Saturday, October 18, 2008

Euphoria and Despair

The markets have certainly been on a wild ride this year. The Dow Industrials, for example, dropped 5250 points from the intra-day high in May to the intra-day low on October 10th. The Nasdaq Composite and the S&P 500 suffered similarly. Many traders and the investing public have taken a very disheartening ride. The other night on the local TV news, one station devoted a segment to the stress people have undergone as a result of this fall. Some, it was reported, had even considered suicide. We've gone from contentment to despair and then, on Monday, when the Dow jumped over 900 points, to euphoria at least for the moment.

As those of you who have been following these articles and who have read my book, "Trade Your Way to Wealth", know, I have not been an advocate of buy and hold. It is times like these that have led me to conclude that I don't want to be holding throughout a downdraft like what we have seen in recent months. I have long argued for establishing an exit strategy before ever entering a position. Unless we do have such a strategy in place, how are we going to cut our losses? Successful traders make money by cutting losses and letting profits run. Letting losses run is painful and does little to advance the ball.

I have received comments on the blog from writers who have said that the only way to make money in the markets is buy and hold. Nonsense. If a stock drops 50%, it must move up 100% just to get back to even. Why hold through a 50% drop? Various traders suggest various ways to formulate an exit strategy. Some suggest exiting on a drop of 5% or 8%, others may use a break through a trend or a price support. There are many good ways to set an exit strategy, but for me the important thing is to have one. What is the exit strategy for buy and hold?

I personally prefer exits based upon the violation of some technical line. Fundamentals can be very helpful in choosing investment candidates, but they provide little help as far as I am concerned in telling us when to enter and when to exit. A while back, a subscriber wrote that he sees no problem using fundamentals to exit; he exits when there is "a change in the fundamentals." I guess I don't know how he does that. What change in fundamentals? Is there an exit when the price goes up? That would create a change in the P/E ratio since it would get higher as the price rose and a higher P/E generally signifies a different value than a lower P/E. How about if the Treasurer of the company resigns? That is a change in fundamentals. Does that signify an exit? What if the company takes out a new loan? That is a change in fundamentals. Is that a reason to exit?

Each of those examples demonstrates a change in fundamentals. Whether it is reason to exit or not becomes a subjective judgment and once subjectivity is a part of the decision, emotions come into play. Emotions play havoc with trading. Just look at what we have seen recently. On Friday, October 10th, their was a huge drop in the markets fueled by despair. The sky was falling. There was no hope for world economy. On Monday, after some major efforts to unlock the credit markets, euphoria prevailed and the markets soared. When we are making subjective judgments, we can fall victim to these emotions. If, on the other hand, we can use some objective discipline like a break through a price support or resistance, we are not letting that emotional pull rule our trades.

Over the past few years I have received a number of calls and emails asking that I give more seminars or recommend some that I consider to be worthwhile. I have steadfastly avoided giving any more seminars because they take a lot of time in preparation and are quite a lot of work. I have been happy with my trading, limited coaching, and writing. Last week, I finished my second book with John Wiley & Sons, the publisher. It will be out shortly after the first of the year. I now have some more free time and I am considering doing another seminar if there is sufficient interest. I would ask those of you who might have a serious interest in attending a seminar with me to indicate your interest in a comment on the blog.

If I do another seminar, it will be in Scottsdale, Arizona over a weekend in late February or early March. I am thinking of making presentations from mid-morning on Saturday to dinner time and then an hour or so after dinner. On Sunday, I would expect to go from about 9:30 in the morning until about 4:00 in the afternoon. Attendees should have some basic knowledge of investing in general. I am thinking about discussing strategies, exits, and hedges on the first day and devoting most of the second day to developing and enforcing trading discipline through technical analysis (no experience necessary on the part of participants). The cost for the two day seminar would be $3,000 and those traveling more than 50 miles would receive a discount of $500 to help reimburse travel expenses. The price would include a spouse or significant other. I will only do the seminar if at least 15 participants commit and pre-pay 1/2 no later than 45 days before the actual date. I will limit the total number (including spouses or significant others) to 60. The seminar would take place at a resort where I have been assured of discounted room charges provided we meet the minimum number of attendees. I am only offering this opportunity to free Newsletter subscribers and to paid subscribers to the services. The paid subscribers will receive an additional $400 discount in addition to the travel discount.

That's it. Please respond on the blog *only* if you are seriously and genuinely interested. If there seems to be enough interest, we'll set up something so that you can make your reservations soon for a great time in Scottsdale later this winter.

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.

19 comments:

Anonymous said...

Hi Bill,
Nice essay on exit strategy. It would be better to be more specific. Might I suggest exit on the 50 day MA. You are in bear country below the 200 MA.

Bill Kraft, MarketFN.com said...

Thanks, Anonymous, I appreciate your input. Exit on the 50 day MA is certainly a usable strategy. When I use a moving average exit, I generally use the exponential moving average. There are innumerable ways to exit. For example, some use crossovers of two moving averages such as the 9 day crossing the 20 day; some use MACD, others DMI. Most importantly, I believe that a trader is best served by 1) choosing an exit strategy and 2) making the decision before entering a position.
Bill Kraft

Anonymous said...

