Saturday, September 27, 2008

The Problem with Market Commentaries

A recent note from a subscriber alerted me to discuss what I am trying to do with the Newsletter articles and why I am doing it. The subscriber chastised me for failing to comment on the financial meltdown in last weekend's article and suggested that I did not write about those developments as every other Newsletter writer to whom he subscribed did. He took it as a sign that I wasn't paying attention to the market. While I understand his issue, it comes from a misunderstanding of what I am trying to do with the Newsletter articles and my beliefs about market commentaries in general.

I do watch the markets quite closely because I make my living trading. It is a rare day when I am not monitoring movements and looking for entries. However, I do not intend to make the Newsletter articles a regular weekly commentary on the markets. I reserve my market comments for paid subscribers in my weekly Summaries to them and generally try to make the weekly Newsletter articles relevant to trading principles, methods, or strategies. In the Newsletter articles, I try to talk about things I believe are important to traders in general and that might advance their trading knowledge and, perhaps, show some approaches that have worked for me over the years.

The subscriber pointed out that all the other market Newsletters he read did discuss the current financial plight in the U.S. As I suggested in my response, I am not writing a market commentary and have no intention of following the herd. What can one say other than things looked bad and bearish plays continued to be in order. No one, absolutely no one knows what the future will be so attempts by commentators to predict the future are nothing but pure speculation. We can come up with all sorts of rational, logical guesses about what the markets are going to do, but they are just that -- guesses. Just consider the jolt the news that Lehman Brothers was in trouble and the news of its subsequent bankruptcy caused. Until that news precipitated the further news that our whole financial system was on the verge of collapse, the markets may have seemed OK, if not great. I did have a subscriber a few weeks ago who commented that he expected another big failure after Bear Stearns, but he made no prediction of which financial institution it would be. In any event, no matter what the talking heads on TV may say and no matter what market commentators may predict, we must keep in mind that it is nothing more than speculation. If any of us knew tomorrow's news, we would be instantly wealthy beyond belief -- we could buy the winning PowerBall ticket.

One thing I will say with respect to the financial crisis is that I am absolutely sick of politicians. As usual, even in these dire financial times, they have directed their attention to posturing and finger pointing. Everyone but the guy speaking at the moment is accused of being at fault. How about being intellectually honest for once and taking some of the blame themselves. How about working together to serve the people rather than working to blame the other guy? I know it isn't just the politicians who created the mess, but, for sure, they helped. When are we the people going to rise up and demand that the politicians represent us rather than themselves. I know I have mentioned politics and that mere mention usually brings out a lot of political comment, but I would appreciate it if readers would restrain themselves from writing political diatribes or defenses of their particular party or candidate since we really do want to limit the commentary to specific trading issues.

Well, that is my "market commentary" this week. Going back to the issues of prediction, all of us have no choice but to trade in the present. The past, of course, is gone, and try as we might, we cannot know the future until it becomes the present. When we make a trade, it is now. Without insider information, we have about a 50/50 chance of success on any particular trade no matter what we think or believe or bet will happen. In my view, that is why it is critically important to successful trading to have entry and exit strategies in place before we ever enter a trade. In that way, whatever may happen, we have set up a position in which we cut our losses and let our profits run. That method and money management will take us farther as traders than the thought that we can predict the future. Remember, we can have 50% winning trades (or even less) and still be successful if we manage our money properly and have a disciplined strategy to cut losses and let profits run.

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.


Anonymous said...

Think BIll for your rational and reasoned response to your well as for responding at all. It is good to read what your goal and intentions are for the newsletter as it tells us all what we can expect. I like it. I agree with you: "I am sick of politicians" and I have my favorites in the moment. But the reason I signed up for your newsletter was to learn something about a subject I am woefully ignorant. THank you for what you share with us!

Anonymous said...

Oops! I meant 'thank you Bill'

JW said...

The breakdown of the credit system we have known to exist is what got us into this situation. It is a larger issue because the loans made were to indiviuals that would not normally qualify for a loan. Threats by congress using and interpreting the CRA Community Reinvestment Act forced banks to make loans to non qualified individuals. It became a larger problem when they were bundled and sold to investment firms in large packages that eventually end up in our 401k investment account. Senators Dodd and Frank are the drivers of the CRA requirement so that "everyone is entitled to own a home." So there is no way not to bring politics into the mix. Thank you for all the good you have done me over the years utilizing your suggestions and knowledge...JW

Anonymous said...

enjoyed your great summary of the market..a.k. south africa

Anonymous said...

Being sick of politicians for their finger-pointing is disingenuous. People want straight answers - and always defeat the politican who gives the wrong straight answer. Politicians will do what it takes to get elected - because anything else guarantees defeat. Instead, blame a shallow, uninformed, superficial voter. They are calling the shots for the rest of us because they are the majority.

Anonymous said...

Go with IBD!
IBD is the KIng
IBD is open now to everybody!

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Everyone should be sick of the Ruling Class elitists in Washington.
First, lobbyists should be banned from within a 100 mile radius of DC
Then clean out[vote out] most of the current politicians!
This situation left unchecked, is a self perpetuating mess.

