Market Cliches -- By: Bill Kraft
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
When I first was drawn to trading I was a little intimidated by
parts of the new language (e.g. diagonalized calendar spread or
strangles or going naked) and I was a little amused by some of the
cliches. Sayings like "you can't go broke making a profit," or "the
trend is your friend" easily reinforced some conventional wisdom with
something I could easily remember. Some of these sayings have become so
well known that I have wondered how often and in what ways they may be
applied. Are they 'truths' of the market? Are they infallible? Is there
some other side? Do they really work? I'm going to take a look at a
couple of these cliches in this article and give you my own thoughts.
Mostly, these are just my opinions and I would encourage you to form
your own. Just doing a little thinking about the meaning of some of the
cliches might give us some new insight.
The first saying that might be worth looking at is the idea that
"buy and hold" is the best (and as at least one subscriber noted) and
perhaps the only way to succeed in the markets. I devoted a little
space in my book, "Trade Your Way to Wealth" , to an analysis of "buy and
hold," and, suffice it to say I don't see how the strategy "buy and
hold" answers the question: "Hold 'til when?" " Buy and hold" is a
strategy based on the historical fact that markets go up over time and
if one holds a position in a stock, it is probably going to increase in
value over time. Depending on the specific stock and depending on the
time frame, that may or may not be true. What the strategy really
lacks, in my view, is an exit. Is the exit "buy and hold" hold until
death? What else is it? When do you get out of a losing position if
your strategy is to buy and hold? How does that thought correlate with
the next important cliche: "Cut your losses and let your profits run."
It seems to me that if you are going to buy and hold (does that
mean buy to hold?) you have no way of cutting your losses. Though your
profits may run, they may also disappear, and even turn to losses if
there is no exit strategy. I personally am a believer in cutting losses
and letting profits run. Hardly anyone would disagree with the general
principles in that cliche. The problem I have seen is that so many
retail traders don't have a clue how to cut losses or how to let profits
run. It does suggest the need for some plan on the trader's part that
will define when, or under what circumstances, the trade will be
closed. There are many ways that creating an exit strategy can be
accomplished and it is up to the individual to chose the strategy that
best fits his own trading needs and personality. One trader may decide
to use a cross above a moving average as a reason to enter and a cross
beneath the average to be a reason to exit thereby making the moving
average the strategy. Would that help cut losses? Sure it would in
most cases. That strategy could also let profits run because there would be
no exit unless and until the stock price dropped down through the moving
average. A different trader may choose to move stops behind his
position either on a trailing basis or at a specific stop price that he
could regularly move behind his position. I discuss this concept in
"Trade Your Way to Wealth" and believe it is an important concept for
every trader to incorporate into his personal trading plan. I don't
mean to suggest any specific exit strategy is better than some other
one, but I do mean to suggest that I think is better to have some
disciplined exit strategy in place than to have none at all.
I hope that is food for a little thought. Down the road, I think
I'd like to take a look at "buy on the rumor and sell on the news" and
maybe "you can't go broke making a profit." Maybe even think about "the
trend is your friend" or "you earn on the turn>' Let me know if you are
aware of some market saying that we might have some fun thinking about.
Good Trading!
Bill Kraft
Success Trading Group -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
Here is a play from the Success Trading Group:
Telefonos de Mexico, S.A.B. de C.V. (TMX)
The market is providing good trading action. We have a lot of stocks on our
radar including "the regulars". We like Telefonos de Mexico (Ticker: TMX) at
its current level for new positions.
Have a great weekend and we'll trade next week.
Success Trading Group Team
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Option Trader -- by Bill Kraft
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Here's a look at a trade Bill is currently working on:
Constellation Energy Group, Inc. (CEG)
With 3 weeks until expiration, the May 90/95 bearish call
spread would bring in at least $1.05 a share credit to open at Friday's
closing prices. The stock just gapped down on high volume, but did
manage to hold at a support at the close. Even with the potential 26.5%
return on risk in 21 days, I will be cautious about entering and will be
looking at early week performance.
Good Trading!
Bill Kraft
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Trend Trader -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.
Here's a look at a trade Bill is currently working on:
Coventry Health Care Inc. (CVH)
Coventry Health Care has broken above resistance on
increasing volume. It closed around $45.10 and has a gap to close that
is about $4 a share higher. Indicators are also signaling a possible
continuation up from here.
Good Trading!
Bill Kraft
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$10 Trader -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Here's a look at a trade Bill is currently working on:
LSI Corporation (LSI)
$10 Trader closed a position on Friday for a return before a
small commission of 6.5% in less than 3 weeks.
Good Trading!
Bill Kraft
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