Hi Bill---can't wait for the second book. Really enjoyed the first! Can you give us a heads up on what you are covering in Book II? Thanks----Nick

Anonymous said...

Bill,

Definitely interested in your seminar, but are disappointed that us single folks (or married folks that want to attend alone!) will basically have to pay the "full" proce, while a couple going gets a "buy one get one free offer". Can we not just have one price per seat ???

Anonymous said...

Bill, definitely interested in the 2-day seminar. Like the previous blogger, a price for single attendees would be helpful. Thanks for the insights you share with us.

Bill Kraft, MarketFN.com said...

Hi Nick. Glad you enjoyed Trade Your Way to Wealth. The next book, Smart Investors Money Machine, deals with the creation of streams of income using a wide variety of devices from dividends to covered calls to selling naked puts to Master Limited Partnerships to REITs to bonds and even includes what I consider to be an important section on reverse mortgages for the older crowd (like me). In it I try to show how almost everyone can add streams income to their life. It is now in production with my publisher, John Wiley & Sons and should be available through them or Amazon shortly after the first of the year. Thanks for asking and thanks for writing.
Bill Kraft

Bill Kraft, MarketFN.com said...

The single price IS what I quoted. I just tried to give folks with spouses and significant others a break. Here's what I will do: anyone can bring a friend or acquaintance at the same price as if that person were a spouse or significant other. In other words you could share the price with a friend and bring them along. In exchange I would expect full payment at least 10 days in advance. In the past, I have run into this situation where the friend decides not to come and then the remaining person thinks they should get some break. I do not want to get in the middle of those situations. If for some reason the friend decides not to come at the last minute, it is not half price and it is not further discounted beyond the travel discount and the paid subscriber discount where applicable. These things are costly for me to put on and they take me away from my own trading. I am trying to do what I can to help out, but if folks are unwilling to pay for the education, it's OK with me. I hope that helps. Perhaps you two bloggers could get together and share the cost. Thanks for bringing your concerns to my attention.
Bill Kraft

Anonymous said...

While I agree with you that having an exit strategy for losers (as well as winners) is really important, almost every single stock broke through supports on 10/10. If you sold them based upon that, would you not be OUT of the market, with certain losses?

E.S.

Bill Kraft, MarketFN.com said...

No, E.S. you wouldn't be out of the market, you would reverse into bearish strategies and making a pot full of money. Even if you were just a bullish player isn't it better to be out of the market than letting losses run?
Bill Kraft

Jim said...

Hi Bill,
Reading your first book is certainly educational and worth every penny. Can't wait for the second book and would love to attend the seminar in Scottsdale. As a previous "buy and hold" person, I know the pain personally to the tune of 6 digits and have no desire to go through it again. Exit strategies and protective puts are a must in my book. Thanks again!

Anonymous said...

Hi Bill!

I'm delighted to have found a way to communicate with you at last. I looked for an email address some time ago when I bought your book but couldn't find one.

Firstly, thank you for an excellent book. Clear, sincere and genuinely useful.

Secondly, please give me your thoughts on Forex trading. My dream is to make a killing in the forex market. I believe it to be the perfect trading market.

Many thanks again.

Scott Silburn
Durban, South Africa

Bill Kraft, MarketFN.com said...

Thanks, Jim. Glad you liked the book and happy to hear you would like to attend if we do the seminar in Scottsdale. So far, there doesn't seem to be a whole lot of interest, but we'll see. If you contact Earleen, I'll ask that she give you my phone number since I'd prefer not to put it out on the blog. I'd be glad to talk to you.
Bill Kraft

Bill Kraft, MarketFN.com said...

Hi Scott. I'm really glad you enjoyed the book and found it helpful. I occasionally trade the Forex market and have made a little more than I've lost. As with any trading, I urge you to paper trade before putting real money at risk and if you do trade real money, make sure you adhere to your pre-determined exit strategy and exercise money management principles. Like many things, it isn't as easy as it looks, but with a good plan and disciplined execution you give yourself a chance to succeed. Thanks for writing. Bill Kraft

Anonymous said...

Bill,
Add 2 more to the list for the Scottsdale seminar.

Paul

Bill Kraft, MarketFN.com said...

Thanks, Paul. We're getting there, but we haven't yet arrived.
Bill Kraft

Anonymous said...

Hi Bill

Many thanks for the good advice. I think I'd do well to study your trading examples & strategies more carefully and try the options market for myself.

All the best, Bill.

Scott
Durban, South Africa

Bill Kraft, MarketFN.com said...

Scott, you're welcome. Keep studying and keep practicing. I urge you to employ good money management strategies and to have an exit strategy in place before you enter any trade whether it be in Forex, futures, or equity options. Good trading!
Bill Kraft

narendrakumar said...

I would prefer to pay 50% in someone's partnership to attend seminar in arizona.

Bill Kraft, MarketFN.com said...

I'm sure that would be a good solution, narendrakumar, or find someone to come with you to share the cost.
Bill Kraft