How Can a Trader Make Market Cliches Work? -- By: Bill Kraft
Copyright 2009, CutLoss, Inc., All Rights Reserved
Bill Kraft
Editor |
One of the many enjoyable things for me in learning about and
trading the markets is the variety of colorful cliches that point out
some little piece of wisdom (mostly) or other. "You can't go broke
makin' a profit," for example, can remind us that it may be a better
idea to take profits at some time before they turn into losses. But
how does that fit with "cut your losses and let your profits run?"
The key in both instances seems to me to be the undefined "when" that
signals the time to take the profits. Even if we can't go broke makin'
a profit, it is certainly better to let those profits run as long as
they actually are becoming increasingly profitable.
In my dealings with coaching students and with other traders, I
have seen that traders may learn relatively quickly to cut losses, but
have a little more trouble letting profits run. There also seems to be
a tendency to take profits relatively quickly as well. Naturally, if
that is what we are doing, we can't go broke -- UNLESS our losses
outweigh the profits. Both the sayings are important in that they
invite our attention to what we should be doing. The how and the when
are what deserve our study.
As with many things in trading, there are a number of ways to
achieve the goals of not going broke, cutting our losses, and letting
our profits run. Unfortunately, it is too often the case that the
trader listens to the little voice in his head (the emotions) to make
trading decisions. I have seen that the voice in the head method
regularly can lead to cutting profits and letting losses run. It
seems clear to me that something else is needed. The key here is
discipline and one way to establish discipline is to use a line on a
chart. For example, if we take any chart of the movement of a stock
price and overlay a moving average we can visualize a disciplined
entry and exit strategy. Suppose we choose a 20 day exponential
moving average and we decide that we will enter a bullish position
when the price crosses above the moving average and that we will exit
when the price crosses below the moving average. Now we have a simple
discipline. Does it work? Take a look at any chart with a moving
average overlaid yourself and you will see that the method catches
many nice uptrends and if you also play bearish many nice downtrends.
In between, you may also see several areas where you would be
whipsawed in and out of a trade incurring, perhaps, a number of
commissions. One weakness of the methodology is the risk of whipsaws
while a strength is that the method keeps us in the game while the
position continues in the favorable direction. In any event, you can
get an idea of how such a technical discipline using a moving average
may be more helpful that the voice in the head method.
Actually, moving averages are forms of trend lines. We can also
draw lines depicting the trends ourselves and use them in similar
fashion to enter and exit positions. By learning to utilize devices
such as these we may be able to enjoy the benefits of another old
market cliche, to wit: "the trend is your friend." Simply put, if we
can find a trend we may be able to jump on and ride it until it is
broken. That, at least, may be one way to let our profits run.
I suppose we can improve our trading when we come upon some of
these cliches by giving them some thought instead of just letting them
go by. There is wisdom in many of them if we can find a way to
accomplish what they suggest. Perhaps the most important one of all to
remember as we trade may be: "Bulls make money, bears make money, but
hogs get slaughtered."
Good Trading!
Bill Kraft
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The Home Depot, Inc (HD)
Home Depot is currently dealing with resistance near the
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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:
DCP Midstream Partners LP (DPM)
DPM is a Master Limited Partnership or MLP that has been
trending up since November. While I already own some shares, I am now
weighing an add-on since the shares have now broken above a resistance
around $15. At the current price, DPM has been making quarterly
distributions (like dividends) at an annual rate of over 15% at the
current price. On the downside, it is fairly lightly traded.
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:
Citigroup, Inc. (C)
$10 Trader is looking to add to his recent successes and
Citigroup (C) definitely looks like a candidate. The stock has moved
up quite well from the March doldrum. It is currently trading just
below $3 and it looks like it could make a move up of $1.20 or so
before hitting resistance around the $4.00 mark.
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Bill Kraft
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