Saturday, December 29, 2007

Certainty

The trouble with certainty in trading is that there isn't any. An unanticipated piece of news can change the direction of a stock in a flash and what looked like a sure thing wasn't. Markets can turn on sudden political turmoil. The Fed Chairman can make a statement and stocks turn on a dime. That is why even the greatest traders suffer losses at times. There is no certainty in trading.

I am amazed by the number of emails I get that contain what their authors contend are absolute certainties. Many are what I would call emails with an attitude. Bold statements like: "you can't make money trading options," or "the only way to make money in the markets is buy and hold," or "I want to make money, why would I even consider selling naked puts," or "this market is not bullish and it will only get worse," are chock full of certainties. These notes are generally written with strong, positive language almost as though the language could bully the reader into believing the same certainty the writer perceives. The language, sometimes reaching the level of invective, demonstrates an incredibly strong emotional attachment to the writer's belief. Many of the emails include such certainties about market direction and stock direction. They drip strong emotion.

The simple fact is that no matter how certain I am about what a stock price will do, my certainty will have no affect on the price. I can't will a stock price to go up. I can have some pretty compelling reasons to believe it will go up, but that does not mean it will go up. There is no stock that may not go down on any given day or for any given week. It doesn't matter what you think or what I think; we are quite unlikely to force a stock to move in a given direction on our own.

Those who are emotionally attached to their beliefs about direction of stock or markets are at serious risk of sustaining significant loss. If one believes a stock is going to go up, for example, and it turns down instead, the trader with the emotional attachment to his belief is less likely to cut losses, but rather stick with the belief that "it'll come back." I personally know people who were certain the Nasdaq 100 would continue to soar as we entered the year 2000. Some of those folks bought or added to their position in the Q's (Nasdaq 100 tracking stock) at the $105 level in early 2000 and, because they were sure the Nasdaq would continue to rise, they held on, and on, and ..... The Q's now, almost 8 years later are trading at roughly 1/2 that price. What profit did their certainty yield?

Whatever we think about the market can only be an opinion. It can be buttressed with innumerable facts, formulae, and rationale, but the bottom line is it is still just an opinion. We must be willing to accept the proposition that we can actually have an opinion that is wrong. If we fail to recognize that fact, we are quite unlikely to fail to cut losses and are doomed to fail in our trading. Trading requires the ability to be facile and the willingness to see what the market is actually doing. Saying something, even with real gusto and sincere belief doesn't necessarily make it so in the markets.

by Bill Kraft, Editor
Copyright 2007, 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:

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

22 comments:

Anonymous said...

There are abolute investing cetainties:
-Financial professional, not the small investor, are the ones who move the market.
- Financial experts, newsletter writers, etc. suggest that the small investor stand firm in market downturns. Yet what we see is another certainty that financial professionals are bailing out - either because of option calls, better knowledge, or fear.
- Another certainty - So small investors lose lots whereas financial professionals only lose a little.
- Yet another certainty - Financial experts, newsletter writers, etc. will cover for their counterparts.
- One last certainty - when purchasing a stock the price will always be higher than the current quote at the time of purchase.

There are lots of other investing certainties. Do the research, instead of the hearsay, and you'll find the above to be axioms.

Harvey

Anonymous said...

Bill you can also be certain that someone like Harvey will write you a comment that basically says all of his negative experiences in the market are because other people caused them to happen to him. People like Harvey never are successful trading because they don't take accountability for their actions. The Harveys of the world are certain to be trading losers.

Keep the great articles coming Bill, I enjoy them!

Josh

radwal said...

It was worth to say it again!My compliments,Bill,your very true truth may help the readers to accept the decision of the markets,undependently what their strong believe may have been.Hopefully you will enjoy your community in 2008 as well.Best wishes to you!

CT said...

Bill, your comments in this article are insightful. After 10 years of up and down activities in the market I understand that making money in the market is like riding a bull... you have to go with the beast and keep your balance. Sometimes the ride ain't pretty and your tired when you get off but keeping balance while on and running when you lose and fall off is the key to winning or at least not getting hurt badly.

