. With a disciplined approach and a pre-determined exit strategy in place we have the ability to increase our chances of success and proceed sine metu.

As an aside, for any who have shown interest in private coaching sessions, I am now booked through the rest of the year. I take no more than one student a month so if you are interested, you might want to contact me for bookings in early 2010. I am continuing the one day reduced price special in Arizona for January, February and March. It is 1/3 off the regular price for a one day session.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Part III - The Basics: Some Ways to Let Profits Run

2009-09-12T06:55:00.001-06:00

This article is the last in the current series dealing with the basics of cutting losses and letting profits run. Last week I focused on various ways to cut losses. Each is relatively simple but all require that the trader follow the discipline and be absolutely faithful to his plan. There is no question that trading real money brings emotions close to the surface and as I mentioned in the first article in this series, many traders cut profits and let losses run. Without iron fisted discipline we all run the risk of falling into that very trap. When we see a loss, it is very easy to say to ourselves: "It'll come back." We may decide to let it go just another 10 or 15 cents and all too often that becomes $1.00 or $5.00 or more. If we incorporate a specific exit strategy in our plan and pre-determine what will trigger our exit before we enter the play, we have taken one very important step in increasing the likelihood of overall profitability in our trading. We have included a disciplined methodology of cutting our losses.

My observations have taught me that many serious traders "get it" and do establish loss cutting strategies fairly early in their learning curves. It seems, however, that they may find it more difficult to let profits run. Instead, there seems to be a tendency to pull the plug fairly early when a profit is seen and the result quite often is to cut profits as well. Just as there are innumerable ways to cut losses, there are many devices to help let profits run.

One way to let profits run is to use a trailing stop order. As the name implies, we can place an order with our broker that trails behind the movement of our stock price and takes us out when it moves against us at a pre-determined amount. I often use trailing stops in situations where my position is already profitable and I want to put the trade on auto-pilot so that I remain in the position until it reverses an amount that I have pre-determined. For those who may be unfamiliar with the use of a trailing stop, let's look at an example. Suppose I bought shares of my old friend XYZ at $20 a share and the stock has moved up to $22 a share. There is profit in the position and I would like to protect at least some of that while continuing to let the profits run if the upward move is going to continue. I could place a trailing stop, based either on a percentage or on a dollar move down. Suppose I decided to set a trailing stop at $0.75. Initially when I place the stop with the stock at $22 a share, that means I would stay in the position as long as the stock price doesn't fall below $21.25. If it did, I would be stopped out and probably preserve at least some of my gain. On the other hand, if the stock moved up, the trailing stop would also move up. Suppose it moved to $25 a share. Now my stop would automatically have moved to $24.25. In this case, the stop would always move up based on the new highs the stock is making. Similarly, I could have chosen a percentage stop instead of a 75 cent stop. In our example, if I chose a 5% stop, at a $22 share price, initially a drop of 5% to $20.90 would take me out. If the stock went to $25, my stop would now be at a 5% drop from that level or $23.75. Ordinarily, trailing stops are placed good 'til canceled so that they remain in place and profits run until a pre-determined retracement takes place.

In last weekend's article, I suggested that one could use a moving average as a stop loss. Use of the moving average can also assist in letting profits run. Suppose as in last weekend's example, I bought a stock as it bounced up off a 50 day moving average. My initial exit might be on a break below that average, but my whole exit strategy could be to exit whenever the moving average is broken. In general, as long as the stock price is moving up the moving average can be expected to be moving up as well. Thus, as long as the stock price remains above the moving average, my profits continue to run and I continue in the play. It is only when whatever moving average I have chosen is broken that I exit the play. Once again, it is the price movement of the stock that takes me out instead of some emotional reaction on my part. The same methodology can be utilized with a trend line.

Yet another way to let profits run is to follow behind the move with a stop loss order. I often move my stop behind Japanese candlesticks. As the move continues in my direction, I am moving my stop up using the candlesticks. When the move reverses it takes me out rather than me taking me out.

Once again, many of these strategies are quite simple. I am certain of one thing. Their use works better than me listening to that "little voice" inside my head that almost invariably tries to suck me into cutting profits and letting losses run.

