Trader's Thread 01 (May 08 - Dec 08)

[winston]

Aggressive or Conservative -- by Bill Kraft

Last weekend a couple of subscribers offered differing points of view regarding conservatism in trading. One, who comments with some regularity suggested that my investing approach was too conservative and defensive for his blood and mentioned that it was unlikely that I had made my money placing collars. Another subscriber and long time investor wrote and took the position that defense and conservatism is an important ingredient in successful investing.

The disparity between the two views points out something that I always address with my individual coaching students. We are all different and we should formulate a trading plan that is specific to each of us. The fellow who argues for a more aggressive style may well be better served by employing more aggressive strategies provided he has the stomach for the risk and truly appreciates the risk he is undertaking. I have found that an aggressive approach entails higher risk than a conservative approach and I am on board with Will Rogers who once said: "I am more interested in the return of my capital than the return on my capital."

As Warren Buffett reportedly said when asked how to make money in the markets: "Don't lose." The first rule for all investors, therefore, should be to recognize the importance of staying in the game. I have known and spoken to many aggressive traders over the years who are no longer trading because they lost all their trading money.

That, of course, does not mean that a trader should not use aggressive strategies. It simply means he should use them wisely. He should be prepared to cut losses quickly when things go the wrong way. Little is riskier in the trading world, for example, than buying a stock. When we own a stock we are at risk of losing our whole investment. If anyone doubts that, just look at Enron, Lehman Brothers, Bear Stearns, or Washington Mutual.

Does that mean we should not buy a stock? Certainly not, but when we do we should be aware of the risk and, in my view, take measures to reduce the risk by doing something. We could have a stop in place, for example, or buy protective puts, or at least have an alert that we follow and sell when our predetermined exit point is hit.

Blind risk taking may well result in disaster. As the conservative investor wrote, she learned to be conservative over years of investing. I have learned that lesson as well. My aggressive subscriber suggests you can't become wealthy trading collars. He is both right and wrong. Placing a collar is a way to preserve capital and if one just places it and does nothing else, he is correct. However, if one places a collar and then trades the option legs dynamically as I do, he is dead wrong.

I recently had a collar on a stock (BIDU) that dropped more than 100 points yet I realized a fairly hefty return because I did just that. Understanding is the key. We can be defensive and conservative and still be quite successful in our trading. We can also be aggressive and may also do well, but when we are being aggressive we must realize we are upping the ante and exposing ourselves to large losses.

[millionairemind]

There are OLD Traders and there are BOLD traders... but there are NO OLD and BOLD traders.

[winston]

Start from the Beginning -- by Bill Kraft

Over the past several months the markets have shown extraordinary volatility and we have been witnessing a serious bear market. During that time I have spoken to many traders and investors who have accumulated large losses. More recently, quite a few have said that they have just sold their positions for significant losses. I am regularly asked whether I think we have hit the bottom.

Each of those facts, the accumulation of large losses, the closing of positions after a big drop, and the quest for opinions of whether a bottom has been reached signal underscore some problems common to many unsuccessful traders.

Accumulating large losses is generally evidence of a buy and hold philosophy and fails to honor the concept of cutting losses. Instead, it illustrates an all too common issue of letting losses run. As many regular readers know, I have long advocated an exit strategy be in place before a position is entered. It can be a variety of things, but it needs to be there or the large losses will inevitably accumulate.

Selling positions only after losses have become too painful rather than as a consequence of a pre-determined exit strategy is another characteristic of a high number of retail investors. Many traders lose and, sadly, but interestingly it is because they tend to buy near the tops and sell near the bottoms. The fact that so many of the folks to whom I have spoken are now liquidating positions may, indeed, be a signal that we are nearing a bottom. We are getting to the point where there are fewer and fewer sellers left.

Of course, neither I nor anyone else can say whether we have a final bottom or not and I personally believe it is a futile exercise to try to predict that or almost anything else. A big sell-off on high volume is often a tip that we may be seeing a bottom, but like anything else in the markets, it does not tell us with certainty. While we may predict that an index or a sector or a stock is going to move in a certain direction, we must always keep in mind that doesn't necessarily make it so. We must understand and accept that our prediction may be wrong and ready to pull the plug as soon as the error is demonstrated.

I titled this article "Start from the Beginning" and, for me, the beginning of a directional play is the determination of what the market is currently doing. In general, roughly 80% of the stocks in an index are moving in the direction of the market (otherwise, the market probably would not be moving in that direction). Why play against that direction? Would we rather choose something that has an 80% chance of success or only a 20% chance of success.

If we see there is a downtrend, it just makes sense to make bearish plays or stand aside. If the market is trending up, the reverse is true. In general, we make profits when we can enter and follow a trend so why not do just that as we start from the beginning?

[kennynah]

A big sell-off on high volume is often a tip that we may be seeing a bottom

refer to Citi's chart to see this high volume sell off some weeks back...

[kennynah]

this wed and next wed, will be 1/2 day trading sessions, being eves of Xmas and New Year respectively...thurs obviously closed for the festive seasons....Fris following are full trading days but they would be "ghost town" really...

while, i consider the current VIX level to be comparatively low to a few months ago, it is still not too bad an idea to be Short some spreads given the very light trading days ahead for the next 2 weeks, which represents a great way to benefit "theta" decay.... just TOL...

[iam802]

Thanks K.

Great idea there... benefit from time decay (aka take some money while pple goes on holiday)

[millionairemind]

I went back to check the SP500 annual returns over the last 50 years.

If the index closes at the current rate which is about 40% off for the year, this will be the WORST year ever...

Amazing actually, from my perspective that so much damage can be done within a single year. This literally wiped out all the gains from the last 4 years of bull market, making the buy and hold investors for index funds none the richer after 10years of holding religiously and saving regularly by listening to all the Wall Street crap about the long haul.

http://www.moneychimp.com/features/market_cagr.htm

[kennynah]

when signals are given to exit....be gracious and just go....

else by the time, the market has to force anyone out of a position, it's ugly by then....

investing/trading is really a part of life, living... no different in this regard on when to join in a party and when to leave

[winston]

when signals are given to exit....be gracious and just go....

else by the time, the market has to force anyone out of a position, it's ugly by then....

investing/trading is really a part of life, living... no different in this regard on when to join in a party and when to leave

Very good advice ! Sometimes, I tend to overstay the welcome extended to me

[kennynah]

This morning, on a boxing day, i decided, it was time to do a general review of my trading period Aug-Dec08. The last time, i reviewed, and it was in a mountain cave for an extended time, was in Aug/Sept 08.

As expected, the review provided some important reminders/lessons and a few congratulatory pats as well. What was meaningful was that the earlier 2008 review generated some critical thoughts which when incorporated in this last quarter's I/T practice, yielded some +ve results. This does not mean that it translated into massive profits, but rather, it means that i was a lot more aware and in tune with most of my trades. I could "feel" my positions vis-a-vis the market movements. I benefited from the cave retreat, evidently.

Perhaps, you too can benefit from such honest reviews of your own I/T practices.