Predictions -- By: Bill Kraft
Copyright 2008, CutLoss, Inc., All Rights Reserved
Bill Kraft
Editor |
"I contend that for a nation to try to tax itself into prosperity is
like a man standing in a bucket and trying to lift himself by the
handle." Winston Churchill
After stirring up the hornet's nest last weekend, I'm returning to
some considerations for traders. Last weekend, I had the privilege to
speak at the Trader's Library event in Chicago and was humbled to be in
the company of legends like Dick Arms (creator of the Arms Index) who
was inducted into the Trader's Hall of Fame and Charlie Kirkpatrick, a
two time winner of the Charles Dow award. Conversations with these men
and several of the other speakers provided an invaluable learning
opportunity; one for which I am extremely grateful.
Among the topics of discussion was the concept of predictions. We
hear and see so much in the media devoted to whether the markets have
found a bottom and where the bottom might be, but the truth is no one
knows. Prediction is little but speculation and has no value. Look how
well the weather forecasters do. Tell me, is the market going to be up
or down next Thursday? Six months ago, who predicted that Lehman
Brothers would no longer exist? In his excellent recent book, Beat the
Market, Charles Kirkpatrick quotes commentator and chief market
strategist Barry Ritholtz as saying the SEC should require all analyst
and pundit forecasts to publish the following caveat: "The undersigned
states that he has no idea what's going to happen in the future, and
hereby declares that this prediction is merely a wildly unsupported
speculation."
All we can know is the past and the present. If I knew the future,
I certainly wouldn't be trading stock and options, I'd buy a winning
lottery ticket and be done with it. Yet, as I talk to coaching
students, I regularly hear things like: "this will be a long term trade"
or "I'll be out of this trade in a week" or "I know XYZ will come out
with a good earnings report and the stock will rocket." I always ask:
"How do you know that?" Predicting that we will be in a long term trade
may be tantamount to saying I'm going to let my losses run no matter
what. Predicting that we'll be out of a trade in a week may be the same
as saying that I've decided to cut my profits. Predicting that a stock
price will jump on an earnings announcement doesn't make it so. Often,
in fact, even when relatively good earnings are announced, a stock price
will fall.
As Mr. Kirkpatrick notes in referring to David Dreman's research
which studied 78,695 earnings forecasts by analysts over a 20 year
period from 1973 to 1993 only 1 in 170 forecasts were within 5% of any
four consecutive quarter's actual earnings. Why do we continue to rely
on such speculation?
As I emphasized in my own talk on Sunday, I emphasized, as I always
do, that one of the keys to successful trading is to have an exit
strategy in place before ever entering a position. That enables a
trader to get out if he is wrong on direction. As I've regularly taught
in past seminars, the strategy needs to be one that permits profits to
run while creating a disciplined unemotional exit that initially is both
clear and close to the entry. In that fashion, prediction no longer
controls. The successful trader, instead, simply reacts to the price
movement. Having a plan that incorporates money management, reward to
risk potential and disciplined exit strategy can supply an edge that
prediction doesn't. After all, even the best traders in history rarely
win more than 50% of the time. The key, of course, is to learn how to
make the profits from the winners significantly exceed the losses from
the losers. Few retail traders enlighten themselves on how to do that.
Hopefully you are among those who do make that effort for without it you
will continue with the vast majority who fail in their trading efforts.
Good Trading!
Bill Kraft
Success Trading Group -- by the Success Trading Group Team
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Here is a play from the Success Trading Group:
Duke Realty Corp. (DRE)
Our Success Trading Group members scored 2 more winning trades this week.
With almost all stocks being set back to lower levels the last few weeks we
have many stocks on our radar for trading next week. We are looking at Duke
Realy Corp. (Ticker: DRE) for a trade early next week.
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:
Lowe's Companies Inc. (LOW)
LOW has come off a double bottom support and broke through
some resistance on Friday. As of Friday close, it looked like there
might be an opportunity opening a November bullish put credit spread
selling the 20s and buying the 17.50s. While, as always, there is risk,
the potential reward looks to be about a 25% return on risk over an 18
day 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:
Lifepoint Hospitals Inc. (LPNT)
This stock in which I have a small position moved up sharply on
Wednesday and Thursday to drift back slightly on Friday. I still like
the stock and would consider adding to my position on an upturn
following a little retreat toward support. It is optionable as well so
it also offers the chance to sell covered calls.
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:
PetroQuest Energy Inc. (PQ)
This week $10 Trader was able to grab a quick 2.6% gain
before a $9.95 commission by buying one day and selling the next. The
stock has formed a double bottom and looks like it could offer
additional opportunities on a break above nearby resistance.
Good Trading!
Bill Kraft
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