Saturday, March 24, 2007

Stock Trading Strategies Review

I have written an Article for this Newsletter each weekend over the past many months. Now, I'd like to indulge in a little review. I wonder how many of my readers agree that trading is a business and that most successful businesses have a business plan. I'd guess that most everyone would agree that a business plan is a very helpful, if not necessary, device to run a business successfully. Next I wonder how many of you actually have formulated your own business plan. Darned few, I'll bet. I always question students who are availing themselves of the free retakes of our basic seminars whether they have done their business plan. It astonishes me how few have done their plan. Not surprisingly, most who fail to do their plan usually just plain fail.

In the April 29th, 2006 edition of this Newsletter "Business Plans for Traders and Investors", I set out 13 elements to help get started on creation of your own plan. Take a look at that again if you'd like. All you have to do is fill in the blanks as they apply to you and you have the foundation of your own plan. I believe most plans are better than having no plan at all, and if yours isn't working, go back and see where the plan is failing and then fix it. Making money in trading, like in almost anything else, requires work, study, and knowledge. As you progress with paper trading (trading without using real money), you'll begin to see risks and pitfalls you might otherwise miss and then you can adjust your business plan accordingly. Remember that the business plan is always a work in progress and can change as you grow in knowledge and experience or can and should change as your own circumstances change. For example, you may initially decide you only have time to look at the market on weekends, but after some successes, you may decide to allocate more time to trading and you might then change your plan to look at the market each day.

Another critically important but little discussed factor is money management. Proper money management keeps the trader in the game. Failure to properly manage trading money can lead to very large losses and can quickly make one an ex-trader. I wrote fairly extensively about money management in the March 25th, 2006 edition of the Newsletter "Money Management and Reward to Risk". In that article, where I discuss ways to manage money, I demonstrate how a trader who employs sound principles can lose 6 out of 10 trades; that is, lose 60% of the time and still be profitable. Do you recall how to do that? Isn't it worth knowing?

What about emotion? I believe and have consistently written that if one is making emotional decisions about their entries and particularly about their exits, they are quite probably losers. How can we discipline our trading in an effort to take the emotion away? Check out the May 27th article "More About Disciplined Trading". Have an exit plan in place before you ever enter a trade and stick to it.

Aside from selling naked calls, what do you think is the riskiest thing we can do in the market? How about buying stock? What is the risk when we buy a stock? It's the price of the stock, isn't it? Or, how often is my stock going to go to zero, you might ask. Do you know anyone who owned Enron or Worldcom or United Airlines before the bankruptcy? Was once enough for them? Would once be enough for you? If we understand that the whole price of the stock is our risk when we buy stock, shouldn't we have an exit and/or hedges in mind before we ever enter the position? Read, for example, last week's Newsletter "What's A Put and How Can It Help?" where I discuss the protective put as a way to limit losses. Of course, there are other ways to limit losses and that brings me to the most important point of all. The money that you use to trade is yours. The risk is yours. Isn't it important to learn how to protect your hard earned money? I submit it is critical for anyone who wants to trade to get "real." Trading isn't a get rich quick endeavor (even though that has happened), it is a business that requires the trader's attention and devotion to education. If you aren't willing to obtain the education, by all means, don't trade. It's that simple.

How can you get the education? You can read. There are many excellent books and articles on trading. You can subscribe to services such as Option Trader, Trend Trader, or $10 & Under Trader to see some of the things someone who actually trades for a living does. You can watch DVD's. You can attend seminars. As some of you know, we are putting on our SWAT (Stockmarket Weapons and Tactics) Seminar outside Denver on the 26th and 27th of August. Subscribers to Option Trader, Trend Trader and $10 and Under Trader get the full two days for $799, others pay $1299. We give a full refund of the seminar tuition if any attendee doesn't like the seminar for any reason by lunch the first day. We've never had anyone ask for the refund. There are many other wonderful seminars available. Many cost much more, some a bit less. I think the important thing is who is teaching. Is the instructor someone who actually trades for a living or is it someone who makes their living by giving seminars? Before you sign up for a seminar, find out who the teacher will be and whether or not they trade for their own living. Ask what percentage of their income comes from trading and what comes from giving seminars. If they won't tell you, you have the answer. Many students seem to think that seminars are too expensive. I paid about $3500 for the first two-day seminar I attended. It took me less than 4 days to make that back with the knowledge I gained and it ultimately resulted in a fantastic change of career for me. I don't mean to suggest that just by attending a seminar you'll suddenly become rich, or even that you'll make money. You may attend a seminar, read books, watch DVD's and still wind up losing. Trading is risky business. The one thing I think I can assure any new trader is that unless they treat trading as a business, learn money management, work on disciplined trading and constantly strive to gain knowledge, their chances of any long-term success fall in the slim to none category.

Bill Kraft, Editor
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