As a little review of this series of articles, I suggest the following are major points:

1. Recognize that cutting losses and letting profits run can be instrumental in achieving trading and investing success;
2. Create and implement a plan that fits your own trading personality taking account of your risk tolerance, available time, and knowledge of strategies;
3. Accept that some trades will lose;
4. Include an exit strategy in your plan that has the stock price movement take you out of a position that is going against you and don't rely on your emotions;
5. Include an exit strategy that keeps you in a position as it continues to move in your desired direction, but that takes you out on pre-determined reversals;
6. Understand that discipline rather than emotion must control the exits;
7. Understand that the biggest impediment to overall success may well be you and your reaction to your own emotions.

I hope this series has shed some light on ways how a trader can cut losses and let profits run. Both my books, "Trade Your Way to Wealth" and "Smart Investors Money Machine" include information that goes farther in discussing these elements in greater detail as they pertain to specific strategies, specific investments and to the "how to's" at various stages of an investors life. I hope you get copies and continue the learning process. For those who are really serious about taking the next steps, you may want to consider an intensive coaching session designed for you personally.

As to the blogger who asked for more information on how to cut losses and let profits run, I sincerely hope this information has advanced your knowledge as well as that of other subscribers.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Part II - The Basics: Some Ways to Cut Losses

2009-09-05T07:54:00.000-06:00

Last weekend I began a three part series of articles dealing with cutting losses and letting profits run. In the first part, I discussed the advisability of the process and suggested the first two steps that need to be accomplished. The first step was to recognize the importance of the concepts in achieving trading and investing success and the second was the necessity of formulating a specific and personalized plan as set out in "Trade Your Way to Wealth" and "Smart Investors Money Machine." This week, my focus will be on relatively precise ways traders and investors might consider in establishing a plan whereby they can cut losses.

One of the first things to recognize in investing is that we can't know how a trade turned out until it is closed. In other words, we find out whether we won or lost and we find out how much only when we exit. Therefore, to my mind, the exit strategy is critically important and it is the precise formulation of that exit strategy that sets us up both to cut losses and to let profits run.

It is my belief that in order to effectively cut losses we must have an exit strategy in place before we ever enter a trade and the entry should be based upon the initial exit. I want to enter a play in such a position that if I am wrong on the direction and the stock turns against me fairly quickly I am out of the play with only a small loss. As you can see, that philosophy first encompasses the concept that I could be wrong and that I could suffer a loss. The simple fact is that anyone who trades will, at least at some time, suffer a loss. Since that is the case, the first criteria for me in establishing an exit strategy is that I want the losses when they do come to be as small as possible. I need to emphasize, however, that does not mean there is no rationale for setting the point at which the loss is to be cut. That is one important purpose of the plan. I want to use some discipline that takes me out when the stock price moves against me in some pre-determined fashion.

There are probably as many ways to plan that exit as there are traders and I am going to explore a few of the possibilities here while also looking at some considerations in determining what method to use. In general, when buying a stock, the highest risk of loss is often near the time of entry. That seems true because there are ways to at least attempt to protect profit as the price moves in the direction you want. Initially, then, I suggest that each trader or investor decide upon their personal real risk tolerance. In that vein it is important to understand that there might be a significant difference between what one thinks their risk tolerance may be when getting ready to enter a trade and what it actually is going to be when real money is being lost. This step involves a little serious soul searching, and only once determined can we use a specific loss cutting method.

Once you have decided what you are really willing to lose on any given trade, it is time to decide on what loss cutting exit strategy you will use. One specific way to cut losses is to employ a strict percentage approach. In your plan, you might decide that if the stock price drops 5% from your purchase price you sell and cut your loss. This basic methodology is suggested by William J. O'Neil, publisher of Investors Business Daily, in his popular book, "How to Make Money in Stocks." In the book, Mr. O'Neil suggests cutting the loss when the price is 7% or 8% below the price you paid. That may or may not sound like a lot to any individual trader or investor and that is where the personal decision must be made. However, the important point is that it does provide a disciplined loss cut. If the stock price drops a percentage that you determine in your plan then you get out with no if's, and's, or but's. The loss is cut. There can be no argument that "it'll come back" or "I'll just let it go another 10 cents." Create the parameter and follow the discipline.

