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

[winston]

Trading Strategies By Bill Graft:-

What strategies you select when trading the markets is entirely up to you. In my view, you should choose strategies that fit your needs, your risk tolerance, and your personality.

Are you someone willing to take high risk in exchange for the chance to reap a high reward, or are you someone who would prefer to emphasize safety of your capital in exchange for a limited (though still potentially good) return?

Do you have a lot of capital or not so much to trade? What time frame is most appealing to you? What level of knowledge do you possess? What have you done and what are you doing to increase your trading knowledge?

In my book, "Trade Your Way to Wealth," I discuss 15 strategies in detail. With respect to each strategy, I outline the relative risk, the potential reward, the relative initial capital requirements, the expected time frame, what protection may exist, the level of monitoring required, and the market direction to which each can be applied. In Appendix D, each of these factors is set out in tabular form so readers have a quick reference to see how a particular strategy may fit their own trading personality.

As an example, in "Trade Your Way to Wealth," I note that buying stock has risk that is limited only by the purchase price (it can go to zero), has unlimited potential, requires a high amount of capital, has no protection built in, requires a high amount of monitoring and is designed for a bullish market. Contrast that to selling naked puts where the risk is limited to the purchase price of the stock if assigned less the credit the trader receives when the trade is entered (so the risk can be less than buying stock without getting the credit to open the position). The time frame for selling naked puts is usually fairly short and the trade is entered with money coming in rather than going out. Which is better is for you to decide.

Stocks and markets can only move up, down, or sideways so an investor or trader need use no more than 3 strategies. The key is to know which ones suit you best. Do you like a strategy where you can make money just as long as the stock price moves, no matter whether the direction is up or down? How about a trade where your upside may be limited but your capital is largely or even completely protected?

Would you like to have a greater percentage of profit potential at a lesser cost than stock ownership? How about a limited risk way to make money when the markets are dropping? Are you familiar with these strategies, or do you just buy stock with the intent of selling it when the price goes up? Could it be worth your while to take a little time to learn and understand these strategies?

In my opinion, these strategies are worthy of study if you are serious about making money in the markets. First, however, it is important for each of us to evaluate what we are seeking in the markets. Are we looking for income? In Trend Trader and $10 Trader, for example, I hold some positions that are specifically designed to produce regular income, sometimes free of federal tax. Other positions in those services are entered in an effort to profit from a price movement. Are we more interested in growth or capital appreciation than income?

Obviously, our strategies would differ depending upon the answers to those questions. At the outset, I would suggest that we need to ask ourselves those questions. The answers will guide us toward strategies that will best accomplish those ends.

Once we recognize where we want to go, we can then decide what strategy or strategies will meet our personal needs best in getting there. Are we looking for the safer, lower risk path or are we willing to take greater risks to expose ourselves to higher potential rewards. Can we look at the markets every day, or only on the weekends?

Might we need to adjust a position as a strategy plays out as in the case of some spreads? If that is the case, we need to be sure that we have both the knowledge and the time to look at the position as often as it requires and to make adjustments when needed.

As always, in my book and in these articles, I hearken back to the importance of creating your own trading plan, using strategies that suit you personally, and assuming risks that let you sleep at night. It is your money. The emphasis needs to be on you and your knowledge and management. Trading is serious business and involves risk. I sincerely believe each of us needs to treat it that way

[winston]

Trading Rulers from Futures Magazine:-

1) Use money you can afford to afford to lose. Mental independence is of utmost importance.

2) Know yourself. You need an objective temperament, an ability to control emotion to be able to trade without losing sleep. You need to be unemotional about your trades.

3) Start small. If you are inexperienced, paper trade first. Then trade the less volatile instruments

4) Dont overcommit. Keep three times the money in your margin account that is needed for the position.

5) Isolate your trading from your desire for profit. Your trade should not be based on hope only. Although hope is a great virtue in other areas, it can be a real hindrance in trading.

6) Don't form new opinion during trading hours. It is better to formulate a basic opinion before the market opens and then look for a proper time to execute that opinion.

7) Take a trading break, preferably every 5 or 6 weeks.

8) Don't follow the crowd.

9) Block out other opinions. Once you've formed an opinion about the market direction, don't allow yourself to be easily influenced.

10) When you not sure, stand aside. Have the patience and discipline to wait for the right opportunity. You don't have to trade everyday.

11) Try to avoid market orders. It shows lack of discipline. Use market orders only when you want to liquidate something immediately.

12) Trade the most active option month. It would enable you to get in and out of a position easily.

13) Trade divergence within the family. When the members of a family are all moving up except one, look for a chance the sell that one, when there is a correction in the family. Example: if all grains are going up except corn, look for a chance to sell corn when grains starts to correct.

14) Don't have too many trading positions at one time.

15) Trade the opening range breakout. If the market breaks thru the opening range on the high side, go long and vice versa.

16) Trade the breakout of the previous day's range. Never buy until the price trades above the previous day's close. Never sell until the price drops below the previous day's close.

17) Trade the breakout of the weekly range.

18) Trade the breakout of the monthly range

19) Build a trading "pyramid". When you add a position (always in the right direction of your trade), make sure that the number of contracts is less than your initial position. Example: If you had bought 4 lots @ $10. The next position could be 3 lots @ $10.05 not 5 lots at $10.05.

20) Never put your entire position at one price. Do your trade in 4 to 5 installments, with each trade in the correct direction.

21) Never add to a losing position

22) Cut your losses short.

23) Let your profits run. Never take a profit for the sake of taking a profit. Always have a very good reason to close out a profitable position.

