Certainty -- By: Bill Kraft
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
Ever since I began trading I have encountered many statements seemingly made with great certainty. I have heard people say that a specific stock price is going to jump up on the earnings announcement. It didn't. I have heard people say that the only way to make money in the markets is to buy and hold. It isn't. I have heard people say that no trader can make money trading. That's just not so. Maybe the one saying that takes the cake is "It's going to come back."
The truth is that little, if anything, is certain in the markets. A few things that seem to be pretty close to certain are:
Some trades will lose Every trader or investor will make some emotional market decision(s) It is difficult to remove emotion from trading decisions No strategy is perfect The more knowledge and experience a trader gains, the greater chance he gives himself to be successful Sometime you will cut your profits and sometime you will let your losses run even though you know you should do the opposite I have an unconfirmed suspicion that those whose personalities work in terms of beliefs in market certainties like "it'll come back," or "there is only one way to make money in the markets and that's to ....," or "there is no way anyone can make money trading" are less likely to be successful than those who simply accept that there are no real certainties. Of course, I am speculating and many may disagree, but I am guessing that those who pronounce "certainties" may be too rigid to accept the vagaries of market movement and may have difficulty in seeing alternative ways to deal with situations. Again, it is just my speculation, but I believe that those who are less rigid, who are able to reverse positions or who are willing to adjust strategies when they encounter a changing or unpredicted situation are more likely to succeed in the long run.
A "buy and hold" investor, for example, is bullish by nature. Essentially, their argument is that if they buy stock in a fundamentally sound company, the stock price will go up over time. Over what time is not ordinarily defined, but from a long term historical perspective, the argument is sound though it certainly has many exceptions. For example, if we look at the Nasdaq Composite (COMPQX) we see that it is up relatively substantially since its low in 2002, yet it is nowhere near its high in 2000 and it is currently trading at approximately the same level as it did 10 years ago in 1998. The results, therefore, for a "buy and hold" investor would be quite different depending upon when they made the decision to buy.
Would it be worth the trouble to learn to trade the market in both directions? An investor could have traded bullish strategies on the COMPQX as it rose from 1994 to 2000 and then traded bearish strategies from the break in 2000 until 2002 or 2003 and then climbed aboard the bull again into 2007. The whole move up from 1994 to 2000 was approximately 4300 points; the move down from 2000 to 2003 was about 3750 points and the move up from there to the present about 1200 points. While the bullish buyer in 1994 would have about an 1800 point gain today, the trader who used strategies to trade both directions, even if he captured only 50% of the moves would be up over 4600 points over the same time. Certainty that buying and holding is the only way to go could have been costly in that scenario.
Please understand that I do accept buy and hold as a very viable strategy. I just believe there are many other strategies, including ones to benefit from bearish moves, that might be worthwhile for each of us to consider. In "Trade Your Way to Wealth" ", my recent book, I examine a number of these strategies and emphasize the importance of money management and risk control. Understanding and using these concepts may very well add to your trading abilities if you are willing to accept the proposition that certainty in the markets is, most often, illusory.
Good Trading!
Bill Kraft
Success Trading Group -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
Here is a play from the Success Trading Group:
RadioShack Corp. (RSH)
Our Success Trading Group members closed another winning trade this week. We closed or recently opened position in Radio Shack (Ticker: RSH). We have lots of stocks on our radar including Exxon Mobil, Kimoc Realty, Ebay and Walgreens.
Have a great weekend and we'll trade next week.
Success Trading Group Team
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Option Trader -- by Bill Kraft
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Here's a look at a trade Bill is currently working on:
ANGLO AM PLC ADR (AAUK)
This stock has been in an uptrend since January and is now, once again, testing a multi-hit resistance. It looks like something's gotta give so I am looking at a possible at the money ($35) Sept straddle, buying both the puts and the calls for somewhere around $6.80 or so. With a straddle, the risk is the total paid to enter and the play can make money if the stock moves fairly quickly in either direction and/or if the implied volatility increases. Since Friday was options expiration day, I want to wait until Monday to decide whether I am going to play this one or not.
Good Trading!
Bill Kraft
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Trend Trader -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops. Here's a look at a trade Bill is currently working on:
Atlas Energy Resources LLC (ATN)
ATN has been running through all time highs and looks as though it may again be able to break out of the most recent channel after a short breather. The stock moved well Friday as it broke resistance on strong volume.
Good Trading!
Bill Kraft
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$10 Trader -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock. Here's a look at a trade Bill is currently working on:
Wonder Auto Technology, Inc. (WATG)
$10 Trader closed a trade Tuesday in which he realized a gain, before commission, of 15% in a single week. I still like the company and am watching to see if another entry is about to present itself.
Good Trading!
Bill Kraft
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Dividend Investor Team
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