Saturday, May 03, 2008

More Market Sayings

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

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

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

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

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

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


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

14 comments:

Anonymous said...

I SPENT 16 YEARS ON THE FLOOR OF THE NYSE AND ANOTHER FAVORITE SAYING WAS "TRADERS DIE BROKE"

myrle c. whiting said...

Mr. Kraft,

I enjoy very much reading your weekly article I always find it helpful and informative and I learn something everytime.

Thank you very much for your time and effort on these articles. I can see that you work hard on the wording and info contained in them.

Your friend and admirer

Myrle C. Whiting

Anonymous said...

Mr Kraft
my name is awais roy i am working in this feild sience 3 years but i read yur articals many time before i realy give you the complement boz your articles are superb and that help me a lot

Your friend and admirer

Awais Roy

Anonymous said...

Can't believe no one has hassled you for misspelling "glitch" as "clitch." Oh well, as long as everyone understands what you're talking about...and please use your spell checker whenever possible.

Anonymous said...

"Earn at the turn"...ranks right up there with "irrational exuberance"! LOL.. gotta remember that one at the next cocktail party.

Seriously, Mr Kraft, I appreciate your effort and time it takes to write your articles . Sometimes, I've heard it 10 times over, and once in a while, I hear it from you for the 11th time....... and it finally sinks in!! Thank You

Afdar said...

Mr. Kraft,

That was exactly what already happened to me.I bought AGU at 66.38 and sold at 70.8. But the stock continued its rally. I was out too early, just because of intraday price movement. Your statement is right about protecting our capital first and then let the profit to move along.

Bill Kraft, MarketFN.com said...

That's an interesting and, hopefully, not prophetic saying Anonymous. What years were you on the floor?
Bill Kraft

Bill Kraft, MarketFN.com said...

Myrle, thank you for your kind comments. I'm glad you enjoy the articles and hope I can keep them interesting to you.
Bill Kraft

Anonymous said...

it would be more helpful if you would actually describe some specific methods of selling when profitable.

Bill Kraft, MarketFN.com said...

Thank you Mr. Roy.
Bill Kraft

Bill Kraft, MarketFN.com said...

Wow, Anonymous, thanks for the editorial comment on my misspelling. I apologize for the spelling error. Any critique on the content?
Bill Kraft

Bill Kraft, MarketFN.com said...

Yup, Anonymous, earning at the turn is definitely better than trying to catch a falling knife. LOL Thanks for the kind comments as well. I have also found that repetition in my market studies has helped many lessons sink in.
Bill Kraft

Bill Kraft, MarketFN.com said...

Well, Afdar, you certainly are not alone. It has happened to most of us who invest or trade regularly. Making a profit is great, but don't you hate it when you pull the plug and then the stock takes off again. Always keep in mind that you can re-enter the position if you find you exited prematurely.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Anonymous, how about using a trailing stop or a trend exit as methods to exit when profitable? You might want to check out past articles in the archives or maybe get a copy of "Trade Your Way to Wealth" for issues like money management, using stops, and applying discipline through the use of technicals. As time goes on, I'm sure I'll be addressing these issues again from different perspectives.
Bill Kraft