As I mentioned earlier, the percentage loss cut is definitely not the only way to discipline loss cutting. I personally use some basic technical formation for many of my exits. Take, for example, a situation where a stock we'll call XYZ has just formed a double bottom bouncing off a level of support. I may choose to enter on that bounce and use a retreat back below the support as my initial (and I emphasize initial) exit. Let's say the stock formed the double bottom by dipping to $15 and then moving up on two separate occasions. The double bottom support would be at $15. I would like to catch it shortly after the bounce so suppose I entered at $15.20. I would make my exit a break below support and might set a stop loss to close the position at $14.90. That means that if the stock price dropped to $14.90 or below, my position would automatically be sold as an "at the market" order. One caution I should include is that a stop loss order does not guarantee that you will get the price at which you set the stop loss. It only assures you will be sold out of the position. Suppose that with my stop at $14.90, XYZ gapped down from $15.10 to $14.30. The gap would have gone through my stop and my stock would be sold at the market which might then be expected to be around $14.30.

Another way to specifically cut losses might be to use a break through a moving average. Suppose you see a stock bouncing up off the 50 day moving average and decide you would like to buy it. The exit could then be a break below that same 50 day moving average. As an aside, that could also be used as a way to let profits run, but that is information for Part III next weekend. Any moving average could be used as the exit trigger, not just the 50 day. I often personally use a variety of others, but the important thing is that I know which one I am going to use before I ever enter a position. A last thought for now is that I might also use a trend line exit where I exit the play on a break through the trend line.

Each of these methods is relatively simple, but serves the purpose of setting a disciplined exit; one that is not dependent upon whimsy or emotion. If whatever line is chosen is broken, the idea is to just get out. The stock price movement tells you when to exit. Always remember if it turns back your way you can always re-enter a position.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Part I - The Basics of Profitable Trading

2009-08-29T07:58:00.000-06:00

Perhaps the most basic concepts necessary to achieve profitable trading are to cut losses and let profits run. The idea is obvious and simple on its face, but it seems that many traders have no idea how to accomplish either objective. In fact, I would hazard a guess that a majority of retail traders do just the opposite. They cut profits and let losses run. That is an almost certain road to losses and frustration.

Recently, a commentator on the blog took me to task and suggested that I use the concept of cutting losses and letting profits run as a tease and suggested that I write a little about exactly how to do those things. I can only guess that he has not been following my articles for very long and has not read my books because I have tried to deal with the "how to" aspect many times. My coaching sessions focus specifically on those actions as they apply to the individual with whom I am working. Accepting all that, I, nevertheless agree with the comments insofar as I believe it could be extremely helpful to at least some readers to discuss specific ways to cut losses and specific ways to let profits run. This article, therefore, is the beginning of a three part series in which I'll try to suggest ways in which the individual can set up his or her trading so that they do cut losses and let profits run in ways that could work for them.

The blogger suggested it would be a cop out to say that the "how" of cutting losses and letting profits run is an individual decision. In that regard, I believe he is mistaken. Each of us must determine the methodology that fits our personal risk tolerance, our goals, our available time, our knowledge base, and the strategies we utilize and with which we are familiar. For example, someone who only trades stocks may have a much different loss cutting strategy than someone who trades call ratio backspreads and someone whose primary strategy is selling options may have a different approach than someone whose primary strategy is buying options.

Recognizing that how we cut losses and let profits run is, indeed, a personal decision and should be part of an individual plan, we can still explore some of the basic concepts that we might consider applying no matter who we are or what our strategy might be.

As many of you may know, in addition to private coaching, I have taught a number of trading seminars over the years. In addition, I often get calls from other traders and often speak with people who have questions regarding trades or investments. With that background I would suggest that it is fairly common that retail traders generally buy stock with the hope that it goes up in price. They tend to enter positions for a variety of reasons, and, among those reasons, may rely on something they have read or heard on TV; they may get a tip from a friend who already owns a stock or is about to buy it; they may act upon a broker's suggestion; or they may have some personal knowledge gained through research or some first hand experience. In many of those cases they are buying a story; a story usually with some basis in fundamentals. When they buy, they give little or no consideration to their entry price, particularly as it might relate to an initial exit in the event the stock turns against them right away. The entry is made with little consideration of how much is actually at risk and with little or no consideration of how much they are personally willing to risk in the trade. Often these are the people who have been taught that the only way to invest is to buy and hold and they will defend "buy and hold" with great fervor.

