The markets have certainly been on a wild ride this year. The Dow Industrials, for example, dropped 5250 points from the intra-day high in May to the intra-day low on October 10th. The Nasdaq Composite and the S&P 500 suffered similarly. Many traders and the investing public have taken a very disheartening ride. The other night on the local TV news, one station devoted a segment to the stress people have undergone as a result of this fall. Some, it was reported, had even considered suicide. We've gone from contentment to despair and then, on Monday, when the Dow jumped over 900 points, to euphoria at least for the moment.
As those of you who have been following these articles and who have read my book, "Trade Your Way to Wealth", know, I have not been an advocate of buy and hold. It is times like these that have led me to conclude that I don't want to be holding throughout a downdraft like what we have seen in recent months. I have long argued for establishing an exit strategy before ever entering a position. Unless we do have such a strategy in place, how are we going to cut our losses? Successful traders make money by cutting losses and letting profits run. Letting losses run is painful and does little to advance the ball.
I have received comments on the blog from writers who have said that the only way to make money in the markets is buy and hold. Nonsense. If a stock drops 50%, it must move up 100% just to get back to even. Why hold through a 50% drop? Various traders suggest various ways to formulate an exit strategy. Some suggest exiting on a drop of 5% or 8%, others may use a break through a trend or a price support. There are many good ways to set an exit strategy, but for me the important thing is to have one. What is the exit strategy for buy and hold?
I personally prefer exits based upon the violation of some technical line. Fundamentals can be very helpful in choosing investment candidates, but they provide little help as far as I am concerned in telling us when to enter and when to exit. A while back, a subscriber wrote that he sees no problem using fundamentals to exit; he exits when there is "a change in the fundamentals." I guess I don't know how he does that. What change in fundamentals? Is there an exit when the price goes up? That would create a change in the P/E ratio since it would get higher as the price rose and a higher P/E generally signifies a different value than a lower P/E. How about if the Treasurer of the company resigns? That is a change in fundamentals. Does that signify an exit? What if the company takes out a new loan? That is a change in fundamentals. Is that a reason to exit?
Each of those examples demonstrates a change in fundamentals. Whether it is reason to exit or not becomes a subjective judgment and once subjectivity is a part of the decision, emotions come into play. Emotions play havoc with trading. Just look at what we have seen recently. On Friday, October 10th, their was a huge drop in the markets fueled by despair. The sky was falling. There was no hope for world economy. On Monday, after some major efforts to unlock the credit markets, euphoria prevailed and the markets soared. When we are making subjective judgments, we can fall victim to these emotions. If, on the other hand, we can use some objective discipline like a break through a price support or resistance, we are not letting that emotional pull rule our trades.
Over the past few years I have received a number of calls and emails asking that I give more seminars or recommend some that I consider to be worthwhile. I have steadfastly avoided giving any more seminars because they take a lot of time in preparation and are quite a lot of work. I have been happy with my trading, limited coaching, and writing. Last week, I finished my second book with John Wiley & Sons, the publisher. It will be out shortly after the first of the year. I now have some more free time and I am considering doing another seminar if there is sufficient interest. I would ask those of you who might have a serious interest in attending a seminar with me to indicate your interest in a comment on the blog.
If I do another seminar, it will be in Scottsdale, Arizona over a weekend in late February or early March. I am thinking of making presentations from mid-morning on Saturday to dinner time and then an hour or so after dinner. On Sunday, I would expect to go from about 9:30 in the morning until about 4:00 in the afternoon. Attendees should have some basic knowledge of investing in general. I am thinking about discussing strategies, exits, and hedges on the first day and devoting most of the second day to developing and enforcing trading discipline through technical analysis (no experience necessary on the part of participants). The cost for the two day seminar would be $3,000 and those traveling more than 50 miles would receive a discount of $500 to help reimburse travel expenses. The price would include a spouse or significant other. I will only do the seminar if at least 15 participants commit and pre-pay 1/2 no later than 45 days before the actual date. I will limit the total number (including spouses or significant others) to 60. The seminar would take place at a resort where I have been assured of discounted room charges provided we meet the minimum number of attendees. I am only offering this opportunity to free Newsletter subscribers and to paid subscribers to the services. The paid subscribers will receive an additional $400 discount in addition to the travel discount.
That's it. Please respond on the blog *only* if you are seriously and genuinely interested. If there seems to be enough interest, we'll set up something so that you can make your reservations soon for a great time in Scottsdale later this winter.
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
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