Saturday, March 01, 2008

Home Runs and Singles

Spring training has arrived for baseball players and that led me to consider some of the analogies of trading to baseball. Over the years, I have observed quite a number of traders who perceive themselves as sluggers who are always looking for the home run in their trading. Rarely, I have found, do they succeed over the long haul. In their zest for knocking one over the fence, they fail to heed the most basic of trading principles -- cut your losses and let your profits run. These folks, it seems to me, are often (though definitely not always) the gamblers of trading. They may let losses run too long in the hope that things will turn around and their position will take off in the direction they initially hoped. Only after large losses have mounted do they realize that they actually have struck out.

I sometimes receive emails from subscribers who "half in fun, but all in earnest" suggest I hurry up and make a trade. In my estimation, that is akin to swinging at a high fastball; the odds of scoring aren't too great. In baseball, the really good hitters look for a specific pitch to hit. They don't try to hit any ball that is pitched. The principle, I believe, is applicable to trading as well. If the markets are rising, that is probably a better time to enter a bullish position than when they are falling. Markets rise when most stocks are rising and are falling when most stocks are falling so why not try to play the percentages in your favor. If we choose bullish positions in a bullish market, aren't we giving ourself a better chance to have a winning trade if we await the bullish market to make that bullish trade? If we persist in trading bullish positions in a bearish market, isn't that a little like swinging at a high outside pitch simply because we may hope we'll make contact?

Ted Williams, perhaps the greatest hitter of all time, had a lot of natural power, but he doesn't hold the home run record. He picked his pitches and knew that some pitch locations simply weren't conducive to the long ball, but could be hit successfully to the opposite field for singles or doubles. In trading, I have found that there is nothing wrong with singles and doubles and if I am persistent and work to pick the right "pitches to hit" the home runs come at times as well.

In my book, "Trade Your Way to Wealth," I discuss different strategies for up, down, and sideways markets. Since those directions are the only ones available to traders, if we take the trouble to learn what strategy is more likely to be successful to a given market, then we are setting ourselves up for greater successes. Once we determine what the markets are doing we are much better able to decide which strategy or strategies to put to work. While none of us is going to be right all the time, we can help give ourselves an edge with that kind of approach.

By looking at reward to risk ratios and utilizing careful money management principles as set out in my book and in earlier articles, we can work to create an edge. We don't need to bat 1000. In trading, a .500 hitter is pretty good and with proper reward to risk and money management can do very, very well.

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

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Anonymous said...

Just ordered Bill's new book. Can't wait to check it out.....Nick

Anonymous said...

Ted was a great hitter and rarely hit the ball to the left of second base.
Apparently he would rather take a walk than hit a ball he couldn't pull.
Defenses would employ "the Williams shift" featuring all but one defensive player on the right field side. I watched him for years and rarely saw him go the other way.
He was the greatest Latin hitter ever.

I enjoyed your book and will read it again some day. I will say you make it seem easier than it actually is.

Bill Kraft, said...

Thanks, Nick. I hope you enjoy the book and find it useful.
Bill Kraft

Bill Kraft, said...

Thanks "Anonymous" I was hoping I'd bring some Williams fans out. Thanks, too, for the comments on the book. I believe one of our problems as adults is that we almost go out of our way to make trading more complex than it has to be.
Bill Kraft

Unknown said...

60 bucks for a book that did not tell me anymore than most $ 15.00 books

Bill Kraft, said...

Sorry to hear that, Dale. I am wondering why you paid $60 when the book is available at $37.80 on Amazon. What $15 books show you where the risk is in every strategy and show you how to manage the risk? What $15 books show you how to put on a zero risk trade or how to play an iron condor with monthly returns that reach over 40%?
Bill Kraft