In its purest form, the strategy of buy and hold generally has no plan as to when or how to cut losses. Positions are simply to be held no matter how much the stock drops. Any exit strategy is ordinarily based on need or whim. The question I always ask buy and hold investors is: "Hold until when?" I usually get a blank look. Hold until death is certainly a strategy and one that may be wonderful for the heirs, but maybe not be so good for the investor. Using this strategy, profits may well run and that is generally something we want to achieve, but so too do losses. Anyone who held the likes of Lehman Bros., or Enron, or Bear Stearns knows exactly what I am writing about. So too, albeit to a lesser extent do longer term holders of issues of even great companies like GE or CAT or MSFT. Of course they may "come back" and hopefully they will. But why hold them during the downdrafts; why let big profits turn into big losses?

If you accept my arguments so far, it only seems logical that you would agree that the first part of cutting losses and letting profits run is to have a plan. Using a plan, you can create a disciplined structure in the beginning that will dictate at what point to get in and at what point to get out. In other words you can set yourself up before entering the position with a trigger mechanism that extricates you relatively quickly from a losing trade and keeps you in a trade that is winning until it turns against you. I discuss precisely how you can create such a plan for yourself in "Trade Your Way to Wealth" and in "Smart Investors Money Machine." In my view, without such a plan one has no disciplined basis upon which to cut losses and no way to make sure profits are permitted to accumulate.

The first key is to recognize that cutting losses and letting profits run can be instrumental in realizing success in trading and investing. Once accepted, the next step is to create a plan for yourself whereby you set out where and how the losses are to be cut. That involves some system to determine the level of loss you are willing to accept and that will be the subject of Part II of this series. Next week, we will look at very specific ways for you to determine the "where" of the loss cut. In addition, we'll address certain orders that traders and investors might consider to implement the loss cut. Once the initial level of acceptable loss is determined, we need to structure the trade in such a way that we try to attempt to avoid cutting profits. In Part III, I'll discuss specific ways a trader can attempt to continue to capture profit while letting the play continue so that profits that are running can continue to do so.

As these articles are published, I expect to be traveling in Ireland so please don't expect me to respond as regularly on the blog as I ordinarily do. Feel free to have an open civil discussion. Let me suggest that there are many, many ways to accomplish the objectives we are discussing here and there is probably no one perfect way. Be tolerant and open to the suggestions of others. We always learn more when we are willing to listen than when we try to force our own beliefs down someone else's throat.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Random Thoughts on Trading

2009-08-22T07:52:00.000-06:00

The other day it occurred to me how much I really like trading. It has given me a quality of life I never dreamed I would enjoy. In my former lives I practiced law for many years and then ran a photo processing business and portrait studio. The law practice was interesting and relatively lucrative but came with heavy burdens of time and obligations to courts and clients. Many times my work day began at 6:00 A.M. and didn't end until 10 or 11 at night. I don't mean that as a complaint, only as a fact to be compared to my trading experience. The photo business came about as a result of my passion for photography. The only problem was that it was a retail business and as anyone who has been or is in a retail business knows, you are a slave to it.

As I have written in "Smart Investors Money Machine" and in "Trade Your Way to Wealth," trading changed my life completely. Once I advanced through the learning curve, my time became my own. I am no longer beholden to clients or customers and my calendar is not set by the courts or the needs of others. I can pretty much do what I want and when I want to do it. Rarely does my trading day extend beyond a couple of hours and I can do it anywhere in the world that I can hook up my computer. It has given me the ability to travel, spend more time with my family, and live life as I choose.

Of course, I do perform functions that take up some of my time. I edit the three alert services (Option Trader, Trend Trader, and $10 Trader), and I write this Newsletter article each week, but I am able to do those things because I choose to rather than from any financial need. I take on the occasional coaching student because working with people who are interested in trading helps keep me sharp and introduces me to some fascinating folks. Trading enables me to do these things that I enjoy and have fun doing. If there is a time when they are no longer fun, trading has enabled me to be in a position where I can just stop doing them.

As I write in "Smart Investors Money Machine," I have learned, and in that book I share, a variety of ways to create streams of income that are at least somewhat independent of the constant use of my time. I've learned that almost anyone can add substantial income with relatively little effort once they have made an effort to learn what to do and how to do it.

