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

[bertyeo]

jus be happy with what u make...

[iam802]

what to do?

everyone who go into stock market, currnecy market etc...want to learn how to make money.

but, always forgot to learn how to minimise loss.

Can't blame them. Education system dictates that marks gets awarded for the right answer and not what you have learnt from your mistakes.

[kennynah]

losses is part of learning process....

[blid2def]

With regards to the education system: I do think you get marks for correcting your mistakes though, in a roundabout way. For example:

You go for a grammar test, and you get the tenses wrong. You get 0 points; and you do corrections (and hopefully you learn your lesson lah).

Next time you go for a grammar test, you get the tenses right. You get 1 point. You're rewarded for getting the right answer - but "getting the right answer" is a consequence of learning and correcting a mistake (hopefully it's not a "tikam" answer lah hahaha). So in a way, you're rewarded for learning from your mistakes.

I'm not saying the education system is perfect, but "learning from mistakes" is a parameter that isn't necessarily easy to measure directly, but could be measured through other means.

[kennynah]

but could be measured through other means.

that's the amount of tuition fees paid since beginning until now...

[blid2def]

but could be measured through other means.

that's the amount of tuition fees paid since beginning until now...

+ keyboards hammered that need replacement
+ LCDs (or CRT monitors) smashed that need replacement
+ Beijing 101 hair-regrowth treatments
+ sleeping pills
+ balls guards
+ ...

[kennynah]

+ wrist guard....(price run away...no position)

[winston]

The Insidious Nature of Greed -- by Bill Kraft

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, 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.

[millionairemind]

W,

Thanks as always for your series by Bill Kraft.. Always learn something new and a good reminder of controlling one's emotions while trading.

Cheers,
mm

[winston]

Searching for the Key -- by Bill Kraft

Over the course of my trading career I have met a lot of people who were trading or trying to trade. I met them at seminars I took, in trading groups, at seminars I gave, and at events where I have spoken. If we are to believe the statistics, most of them were doomed to fail.

From the perspective of an outsider watching it is pretty easy to identify the ones who probably just won't succeed. I have seen the same mistakes made over and over by the same individual and by many different people. Instead of giving themselves an edge to succeed, they set themselves up for failure.

I was reminded of some of the mistakes by someone who is doing it right. An old friend and partner called me today to tell me he was retired, had read my book, and wanted to trade. He asked for other study suggestions and said he was "chomping at the bit" after reading my book and another.

At this point, my friend already has parted company with many who will fail as traders. He said he really wanted to start right away but knew he had just enough knowledge to be a danger to himself. How right he is. He sees the potential, but, even more importantly understands the risk.

Impatience is definitely an enemy of the successful trader. I can't tell you how many times I have witnessed people who were exposed to a strategy new to them begin trading it right away with real money. Most often they only understand the bare bones of the strategy, if that, and have no idea how to adjust a trade or when adjustments might be necessary. In many instances if asked what do they have at risk in a position they are unable to answer. They are just charging forward seeing only the "up" side until the down side jumps up and bites them.

Another common problem is the hunt for the secret strategy or for the automatic software that guarantees success. One fellow told me you couldn't earn big profits with the strategies in "Trade Your Way to Wealth" and complained that I didn't give away any secrets. Absolute nonsense. Of the many strategies discussed were things like buying stock and shorting stock along with many option strategies including buying LEAPS calls.

Of course one can earn big profits with those strategies and many undoubtedly have. And, yes, there is no hidden secret. The secret is in the open. Know the strategy, know the risk, formulate a plan including an exit strategy and follow the plan, exercise sound money management, trade with discipline-- that's about it.

Most trading strategies are relatively well-known, and will lead to success if used properly by a knowledgeable, disciplined trader. Almost none will work for the trader who is not intimately familiar with the strategy or who permits his emotions to make his trading decisions.

Another common characteristic is the search for the perfect system or the perfect software. No one, absolutely no one, can know the future. How can anyone say that any system of trading the markets is going to be infallible? What will be the state of the world in 3 years? or in 5 years? Won't what happens in the world affect the markets? Will the U.S. be at war? If so, with whom? What will the capital gains tax structure be?

What will have happened with inflation? We can speculate on those things all day long, but we can't know until we get there. No software or system can predict the unpredictable. Those who create and sell systems and software know that they cannot predict with certainty.

That's why they can never and will never guarantee your success using the software. When the well-funded software developer is willing to guarantee your capital when using his system, it might be time to buy. Meanwhile, examine them with a careful eye. I don't mean that many systems and a great deal of software aren't helpful. Some definitely are; they are just not the panacea the eager trader seeks.

Though many of us understand that the future is unpredictable, we still try to trade by prediction. Some will advocate buying a stock because it has great fundamentals and, therefore, it "must go up." Over time they may be right (maybe not?). The question is when. Simply because a company is great doesn't mean that it's stock price will go up.

GE is a great company in my estimation. In 2000 it traded at a split adjusted price around $60. Today it is trading at less than half that. Any prediction that GE will hit $70 may have to wait. Several months ago, a subscriber suggested that the only way to go was to buy and hold. He used his family's holdings in Citigroup (C) as an example.

In 2000 Citigroup stock was trading in the low $50's. In mid-2007 it was trading in the low $50's. Today (August 20, 2008) it closed at $17.49. Well, some say, of course it dropped, that is because of the credit crisis. That is the fundamental reason, but as of about the middle of 2007 it was at least unpredicted if not unpredictable. I am unwilling to sit through the drops from $50 to $18 if I can avoid it so rather than trying to predict, I try to let the market movement take me out and put me in.

One last problem for this article that I have seen with unsuccessful traders is that they see a trade but don't make it because they are waiting for confirmation. I'm not against confirmation, but I have seen situations where the delay in entry causes the trader to miss the trade or much of it, or, even worse, puts the entry far from an exit in the event the play goes the wrong way thereby increasing risk rather than reducing it by awaiting more confirmation.

Down the road, we'll look at some other issues and, hopefully, some ways traders can make themselves aware that they are setting themselves up for the fall.