Play the Market at Hand
-- By: Bill Kraft
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
In recent weeks, I have received a number of emails from traders
who have been suffering a high percentage of losses in their accounts
and who wonder what they are doing wrong. In many cases the answer is
that they are playing a market that does not exist right now. They have
been buying stock only to see it fall in price. While some stocks will
inevitably move up in bearish markets, most are going to fall. If we
think about it, the markets would not be falling if most of the stocks
in the market weren't also falling; that is why the indexes drop -- most
of their components are dropping. When we buy stocks in a falling
market, we are making a bet on an upturn rather than taking what the
markets are willing to give.
I am writing this article on Monday, July 28th and, at the moment,
68% of the S&P 500 stocks are showing losses. If that is the case, why
would I want to buy an S & P 500 stock? Isn't that the way to give the
other guy the edge? In trading, as in life, there is no foolproof way
to predict what will happen tomorrow. We can try to predict the future,
and sometimes we will be right, but, truth be told, we have no control
over the future. A rising market can turn on a dime as the result of
some unexpected, unpredictable event geo-political event. If we can't
predict the future, how can we possibly succeed at trading?
The answer, I believe is to play the hand we are dealt rather than
trying to play the hand we hope we may be dealt. In playing the hand we
are dealt, we can try to get an edge by observing what the market is
actually doing rather than what we think it might do. If, as has been
the case, the markets are falling, why not make bearish plays instead of
trying to force a play in the opposite direction? I once knew a
successful trade who said: "Play it until it breaks." Pretty good
advice in my opinion. If the markets are generally bearish, emphasize
bearish plays until it turns. If 70% of stocks are going down, consider
playing the downside by selling short, buying puts, entering bear call
credit spreads, or any other bearish strategy to give yourself the edge
by favoring the current direction. Will the market turn? Of course it
will, but no one and no system can tell us when. Meanwhile, let's try
to take what it is willing to give.
If I am looking for a directional play, I look to see the market
direction and then I look at sectors that are moving the same way as the
markets and then I look at individual stocks moving in the same
direction as the sector. Once some candidates are identified, the next
step, for me, is to see where my exit will be in the event I am wrong on
the direction so that I can try to exit with a small a loss as
possible. If I enter a directional play and it moves my way -- great.
I'll just follow my exit strategy for the play and let it run. If it
goes the wrong way, my initial exit should get me out with a relatively
small loss so I can try again.
Good Trading!
Bill Kraft
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Option Trader -- by Bill Kraft
Our Option Trading Service is for conservative traders that understand leverage principles and enjoy the challenge of options trading. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on always minimizing our losses!
The Option Trader service utilizes standard trading in Puts and Calls as well as strategies using Leaps, Straddles, Credit Spreads, Calendar Spreads, and Naked Puts. But no matter how sophisticated a strategy may be, we ALWAYS know our downside potential on every trade.
Here's a look at a trade Bill is currently working on:
Prudential Financial Inc. (PRU)
In a pure volatility play, I sold some puts on Wednesday and
bought them back on Thursday for a gain of 60 cents a share. While
this trade was shorter than most for me, every once in a while, we see
something that looks like it can present a quick gain without exposing
myself to risk for any extended period.
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:
American International Group, Inc. (AIG)
AIG has been in a long downtrend since about the middle of
last year. Recently it formed a double bottom (right cheek high) and has
begun a little uptrend. It looks like this one should remain on the
radar, but I'll exercise restraint until the earnings are announced and
that is scheduled for next week.
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:
Premier Exhibitions Inc. (PRXI)
I recently was in and quickly got out of a position in PRXI
when it took a dip. Once again, the stock has broken the support
resistance line and I want to be watching for an entry off the newly
established uptrend.
Good Trading!
Bill Kraft
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