Blessings in Christ Jesus this new year,

CT

Anonymous said...

Duh.......What? People like me pay you to give your opinion so that we can form one of our own. We believe that someone like you should, and probably does, know more, hopefu8lly far more than we do. That is why we seek your advice and hang on your every word. Do we expect that you are always right? No...we hope that your opinion is right more than it is wrong. However with the kind of opinion that your expressing which is that everyone has an opinion and that strong language doesn't make it so........Duh, is that your opinion? Is that the gem that I paid to hear about? Is my time worth nothing? Give me an opinion about what you believe in! Should I buy DNDN should I sell, should I hold! should I invest in cd's because your advice is don't listen to the people who use strong positive language! Howard Hendrix said, "we are all walking around with our imbelical cord in our hands seeking to plug it in." Duh....give me advice I can use and that you believe and not puff articles that say nothing at all! signed Phil Wellington

Anonymous said...

Thanks Bill, for a good reminder of the need to manage our opinions, in addition to our trading. I always look forward to your newsletters.

Zahir

Anonymous said...

Dear Bill,

I get value and inspiration from your free weekly newsletter. I'm grateful for your generosity to write it and to offer it free of charge. I haven't signed up for any of the pay services yet, but once I get more comfortable with which one best suits my style and situation (and I build my accounts), I will. Best wishes for a happy and prosperous 2008!

Anonymous said...

Mr. Frist,

Thanks for your wonderful and even-handed weekly postings. In this climate of extremes, it is refreshing to have your voice of reason.

I like your general comments so much that I have pre-ordered your book. And I look forward to its Feb release.

Keep up the good work,

Steven Shum

Tony said...

Re: Certainty, or lack of, in the Stock market.
I traded stocks on my own (with the advice of various services) and I lost a lot of money. Unfortunately, now I am burned out and I don't want to see another stock again. Trading and thinking always that "you are right" in your trades is like financial suicide. There is no certainty. Thanks for the newsletter Mr. Bill! It does make me think about the market again. You are very realistic about it. Maybe I'll get into it again with some guidance from your services; in my next life...kidding....in the next 'new' BULL market?

Rod said...

great article!!!! thanx Rod

Anonymous said...

Bill,

I've read many of your columns and found them to be well-reasoned and informative. Keep up the good work!
Here's some suggestions for 2008 topics:

1. Your favorite books for traders

2. How to quantify the risk inherent in a trade or startegy

3. How to select one strategy over another to maximize profits and minimize risk prospectively

4. Your favorite stock (or trading stategy) selection software

Bill M. Stock Trader

Bill Kraft, MarketFN.com said...

The blog signed "Harvey" disagrees with my article (as is his absolute right) and says there are several absolute certainties in the markets. Among those things he says are certainties are that newsletter writers suggest that the small investor stand firm in market downturns. I am a newsletter writer and I definitely do not suggest that the small investor stand firm in market downturns. In fact, I suggest that any investor play the market as it presents itself. In my book, "Trade Your Way to Wealth," for example, I show the small investor how to play up, down, and sideways markets using different strategies that profit from each. Harvey also writes that the professionals bail out in downturns -- would that be so for many mutual funds managers fail to do exactly that. Harvey also says it is a certainty that, when buying, the stock price will ALWAYS be higher than the current quote at the time of purchase. I'm not sure what he means by that "certainty" but it may mean he is not placing limit orders or his broker is getting bad fills. The price should not exceed the ask and if limit orders are placed, Harvey won't pay more than the limit.

Bill Kraft, MarketFN.com said...

Thanks, Josh, I appreciate the kind words.

Bill Kraft, MarketFN.com said...

Thanks, Radwal and Happy New Year to you and yours as well. Happy New Year to all our subscribers.

Bill Kraft, MarketFN.com said...

Thanks, CT and kudos for the clever analogy. I agree that sometimes the ride isn't pretty, but that is where money management, cutting losses and letting profits run can turn that ride into success as it appears you have discovered. Happy 2008 to you, too.

Bill Kraft, MarketFN.com said...

