Using Subscription Trading Services

In my experiences trading for a living, as editor of stock and option subscription services, and in classes where I teach budding traders, I have seen many approaches to trading and to the uses of subscription services. I think it may be worthwhile to discuss some of the benefits and pitfalls of using those services.

Invariably in the trading classes I teach, I am asked how I find the stocks I trade. My standard answer is that there are many ways to find what to trade. Pure fundamental analysis is one way to select a stock; using the list of 100 from Investors Business Daily is another; utilizing scans available on charting services like Worden Brothers TCNet or various brokerage sites is another and of course subscribing to services like the Trend Trader or the Option Trader is yet another. Each of these methods can be quite valuable and may be a wonderful starting point for the trader or investor with any level of experience.

In the case of the Investors Business Daily list, the trader has a starting point from which to narrow the search. So, too, the scans can incorporate criteria that the trader desires such as P/E, moving average crossovers, MACD, stochastics, DMI, and inumerable other indicators that suits the particular investor's fancy. What these things may or may not do is tell the investor or trader when to enter and when to exit a trade.

The subscription service has the advantage of letting the subscriber know both what the editor likes and when the editor is entering or would like to enter. What a great starting point that can be! The editor has already done a lot of the work. He has found a stock he likes and he has found an entry that is good in his mind. That doesn't mean that the subscriber should take it as a personal recommendation. It is a jumping off point for the subscriber. It is critical to remember that the subscriber is the one taking the risk if he enters a position so the trade must be one that fits the subscriber's own criteria.

One should be selective in choosing a subscription alert service. Is the service designed for the way you like to trade? If you like day trading, is the service designed for the day trader? Does the subscriber want trades every day? What is the editor's philosophy? Does the service limit itself to trading only large cap stocks or are all stocks fair game? What do you want to trade? Does the service only provide information on option trades? If so, do you have an understanding of the strategies that are going to be employed or are you willing to learn? Is that what you want? The Option Trader, for example, is a service that sets out option trades I enter. Some may be relatively simple like buying a call or a put and some might be more complex like diagonalized calendar spreads or iron condors. The Trend Trader, on the other hand, simply buys stock with the hope that it will go up. The Trend Trader strategy is quite simple. I try to buy low and sell high. Of course, the risk of buying a stock at $50 or $60 may be much different than placing an option spread trade. Which one is more to your liking?

Subscription services don't recommend that you enter a position. That is extremely important to remember. The editor tells you what he is doing or what he thinks is a good entry or exit. Should you follow that blindly and take it as a recommendation to you? Of course not. You may not have the same amount of capital, your risk tolerance is probably much different, your knowledge of strategies may not be the same, your money management rules could be different from the editor of the service. What you do know is that someone with experience trading likes a particular trade. Now, taking that, doesn't it make sense to evaluate the risk in that trade? Does it fit your own risk tolerance. Can you enter the position without violating your personal money management rules? Do you see the rationale the editor used when he entered the trade? Where is his exit if the trade goes against him? Would your exit be the same? How fast can you move to exit a trade if things happen quickly? Does your broker allow the same kind of orders as the editor is indicating he is using. For example, if the editor is in an option trade and says his initial exit is contingent on the price of the stock going below "x" you need to know whether your broker provides for contingent orders.

Trading, for many, is an unfortunate exercise in greed and fear. I once had a new subscriber write complaining that I hadn't done a trade in two days! What did that tell me about the subscriber? First it told me that the person was impatient and impatience is an enemy of good trading. I have learned to try to take what the market will give me. I think it is a serious mistake to force trades. Suppose I get an email with the complaint that I haven't made a trade in two days. Should I force a trade so that it looks like I am doing something or should I wait until I find a trade where I think I stand a good chance to profit? The answer seems obvious. I am trying to make profitable trades and sometimes it takes a little time to find one. Our impatient friend should realize that I am not working in his time frame and perhaps should seek another who is. I am not a day trader and do not have a day trader mentality. In my case, the prudent subscriber should read what I have written when I sent out past alerts, read my articles in the Newsletters and see where I am coming from. I am concerned about risk and about cutting losses if a position moves against me. I am concerned about money management and trying to profit over the long haul. Though I am happy when I get them, I am not expecting huge profits from every position. I don't expect to be "in the game" every minute. Like I said, I try to take what the market will give me. I know I can't make the markets do anything.

Unfortunately, many who attend my basic seminars and many who subscribe to services are trying to "get rich quick" and that isn't the way it usually works. Getting rich steady would be fine, wouldn't it? In our classes, we try to help people learn how to trade in a fashion that removes greed from their trading decisions. We try to get them to construct a method of trading that helps them cut losses and let profits run in a disciplined unemotional manner. If we really think about it, does it make sense to blindly follow what someone else is doing without regard to risk, without regard to money management, without regard to potential reward, without a strategy of what to do if the move goes against you.

No matter where you get the idea, always remember the trade is yours. The risk is yours. The ability to enjoy the profits is yours. It's your money that is at risk so doesn't it make sense to be aware of what you are doing. Subscription services are great. They provide a marvelous way to see potential trades and learn what a trader is doing. You can learn vast amounts from subscription services and you may often come upon terrific trades that fit your style, degree of risk aversion and time frame. Services can provide significant insight and can do away with a lot of time spent searching for trades. Just remember, what they are unlikely to do -- that is make you rich with no effort at all on your part.

If you haven't read it, I earnestly suggest you read Rich Dad, Poor Dad by Robert T. Kiyosaki. It'll show you the importance of using your assets to increase your net worth rather than simply relying on a job. More importantly, if you aren't already convinced, it may help you to understand how valuable it is to learn about investing. In my view, services like the Trend Trader, Option Trader as well as the other services offered on our website are extraordinarily valuable tools for any trader or investor provided they are used as intended. The intent is to provide the subscriber with ideas from editors who are experienced and/or professional traders. Once the idea is received, the subscriber must then make his or her own analysis because, in the end, it will be their decision, their risk or their reward.

Bill Kraft, Editor
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