Saturday, April 19, 2008

Trading Is About You

What strategies you select when trading the markets is entirely up to you. In my view, you should choose strategies that fit your needs, your risk tolerance, and your personality. Are you someone willing to take high risk in exchange for the chance to reap a high reward, or are you someone who would prefer to emphasize safety of your capital in exchange for a limited (though still potentially good) return? Do you have a lot of capital or not so much to trade? What time frame is most appealing to you? What level of knowledge do you possess? What have you done and what are you doing to increase your trading knowledge?

In my book, "Trade Your Way to Wealth," I discuss 15 strategies in detail. With respect to each strategy, I outline the relative risk, the potential reward, the relative initial capital requirements, the expected time frame, what protection may exist, the level of monitoring required, and the market direction to which each can be applied. In Appendix D, each of these factors is set out in tabular form so readers have a quick reference to see how a particular strategy may fit their own trading personality.

As an example, in "Trade Your Way to Wealth," I note that buying stock has risk that is limited only by the purchase price (it can go to zero), has unlimited potential, requires a high amount of capital, has no protection built in, requires a high amount of monitoring and is designed for a bullish market. Contrast that to selling naked puts where the risk is limited to the purchase price of the stock if assigned less the credit the trader receives when the trade is entered (so the risk can be less than buying stock without getting the credit to open the position). The time frame for selling naked puts is usually fairly short and the trade is entered with money coming in rather than going out. Which is better is for you to decide.

Stocks and markets can only move up, down, or sideways so an investor or trader need use no more than 3 strategies. The key is to know which ones suit you best. Do you like a strategy where you can make money just as long as the stock price moves, no matter whether the direction is up or down? How about a trade where your upside may be limited but your capital is largely or even completely protected? Would you like to have a greater percentage of profit potential at a lesser cost than stock ownership? How about a limited risk way to make money when the markets are dropping? Are you familiar with these strategies, or do you just buy stock with the intent of selling it when the price goes up? Could it be worth your while to take a little time to learn and understand these strategies?

In my opinion, these strategies are worthy of study if you are serious about making money in the markets. First, however, it is important for each of us to evaluate what we are seeking in the markets. Are we looking for income? In Trend Trader and $10 Trader, for example, I hold some positions that are specifically designed to produce regular income, sometimes free of federal tax. Other positions in those services are entered in an effort to profit from a price movement. Are we more interested in growth or capital appreciation than income? Obviously, our strategies would differ depending upon the answers to those questions. At the outset, I would suggest that we need to ask ourselves those questions. The answers will guide us toward strategies that will best accomplish those ends.

Once we recognize where we want to go, we can then decide what strategy or strategies will meet our personal needs best in getting there. Are we looking for the safer, lower risk path or are we willing to take greater risks to expose ourselves to higher potential rewards. Can we look at the markets every day, or only on the weekends? Might we need to adjust a position as a strategy plays out as in the case of some spreads? If that is the case, we need to be sure that we have both the knowledge and the time to look at the position as often as it requires and to make adjustments when needed.

As always, in my book and in these articles, I hearken back to the importance of creating your own trading plan, using strategies that suit you personally, and assuming risks that let you sleep at night. It is your money. The emphasis needs to be on you and your knowledge and management. Trading is serious business and involves risk. I sincerely believe each of us needs to treat it that way.

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

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