Maybe that's the rub. All too many come to trading thinking it will be easy and the truth is that it isn't easy. Successful trading can be simple, but that isn't the same as being easy. Before trading can work for any individual I am convinced that the person must make serious efforts to understand that it is a business and as such requires knowledge, a specific plan, and practice. Successful trading also requires self-knowledge and understanding. One of the greatest battles we seem to fight in reaching the ultimate status of becoming a winning trader is against ourself. We must learn to achieve a level of discipline that removes as much as possible the elements of greed and fear from our trading decision making process. All of these things involve real effort and without that effort it is difficult if not impossible to become a really good trader.

For most, the question becomes is it worth it? For me the answer has been a resounding yes. One of the best trading teachers I have ever known once said something like: "If you are willing to do for 6 months or a year what others won't, you will be able to do for the rest of your life what others can't." That thought has stuck with me for more than a decade of trading now and it rings as true today as when I first heard it. When I began, I spent about 5 or 6 hours a day studying and I did that for at least 4 months. At that point, I had no job so I was able to devote the time. I understand that most readers simply can't devote that much time a day to study, but most could afford an hour or so on the average. Maybe it would be a great trade-off in the long run to give up an hour of TV a day in exchange for a better quality of life not too far down the road. Sure, it will take longer devoting only an hour a day to study than it took at 5 hours a day, but in the end the rewards can be unbelievably great. Imagine a life where someone could work half the time and make three or four times the money. Would that be worth the effort? Only you can say. Trading and investing definitely isn't for everyone. It involves risk and oftentimes risk that an individual may be unwilling to take, but armed with appropriate knowledge risks can be managed and controlled.

Anyway, that's my ramble for this weekend and I hope it provides some food for thought. Personally, trading has been very, very good to me and maybe it could be to you as well.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Complexity

2009-08-15T06:00:00.000-06:00

One observation I have made over my years of trading, coaching, and conducting seminars is that there seems to be a conception among many retail traders that trading and trading plans need to be complex. I couldn't disagree more. I have found that using simple, basic methods, one can be quite successful. I have often said, and reiterate here, that good trading is simple, but that does not mean it is easy. Doing the simple things can be difficult. Difficult because we tend to have fights with ourselves. We may have some specific entry strategy, for example, but fail to make the entry because we decided to wait for more confirmation and by the time we see enough confirmation to satisfy ourselves, we have missed the trade.

Several years ago, a couple who had attended a series of my seminars asked if they could spend some time with us on Hawaii while we were over there so they could see exactly what I did in my own trading. These folks had a great knowledge base and knew quite a number of strategies. I spent the better part of a day one Sunday with them, looking for some candidates to trade the next day. During that time we found 4 or 5 candidates upon which we agreed and discussed entry the next day provided they did not reverse direction. We also agreed to meet the next morning and walk the beach. Since Hawaii is so far west, the markets open quite early and around 4:30 A.M. Hawaii time, I placed three of the trades we had discussed. Later in the morning we met and as we walked the beach, I asked these folks which trades they had entered. I was shocked when they responded: "None of them." After having spent the greater part of a day trying to help them find some entries, I was really curious why they hadn't entered even one. They told me they were looking for more confirmation. By the time we got back from our walk, they had gotten the confirmation, but with a strong market, it happened that they missed all the trades. Fortunately, I was able to close all of mine within a few days for a nice profit.

The principle I had tried to show them was to find an entry with an adequate potential reward to risk ratio and an exit that would take them out with a small loss if the position moved against them soon after entry. By the time they had what they considered to be confirmation, the reward side of the reward to risk equation was much less than we had seen on Sunday and the exit or potential loss was much greater than it had been had they entered as we had discussed. The entry concept was simple, but, for them it certainly wasn't easy.

Clearly, these people believed that by waiting for what they considered to be confirmation they thought they would be entering a "safer" trade. Tain't necessarily so. Could they have entered after seeing their confirmation and still seen the trade turn immediately against them? Of course that could happen. No one can know the future and some general market or stock specific news could have triggered a reversal. What then would have been their situation? If they were using the disciplined exit they had already pre-determined on Sunday, the loss would be greater since the stock had to move to achieve the "confirmation" they required. In this situation, the complexity was the addition of a requirement of confirmation after they had already seen an entry that would work.

These folks are not alone. I have often seen retail traders jump from strategy to strategy each time they are exposed to something new evidently believing that there is some secret holy grail of trading. If there is, it isn't jumping from strategy to strategy.

