The Insidious Nature of Greed -- By: Bill Kraft
Copyright 2008, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
Most of us are probably aware that emotions can be the downfall of
traders. The markets undoubtedly react to fear and greed. All we need do
is recall the tech bubble of the late 1990's when traders were paying
exorbitant prices for stocks of companies that had no earnings, and in
some cases, barely a business plan. Greed fueled the fire and people
bought positions with no thought that things might turn south. Instead,
the drive for profit controlled their actions. Risk awareness and risk
aversion went out the window and, for many, so did large portions of
their portfolios when the markets turned over and headed south.
As I considered writing an article about the dangers of greed, I was
reminded of a man I casually knew and whom I watched at a gambling
casino in San Juan many years ago. The fellow was a fairly well known
and pretty well-heeled lawyer back east. He was playing roulette at a
high stakes table and was apparently using the Martingale approach where
he doubled his bet whenever he lost. The strategy often may work since
the gambler starts with a bet of one unit and doubles it after each loss
so that when he finally does win, he wins his original unit. As those
familiar with the strategy are probably aware, it may often yield
success, but it definitely can produce catastrophe if the gambler has
enough losses, he will come up against the table limit and no longer be
able or permitted to double his bet. As I came upon the table, I noticed
that the lawyer was flushed and sweating profusely. What I learned was
that he had gambled and lost thousands and he was reaching the table
limit. I heard him ask the pit boss to increase the limit and saw his
face drop even farther when the request was denied. The wheel spun and
he lost.
What motivated this fellow? Certainly greed or he probably would not
have thought of high stakes gambling in the first place and probably
also a belief in infallibility of his system. The two often go hand in
hand and often result in disaster. I recall another trader who once
called me and told me he had just bought 200 short term call contracts
(that controls 20,000 shares of stock) on a company whose earnings were
to be announced the next morning. I asked him why he did that and he
told me it was because he knew the earnings were going to be good and he
knew the stock would go up. I said: "How do you know that? Do you have
insider information?" He didn't have insider information, he just "knew"
it. When I suggested that the price of a stock often dips when earnings
are announced even if they are relatively good, he ignored the
possibility and told me to just watch the next day. I did. The stock
price fell and the phone rang asking how he could fix what had become an
awful trade. This guy had made his trade purely on the basis of greed
and his belief that he could predict the future. He was mistaken and the
greed turned to fear and anguish in a nano second.
Both those examples are somewhat extreme, but they should be a warning
to all of us. No matter what we think, we can't know the future and no
matter how infallible we believe a system to be, it isn't.
Something I have observed many times over the years of teaching
seminars, coaching, and just communicating with traders is that there
are an awful lot of people trying to use strategies that they haven't
learned. I've seen people in trading groups go to a talk about some
strategy that is new to them and immediately put real money at risk
using the strategy without any idea of the risks or whether or how the
strategy might need to be adjusted in the event things didn't go the way
they "hoped."
In my individual coaching sessions and in my book, "Trade Your Way to Wealth" , I try to make it a point to invite traders' attention to risk
and how it might be managed. In trading as in life, it isn't all going
to be good. We need to be aware that almost all of us have a streak of
greed and that it can suck us into some pretty bad situations if we
don't take measures to discipline our trades and control our losses.
And as a last note, if you don’t yet have plans for October 26, why not
come and hear me speak at the
"Traders' Library 2008 Forum" in Chicago. In my session, I will use current
examples to show you how to make limited risk and even no risk trades to
protect capital while putting yourself in a position to enjoy
significant profits. Featuring some of the top minds in the investment
world, this 2-day event will be a great place to learn more tricks of
the trade and to meet and mingle with smart active traders. I would be
pleased to meet you there—visit "Traders' Library 2008 Forum"
for more information and to register today.
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:
Procter & Gamble Co. (PG)
Our Success Trading Group closed another winning trade this week. We closed
our position in Proctor & Gamble (Ticker: PG). We have lots of stocks on our radar, but
we are looking for a pull back in most before our next entry.
Have a great weekend and we'll trade next week.
Success Trading Group Team
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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:
Qiao Xing Universal Telephone Inc. (XING)
I was in and out of a 2 day play using LEAPS calls on XING
and realized a 16.7% gain before commission in that short time. The
stock is currently trading near a resistance and should shortly provide
an option trade in one direction or the other. I'll look for a bullish
trade if it breaks up through resistance or something bearish if it
turns back down as it looks like it might.
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:
NYSE Euronext, Inc. (NYX)
NYX has formed a double bottom followed by an uptrend that began
around the first of the month. The stock looks like it could provide and
entry 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:
Navios Maritime Holdings Inc. (NM)
I closed a one week trade for a 1.6% gain before commission
during the past week. I exited the trade just ahead of an earnings
announcement. The stock has been channeling since the beginning of the
year and I am watching it to see whether it will retreat to support
around $8.50 and turn back up as I suspect it may. If so, I will be
considering a bullish entry once again.
Good Trading!
Bill Kraft
Try our Under $10 Trader Real-Time Alert Service!
Dividend Investor -- by the Dividend Investor Team
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Here is a play from the Dividend Investor Team:
Consolidated Edison Inc. (ED)
Our Dividend Investor members also closed a "trade" position this week for
another win. We like Consolidated Edison (Ticker: ED) for new positions at
$40.00 for either a "trade" or an "invest" position.
Have a great weekend and we'll trade next week.
Dividend Investor Team
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