Saturday, December 12, 2009

A Few Random Thoughts About Trading

At times, it is a struggle to come up with a new and specific subject for an article every week. As I was thinking about what I should write this weekend, it occurred to me that trading is a part of life and in life we see ourselves do many things without a conscious intention.

Supermarkets are great examples that use our natural tendencies to add to their sales. As we go to a check-out, look around at all the last minute things we can buy just by reaching out a hand. Tabloids with enticing headlines abound. Have you ever been tempted to read that article about the boy who was abducted by aliens only to return with an astonishingly high IQ or the article about the celebrity who is having affairs around the world. Even if that doesn't get us to buy, there are many who pick up the paper just to glance at the tantalizing article. So, too, are there tempting bars of candy and the all so necessary breath mint.

As we know, these displays set us up for the "impulse" buy. We may not need it, but the suggestion may lead us to buy it. Have you ever noticed that in your trading or investing? A friend or a broker might suggest a stock, for example, and we just buy it. We do no fundamental analysis and certainly may fail to look at a chart to see whether there is an opportune entry or, probably even more importantly, whether there is a handy exit. While an impulse buy of a candy bar may not be terribly devastating, an impulse buy of stock might be.

Just like at the supermarket, if we think about things and do even a little analysis, we may pass on the stock as we would on the tabloid. We might see that the stock price is pretty far from a logical exit or that the reward to risk potential may not be what we ordinarily plan.

Generally, the wiser supermarket shopper makes a list and doesn't go shopping on an empty stomach. They have a plan and the plan has eliminated much of the impulse buying since a growling stomach isn't suggesting additions to the cart and the list has set pre-determined choices based upon the shoppers needs.

Perhaps the trader would be wise to follow some of those cues. Having a plan in the first place would help eliminate candidates that fail to meet the trader's requirements. As an example, a trader who is interested in entering a bullish trade might demand that any potential entry be above the 50 day moving average and he might discipline himself to understand that he need not be invested in bullish positions when a market is decidedly bearish. I've found that most of my selection process with stock and options is one of elimination rather than selection and only when I no longer find a reason to eliminate am I ready to add to the portfolio.

I hope you have a wonderful weekend.

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

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Gary said...

This is a great article, and one that I find myself falling into continually. When I hear one of the financial talking heads telling about how bad the economy is and how bad things are going to get, my first instinct is to turn even more bearish than I currently am. Having made some well thought out and researched picks, I rush out and sell in a panic only to watch those stocks or options climb, while I sit on the side lines once more.

Bills754 said...

As Gary said, this is a great article, but oddly enough I focused on your opening comment and have a suggestion (as well as a request) for a future article.

Most of the funds I have available for trading are in a self directed IRA and are subject to restrictions which limit flexibility. Any suggestions as to how to cope with and overcome these limits?

Michael Loren said...

I am also in an IRA, but I trade with ETF's. Since I am not a daily trader, I don't have the urge to trade all the time. Sometimes, I need to wait, especially when the market is going sideways or up. If the market goes down, my stops may end a trade and I am left with more cash and then I need to think about getting into a new trade or add on to an exiting one. It is becoming clearer to me that there may be bearish events that will influence things, but I don't think I've heard any knowledgeable experienced guys who really know where the market is going. Most people are expecting some sort of correction, but with low interest rates and federal tarp money coming into the system despite high unemployment, we need to be somewhat long on this market.

Anonymous said...

CDR cancelled its dividend last April= no yield.

Bill Kraft, said...

Thanks for writing, Gary. You're definitely not alone. That's one of the reasons I try to set up plays so the actual price movement takes me out rather than what my prediction of that movement may be. Here's to great success!
Bill Kraft

Bill Kraft, said...

Thanks for the kind words about the article, Bills754. There are ordinarily two categories of restrictions when dealing with self-directed IRAs. The first are the governmental regulations and the other are restrictions imposed by individual brokerage houses. For example, governmental regulations might permit the sale of naked puts while your broker may not allow that in an IRA or with individual investors. There is little one can do when the restriction is governmentally imposed, but when it is broker imposed, one can discuss it with the broker in an effort to negotiate what you want or, failing that, find a broker that will permit what you want. After all, it is your money.
Bill Kraft

Bill Kraft, said...

Thanks for writing, Michael. You hit the nail on the head when you wrote: "...I don't think I've heard any knowledgeable experienced guys who really know where the market is going." That statement is always true. "Experts" may have strong opinions of what a market is about to do, but they are nothing but opinions. Those opinions can well be wrong and need only a piece of unexpected news to prove them wrong. We do know that the market will correct, but the question is when and no one can answer that with certainty. It could be tomorrow or next week or next month or next year. The old adage "play it 'til it breaks" comes to mind. Right now, the market has been continuing bullish. It is coming upon an area of resistance, but until it stops being bullish why play against the direction?
Bill Kraft

Bill Kraft, said...

Thanks, Anonymous, I must have gotten bad info on the CDR dividend. Without a dividend, CDR is a much less attractive play as far as I am concerned. I appreciate your catching me on that one.
Bill Kraft