Anyone who believes that added complexity can bring the answer might want to review the Long-Term Capital Management debacle. Long-Term Capital Management was managed by sophisticated and bright professionals; it had two Nobel Prize winners on its advisory staff and a complex plan using modern finance theory. In spite of the complexity, it not only failed, but nearly brought down the U.S. if not the world financial system (years before the current bailout issues).

The answer, I believe, is in learning how to cut losses and let profits run. Though I have discussed these critical concepts in "Trade Your Way to Wealth" and "Smart Investors Money Machine" as well as in numerous articles over the years, a subscriber recently suggested that I keep tossing the notion out as a "tease" and further suggested that it would be helpful if I could give some guidelines on how to do those things. I agree. I am currently preparing a short series of articles that should begin around the end of the month in which I will try to do exactly that -- try to give some guidance on how a trader might go about cutting losses and letting profits run. Again, the concepts are quite simple, but as with so many things in trading, not necessarily easy.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.

Some Market Action Observations

2009-08-08T08:03:00.000-06:00

One of the things I always emphasize when I start working with a coaching student is that the markets tend to behave much more in response to the psychological than to the logical, particularly in the short to mid-term. Many retail traders seem to fail to account for the relatively high levels of emotional reactivity in the markets in making their trading decisions. As an example, have you ever noticed that it is not unusual for a stock price to dip or drop right after an earnings announcement even if that announcement was not at all bad?

I am reminded of a situation that occurred several years ago. A fellow who had come to one of my seminars called one day and told me he had just bought a hundred or so short call option contracts on a company he followed and that the company was going to announce earnings the following day. I was astonished and asked where he learned to do that because it certainly wasn't from me. He responded that he knew the earnings were going to be really good. When I asked how he knew and whether he had insider information he said no, he just knew the earnings would be good. Sure enough, the earnings weren't bad, in fact just under the analysts prediction and the stock tanked. Why? I guess we can never know for sure, but that kind of action seems to occur with regular frequency when the earnings miss some analyst's predictive guess. My acquaintance lost a bundle and stopped trading.

News can certainly be a catalyst to price movement as well. As with so many of the old saws, "buy on the rumor, sell on the news" has a basis in experience. I would suggest the better approach might be to buy on the rumor and sell before the news. What really seems to occur, using the example of an earnings announcement as upcoming news, is that there is speculation, sometimes wild speculation as an earnings announcement approaches. As I am writing this article on Wednesday afternoon, August 5, 2009, for example, AIG is up over 60% before its earnings announcement on Friday. One squib I read indicated that was because analysts anticipate it'll swing to a profit. Another analyst suggested the jump was caused by scrambling shorts buying to cover positions and said there was " ...certainly no news to account for it." In either event, it is clear that speculation is extremely high on the upcoming news. Shorts are clearly fearful and longs are basking in fulfillment of their greedy side. What will the announcement be? I certainly don't know, but I do know that once it is made, we will have the answers and at that point, the questions will have been answered. The guesswork will be over and the predictions either fulfilled or they will have fallen by the wayside. In many instances (though certainly not all) once the reason to speculate is gone, the wild swings are less likely to occur. For that reason, I personally try to be aware of the dates when earnings will be announced and may make a play going into the announcement, but exit before the actual announcement.

Another example of market reaction relates to time of year. The point is analogous to the preceding discussion in that it can also relate to earnings season. Many companies announce their earnings in the month following the end of each calendar quarter, for example. So, for example, when the first calendar quarter ends in March, traders are looking forward to the earnings announcements in April. Speculative interest rises and "bets" are being placed as to how good earnings will be; whether the earnings will beat the last quarter, or the same quarter a year ago, or some analyst's guess (prediction). Once the earnings are announced, the answers are at hand and the reasons for the speculations are gone. The questions have been answered. Now, as the calendar reaches May, there is no immediate excitement about upcoming earnings reports for those companies that have just reported so, absent some other news, things are more likely to be more peaceful. The same situation applies in August, October, and February.

As with so many things in the market, I don't mean to suggest that these are hard and fast rules. In my view, they are just factors about which it may be helpful to be aware. If we take October as an example, think of the crashes and drops the market has suffered during that month over time. Last year, as one example, the Dow fell over 2600 points from the October high to the October low.

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

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

To comment on Bill's article click on the "comments" link below.