Anonymous said...

anonymous said:

In not one document did the so called 'founding fathers' pen the
term democracy! Mr. Washington's
general staff offered to storm congress and make him emperor!
Alexander Hamilton wrote to a fellow aristocrat "sir, the common
people are stupid and will do what
we compel them to" (not unlike
Adolph Hitler's remark "how wonder-
ful a thing it is for governments
that the people don't think!"), the masses that elect and re-elect 'republicrat'after 'republicrat'
'rulers' and stupidly and weakly
refuse to foster and sustain a
strong third party in this country are as responsible as the "rulling Class Elitists" in Washington for the underlying causes of present and past economic crises in this country! (Louis Mcfadden, once chairman of the House Committee on Banking and Finance was shot at twice and poisoned once at lunch after calling for the impeachment of Herbert Hoover and the elmination of the Federal Reserve Board on the grounds of its unconstitutional acts which he contended had caused the stock market crash of 1929 and
the subsequent depression! He died
mysteriously several days before a
scheduled hearing before congress
in the early thirties...check out
Google search on Louis T. Mcfadden
and the Great depression for more
interesting tid-bits on American
History our educational system has
never bothered to teach, I wonder
why! By the way McFadden was a
Republican not a democrat, a Ron
Paul of the twenties and thirties
you might say!

Those who do not learn from their
history are doomed to repeat it..
George Santyana


Anonymous said...

The real questions now is of most importance: What will happen this Monday and next week if no plan of any kind is put forward and voted on by late Sunday? How will the markets respond? How will we individually be affected?

We are in fact very close to a worldwide financial market melt-down.

Contributed by: REF/CO. USA

Unknown said...

Thank you Bill for not blowing up the situation more than it already has. The problems we are facing are definately disastrous, however, this is a natural occurrance in a capitalist economy. The bailout will only guarantee long periods of stagflation and inflation. In capitalism there are winners and loosers and by prolonging the loosers life we are only guaranteeing a long painful death.

Anonymous said...

My comment is on the tools of trading.

In "Trade Your Way to Wealth", there are some concepts on Stop-Loss and Trailing Stop, which I would like to see me clarify.

In "Types of Orders What Will I Wear?", You say:

"One downside is that stops may be visible to the floor. It has happened that a stock will drop, hitting a price that triggers a number of stops, and then turn back up."

But in optionXpress FAQ reads as follows:

"A stop order is a contingency order to buy or sell a security when the market reaches a particular level. When the price reaches the level specified in a stop order, that order becomes a market order and is executed at the best possible price."

Question 1: This means that the order will not be sent to the market (and therefore not visible to anyone) until it reaches the predetermined price?

Question 2: With respect to Stop-Loss, should be more secure place an order "stop limit" to avoid the situation that you said, in which large investors unloaded "great positions" to "market orders" and thus avoid selling the stock to a very low value?

With respect to the trailing stop, you say:

"As an aside, I like trailing stops, but usually place them only when the position has already become profitable."

Question: It would be advisable to put a "trailing stop" (immediately after buying the stock) through a "contingent order" to fire the trailing stop once the stock reaches a predetermined price or percentage?

Thanks in advance.

Bill Kraft, said...

Thanks, Anonymous, I believe we all need to keep working on our trading education, no matter who we may be.
Bill Kraft

Bill Kraft, said...

Thanks, JW. I'm glad some of the trading info has been helpful over the years.
Bill Kraft

Bill Kraft, said...

Thanks, a.k.
Bill Kraft

Bill Kraft, said...

Doing what it takes to get elected as you say, Anonymous, is what I consider to be disingenuous. Intellectual dishonesty just doesn't deserve rewards, but I certainly understand and appreciate what you are saying.
Bill Kraft

Anonymous said...

couldn't agree with you more. As for the bailout. We all know it's a band aid. To little to late. Only getting in deeper. To many variables that will upset a too weak and vain attempt at a fix. An Obama preidency will bring us down even quicker. That man is very bad for the country. Amazes me that "the people" don't see it.Check out his record folks and his background. One empty suit that man. He also simply lied and the masses are missing it. The excuse is..."don't they all what" there is the problem. complacenecy...ours for certain ruination. I'm ready for a change. Give them all ( politicians) 2 yrs off with pay. then we will be alright.

Anonymous said...

Dear Bill,

Your point is timely and only too right. I am very much interested in the psychology of trading and have done a lot of research in this area to improve my own trading.
Of course, watching the news only serves to assess what the prevailing opinion of the general public at any given point may be. It is has little to do with facts and is only the view of a commentator through their particular lens of reality. The recent financial rout has got its root cause going back for years, even decades. This is an entirely different discussion though and this is not the place to elaborate on this subject.
Alas, it is difficult not to be influenced by it and that is why I for myself do not watch any news at all and just follow my analysis. (In my case Elliott wave and Gann and CCI)

In my book, there is only one question and this is: What is my trading system presently telling me about the present market cycle? That will dictate how I will trade it, or indeed if I want to trade it, because the cycle will tell me the risk involved and that to me is the most important decisive factor whenever I take a trade.

Anything else is noise, and we know what happens when there is too much noise, your hear nothing.
A look at any long term chart will make it obvious that markets do not react to events but foretell them. Listening to all the hype just fulfils the need of drama the human mind has always had. It gives people a (false) sense of security.

Mercedes Oestermann van Essen

Bill Kraft, said...

Dario, the folks at OptionsXpress once confirmed that stop loss orders are visible to the market makers; contingent orders are not. A stop loss order will always get you out once the number is hit. A stop limit will not necessarily. Suppose you place a stop limit to sell with the stop at $20 and the limit at $19.50. If the stock gapped down to $18, your stop would be hit, but your position would not be sold because you could not get your $19.50 limit. It could continue to fall and you would not get out. It is my personal preference to place trailing stops once I am in a profitable position because the position is then on "auto-pilot." Early in a trade, I usually will use a contingent stop. Hope that gives you some clarity.
Bill Kraft

Bill Kraft, said...

Thank you for writing, Mercedes. We are in agreement. Once a trader develops a system, the wise thing to do is follow it as long as it is working.
Bill Kraft