Duh, Phillip. The first thing I should note is that you pay absolutely nothing for the Newsletter so maybe you shouldn't be whining that you aren't getting what you paid for -- duh. In the paid subscription services I do send alerts concerning many of my own trades. My point, however, is that you shouldn't be hanging on my or anyone else's words. You should take the time to educate yourself. Even my subscription services (or anyone else's for that matter) should be nothing more than a starting point. Understanding that the market is full of uncertainties is important. Among other things, it makes one aware that no one is going to give you all the answers you seek. If you really want my opinion, let me suggest that you spend your time learning how to assess a stock yourself. Don't expect others to do the work for you and tell you what to think about DNDN or any other stock. Whatever someone else may believe is their opinion and may not be relevant to your situation at all. They may have different investment goals, different risk tolerances, different amounts of risk capital and maybe even less knowledge than you. Don't demand to be spoon fed. Investing is a business; if you intend to be involved, I suggest you learn it just as you did with whatever field in which you may work.

Bill Kraft, MarketFN.com said...

In my view, you are doing the right thing. You are learning about trading rather than trying to find some holy grail. Congratulations on what I think is the right approach.

Bill Kraft, MarketFN.com said...

Thanks, Steven. Hopefully the good news from my publisher is that the book will actually be released in January. As you probably know, it is available on Amazon where they indicate a February date, but you may well get it earlier. I sincerely hope you enjoy it and that you find it helpful.

Bill Kraft, MarketFN.com said...

Right on, Tony. Sorry to hear about your past market experiences. Some times it is important to take a break from the market (or almost anything else). The fact that you are reading the articles indicates you still have interest and I applaud you for advancing your trading education. Unfortunately, many new or inexperienced traders fall into the ready, fire, aim column since they fail to do the learning before the trading. You sound like you are doing the learning first now, and I believe that leads to much greater chances of success.

Bill Kraft, MarketFN.com said...

Hey, Bill, almost sounds like I planted the suggestions you make (as you know, I didn't). My favorite book, without any humility whatsoever, is my new release, "Trade Your Way to Wealth." In large part it deals with risk awareness and risk evaluation as well as the selection of appropriate strategies for differing market conditions and direction. I wrote it because I believe many trading books fail to demonstrate pitfalls in the effort to excite readers about possible profits and I believe it is imperative to understand the risks in every trade if one is going to succeed.

I would also suggest Dr. Alexander Elder's, "Trading for a Living" and Lawrence McMillan's "Options as a Strategic Investment" as extremely helpful trading books. Anyone new to and serious about trading should consider a work on technical analysis as well. In that category, Martin Pring's "Technical Analysis Explained" does a wonderful job. I also recommend Steve Nison's writings and DVDs on Japanese Candlesticks.

At the moment, I use Worden Brothers TCNet for charting and a program called OptionVue for analysis, particularly with regard to volatility trading. If you subscribe to the Worden Brothers wonderful charting services (either Telechart or TCNet), please consider advising them you are getting it through distributor AF126. If you do that, I get a little bump for the referral. If you'd rather not, that's OK, the charts are still super.

Anonymous said...

Bill; It is obvious, the dollar must go down and gold go up. That is why I have a 5% trailing stop loss on my GLD.
Keep up the good work.
Thanks

l g popoff said...

you claimn that you are trend trader and cant et 25% per year???? what type of research have you done in order to understqand market cycles..ever try making a point and figure char for past 75 years $15 reversasl to the $5 unit???/ give it a shot long hand with adding machine ince back in the 50s no computers but you learn fast....then you can graduate to exponantial moving averages.m.a.c.d. and directional stats...thats all you need of the 40 plus indicators ..they all give signals at the same time practically....stop looses are never hit (read last few words again) of course wharts laguhable is 49 funds that still held bear stearns from 178 (weekly sell signal) 158 (montly sell signal0 all the way to 2...now that reall investmentr intellignece for ong term investors.....long teerm investing is for suckers..is fischer sweating alittle now??? i should think so..
l g popoff retired (early)
credit suisse tucson