This weekend I am going to discuss a couple of topics. The first
deals with some trading issues raised by an email from a subscriber to
one of the alerts and the second with a suggestion by a blog contributor
that I provide some information about the differences between my two
books, "Trade Your Way to Wealth" and "Smart Investors Money Machine" .
I'll provide the information about the books toward the end of the article.
This past week, on one of my subscription services, I sent an alert
indicating that I was buying shares of a stock that had been trending up
and that had just broken above a resistance. The sector was also
trending up. The company was reducing debt and the stock had also
recently been upgraded to "outperform." Those were salient facts of
which I was aware when I bought the stock in my own account. After
market hours, the company announced that it would be paying fairly
generous dividends on certain classes of preferred shares. The following
morning, the stock price fell. I received a couple of emails from
subscribers evidencing concern evidently because I had not immediately
pulled the plug as the stock began to fall.
One email labeled the trade as stupid because I bought at a high
and failed to wait for a dip. Since I am still in the position as I am
writing this article, I can't yet agree or disagree as to how bright or
stupid it may have been. I do confess, however, that every trade I make
isn't great, and I do have losers on occasion. As I write in the next
paragraph, both entry and exit strategy for this trade were in place
before entry. The facts of the market are that prices do go up and down
and can reverse unexpectedly and on a dime. Until a price reverses
down, we can't know what the high actually became. In this situation, I
did not know that my entry would prove to be at a near term high until
it was followed the next morning by a turn down. The entry could only be
said to be at or near a high after the price dropped the following day.
I should mention that my entry in the stock in the example was nowhere
near the high for the year, but was near a recent short term high.
Actually I do like new highs in many situations, but that was not
the reason for my entry in this trade. The specific reason for entry in
the example was that the price had broken up through a resistance or
ceiling. My exit strategy was to sell if and when the stock broke down
through the uptrend line since I am aware that often a stock that breaks
resistance may take some time to deal with that level. In both entry
and exit, the strategy was controlled by a technical discipline -- i.e.
enter on the break above resistance, exit on a break down through the
trend. As with any strategy, the one I employed in this situation can
result in a loss. Some trades lose; it is that simple. The best way I
know to trade is to utilize a discipline that is designed to cut losses
and let profits run. That was the idea in the example trade. The loss
would be cut when the stock no longer remained in the uptrend, but as
long as it was trending up, I would not exit in spite of normal
fluctuations in price that do occur every day.
One readily apparent reason for the dip in the stock was the
after-hours announcement of dividend payments. Whenever dividends are
paid, cash is going out of the company and, theoretically, at least, the
value of the company is reduced by the amount of the dividends paid. It
is not unusual to see a stock price dip on such announcements only to be
followed by another upswing. As long as the stock does not violate my
pre-determined exit and remains in a trend in the direction I want, I
want to avoid pulling the plug out of panic. All too often, it is panic
that motivates action with retail traders and it is a significant enemy.
Some important lessons here, I suggest, are that 1) not all trades
win; 2) day to day prices fluctuate, often as a result of unpredictable
events; 3) one should have an exit strategy in place and stick to it;
4) trading should not be ruled by panic; and, 5) as traders we need to
rely on something other than our emotions in pursuing our trading business.
Thanks to the blogger who asked me to explain the differences
between my two books. First, I suspect that the new book, "Smart Investors Money Machine" , is designed to and probably does have appeal
to a broader audience. "Smart Investors Money Machine" is premised upon
the idea that most of us have one major source of income -- our job, but
that having more income would definitely be helpful. This book detail
many ways in which we can add additional sources of income to enhance
our finances if we only chose to do so. Using examples of young
unmarrieds, growing families, and folks near retirement, I show a wide
variety of ways in which almost anyone can add more income each month.
I discuss a wide array of devices and methods including (but not
limited to) things as diverse as dividend capture, bonds, MLPs, writing
covered calls on stock you already own, even reverse mortgages and
annuities to show how people can add streams of income and I discuss how
much (or how little) effort may be necessary to achieve a better quality
of financial life. This is a book that can help nearly anyone, no matter
how much or how little time they have and no matter how much or little
money they have, to add some income to their lives by having money work
for them instead of the other way around.
"Trade Your Way to Wealth" , on the other hand, is more focused on
people who have an interest in trading. In my view, trading should be
treated as a business (whether full time or part time) in order to
achieve success. "Trade Your Way to Wealth" sets out critical elements
of a trader's business plan and takes the reader through a step-by-step
process of how to create a personal business that is specific to his
requirements. In "Trade Your Way to Wealth" , I then set out at least 15
specific stock and option strategies that can help traders achieve large
profits with varying levels of risk. Since I have seen so many traders
fail to understand and appreciate the risks they are taking, I try to
emphasize the risk in each strategy and show specific methods to reduce
and, in some situations, even eliminate risk in trading. In addition to
explaining the strategies in detail, I discuss the relative rewards each
offers in relation to the risk the trader may undertake. This is a book
that is meant to help people from novice to relatively experienced add
to their trading knowledge.
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:
ABM Industries Inc. (ABM)
Our Success Trading Group members scored another winning trade this week when we closed out a position in ABM Industries (Ticker: ABM). We are watching several stocks and are looking forward to trading next week.
Have a great weekend and we'll trade next week.
Success Trading Group Team
