Saturday, June 20, 2009

Picking A Strategy

I recently wrote a little about picking a stock and mentioned a few of the myriad ways in which an investor or trader might go about selecting a candidate. In my own trading life, as I review stocks, I find that the process becomes much more one of elimination than selection. As I look at a chart, for example, I can see that good old XYZ may have just reached up to a resistance and is turning down. A quick fundamental review may show that earnings have dipped due to some new competition, debt is considerably higher than other stocks in the sector, and a potentially large lawsuit has just been commenced against the company. If all this is occurring in a bull market, XYZ is not a buy for me; it is eliminated as a potential bullish addition to my portfolio since I know there are other better candidates out there. Does that mean that as a trader I am not interested in the stock? Definitely not. Though I have quickly rejected it as a buy I may give further consideration to XYZ as a bearish candidate. I may look at a different strategy that looks like it might have a greater chance of success with XYZ. Does it fit my parameters to short the stock, or to buy puts, or maybe put on a bear put debit spread or a bear call credit spread? I can see how those strategies might be a better choice given the information I have about XYZ and its price performance.

A majority of investors and retail traders may pass right over XYZ since their bias is bullish and they are only looking for stocks to buy. Those investors may only really consider one strategy; buy the stock first and sell it later. In so doing they easily may miss the apparent opportunity the XYZ scenario offers to an investor armed with more than one strategy. There are many ways to making money in the markets, and the utilization of various strategies can add income streams and profits to the trader or investor who gains understanding.

How we invest or trade is a personal decision. The decision is influenced by how much time we have, how much cash we have to invest, our age, our family situation, our risk tolerance, our interest and a variety of other factors. No matter who you may be, if you have the interest to read this article, there is almost certainly a strategy that will fit your situation and comfort level. I devoted my new book to this subject. "Smart Investors Money Machine" is designed for investors as well as traders. In "Smart Investors Money Machine," I have tried to consider a wide variety of investors and traders using examples of a young single person, a growing family, and a couple reaching retirement to show numerous ways each might select a strategy that fits them and their lifestyle and at the same time will provide them with more income. The book isn't limited to option strategies though it does discuss some. The scope of "Smart Investors Money Machine" encompasses a variety of strategies from buy and hold to dividend capture to writing covered calls, to specific sectors that offer exceptionally high yields and includes a basic primer on bond investing and annuities, and even explains a little about reverse mortgages. With each strategy, I not only describe the strategy but also show how people in differing times and stations of life might use it to bring in more income to lighten their daily load.

The point is there are lots of ways to create streams of income. Some of them require a lot of time and some very little time. Some are very risky and offer higher potential rewards while others are accompanied by a lesser risk but offer a lesser potential reward. There are plenty of ways to do it and some of those ways are likely to fit your specific circumstances. In my view, it is definitely worth the trouble to explore the possibilities and see what you like and what can work for you.

Almost assuredly there are strategies for you. What I often see is people trying to be traders rather than investors when they have neither the time, the knowledge, the capital, nor the risk tolerance to really be traders. My advice to them universally is it is great to be a trader, but first you need to acquire the knowledge. In the meantime, there is no reason why they shouldn't be generating additional income using other strategies that may be less complex, less time consuming, require less attention (in some cases even no attention), and still add a stream or streams of income.

The strategies we utilize are critically important to our success and choosing what strategy we will employ may be as important, and sometimes even more important than the specific XYZ we select.

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved

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Ivo Leclère said...

Hi Bill,

The mistake I made was hoping to be a daytrader as soon as possible.
I took lessons for one day and learned to trade futures in the 3' timeframe. That's as wrong as can be. I had at the beginning no idea of the position of the 3' frame into the bigger ones. Therefore I learned to take small position on monthly and daily basis ( no futures but trackers on qqqq ) and so I learned to see the smaller frame into the bigger one.
Indeed it is not so important to enter xyz somewhere but it is very important to know in with timeframe you take position on xyz and to handle in the chosen frame.

Anonymous said...

Hi Bill,
(re: hands on example)
A.Usually I learnt from readers n ur comment. With 1 comment,it was a quiet week.
B.My other observation, as a writer u tend to give a helicopter view n u leave us to choose whether it fits.I hv other thinking on how u definitely can train / help me. i.e: Write newsletter, WEEK 1, COVERED CALL WEEK, show us how & why u select the underlying /strike price etc. By doing this, we can follow ur thinking process with actual recent chart / number !. (The rule could be : Ignore/Forget readers' comment).This surely will give us a Million$ knowledge, because we learn on ur step by step selection process.WEEK 2, OTHER STRATEGY (SPREAD ???). Of course, this should be compliment with ur book "Trade ..Wealth".What do u think ?. Thank you & Best Rgds Frans

Bill Kraft, said...

Thank you for writing, Frans. Your suggestions are certainly sensible. The reason for my "helicopter view" is exactly to have the reader choose what fits him. As those who have read "Trade Your Way to Wealth" are aware, I believe each trader must work out his own individual plan and it is likely to differ from the plan of almost every other trader. We each have different goals, risk tolerances, time available, levels of knowledge, cash to trade, etc., etc. My personal parameters for a given strategy would likely not work for others with different levels of knowledge, cash, and so forth. As an example, when I place a credit spread, I know that it may very well require adjustments and the triggers for those adjustments could be very different for many traders. In the credit spread situation, suppose I placed a bear call spread where I am short the lower strike price and long the higher strike price and the stock price falls. I personally might sell to close the long leg in an effort to capture more profit, but in so doing I would be naked the call and many readers would not be permitted to do that because their broker has not given them the necessary trading level and they are not equipped to undertake that risk. In the covered call setting, I utilize at least 4 or 5 different methods to execute the strategy, some of which may require close attention to the market moves while others may require little or no attention. I discuss those kinds of issues for different types of traders and investors in "Smart Investors Money Machine." While I understand and appreciate your suggestions, from my perspective it is better to give readers an overview and it is then up to them to study and practice (through paper trading) strategies to see exactly what fits their trading needs and personalities. It is my observation that blindly attempting to follow what another trader does rarely makes a successful trader. Again, Frans, thank you for your thoughtful comments.
Bill Kraft

Anonymous said...

Thank you so much Bill.
Intentionally or not, I found that your answer always give something to be learnt. Your example on how you deal with spread is the latest hands on that I am referring to. You are like oasis for me. Bravo !.

Bill Kraft, said...

Glad it was helpful, Frans.
Bill Kraft