24) Be impatient with losing positions. Never carry a loss for more than 2 or 3 days and never over a weekend.

25) Learn to like losses. Losses are part of business. When you gain the emotional stability to accept a loss without hurting your pride, you are on your way to becoming a good speculator.

26) Use Stop Orders cautiously. Place your Stops when you place your oders but not too tightly. Use Mental Stops if you are watching the markets.

27) Get out before contract maturity.

28) Ignore normal seasonal trends. Too many people try to trade normal seasonal trends so do the opposite.

29) Trade the divergence from the normal. If the market is expected to go up but fails, then it is a good sell signal and vice versa. Wait for the market to lean one way, then time the trade in the opposite direction.

30) Avoid picking tops and bottom. Instead, let the market price action prove that a top or botom has been formed.

31) Buy bullish news; Sell facts

32) Bull markets die of overweight

33) Look for good odds, where the loss potential is small in relation to the profit potential

34) Always take windfall profit. Take unexpected quick profits and run

35) Markets fall faster than they rise. Therefore, shorting the market at the right time can be very profitable

36) Act promptly. This does not mean that you should be impulsive. When your judgement says that you should liquidate a position, act immediately.

37) Don't reverse your position. When your position is a loser and you decide to get out, don't make a 180 degrees turn. Stand aside first else you may be whipsawed.

38) Don't be a nickel and dimer. When you think that it is time to do something, make your move.

39) Know the price trend.

40) Watch for key breakouts through price trendlines. When price break through a trendline and trade outside the trendline for 2 to 3 days, it's usually a good trading signal

41) Watch for 50% retracement after a major move

42) Use the half way rule when picking buy-sell spots. Buy in the lower half of a trading range and sell in the upper half.

43) Watch the magnitude of market change. When the market moves up each day but in smaller amounts, the downtrend may be around the corner and vice versa.

44) Congestion areas on the chart can mean support or resistance. The longer the market has been chopping in the trading range, the further the price move, once it breaks out.

45) Major moves frequently climax with a key reversal.

46) Watch for heads and shoulders formation.

47) Watch for "M" tops and "W" bottom

48) Trade triple tops and bottoms

49) Watch volume for price clues.

50) Watch Open Interest for buy and sell signals.

[winston]

Market Cliches -- by Bill Kraft

When I first was drawn to trading I was a little intimidated by parts of the new language (e.g. diagonalized calendar spread or strangles or going naked) and I was a little amused by some of the cliches. Sayings like "you can't go broke making a profit," or "the trend is your friend" easily reinforced some conventional wisdom with something I could easily remember.

Some of these sayings have become so well known that I have wondered how often and in what ways they may be applied. Are they 'truths' of the market? Are they infallible? Is there some other side? Do they really work?

I'm going to take a look at a couple of these cliches in this article and give you my own thoughts. Mostly, these are just my opinions and I would encourage you to form your own. Just doing a little thinking about the meaning of some of the cliches might give us some new insight.

The first saying that might be worth looking at is the idea that "buy and hold" is the best (and as at least one subscriber noted) and perhaps the only way to succeed in the markets. I devoted a little space in my book, "Trade Your Way to Wealth," to an analysis of "buy and hold," and, suffice it to say I don't see how the strategy "buy and hold" answers the question: "Hold 'til when?".nn" Buy and hold" is a strategy based on the historical fact that markets go up over time and if one holds a position in a stock, it is probably going to increase in value over time. Depending on the specific stock and depending on the time frame, that may or may not be true.

What the strategy really lacks, in my view, is an exit. Is the exit "buy and hold" hold until death? What else is it? When do you get out of a losing position if your strategy is to buy and hold? How does that thought correlate with the next important cliche: "Cut your losses and let your profits run."

It seems to me that if you are going to buy and hold (does that mean buy to hold?) you have no way of cutting your losses. Though your profits may run, they may also disappear, and even turn to losses if there is no exit strategy. I personally am a believer in cutting losses and letting profits run. Hardly anyone would disagree with the general principles in that cliche. The problem I have seen is that so many retail traders don't have a clue how to cut losses or how to let profits run.

It does suggest the need for some plan on the trader's part that will define when, or under what circumstances, the trade will be closed. There are many ways that creating an exit strategy can be accomplished and it is up to the individual to chose the strategy that best fits his own trading needs and personality.

One trader may decide to use a cross above a moving average as a reason to enter and a cross beneath the average to be a reason to exit thereby making the moving average the strategy. Would that help cut losses? Sure it would in most cases. That strategy could also let profits run because there would be no exit unless and until the stock price dropped down through the moving average.

A different trader may choose to move stops behind his position either on a trailing basis or at a specific stop price that he could regularly move behind his position. I discuss this concept in "Trade Your Way to Wealth" and believe it is an important concept for every trader to incorporate into his personal trading plan.

I don't mean to suggest any specific exit strategy is better than some other one, but I do mean to suggest that I think is better to have some disciplined exit strategy in place than to have none at all.

I hope that is food for a little thought. Down the road, I think I'd like to take a look at "buy on the rumor and sell on the news" and maybe "you can't go broke making a profit." Maybe even think about "the trend is your friend" or "you earn on the turn".

Let me know if you are aware of some market saying that we might have some fun thinking about.

[winston]

Market Cliches II -- by Bill Kraft

Last weekend I wrote about some market cliches so we could think about their efficacy. While these sayings have become conventional wisdom, the real question for us as traders and investors is are they complete and do they work; do they produce the intended result?

This week, I would like to examine a couple more with the same objective in mind. One of my favorites is: "You can't go broke makin' a profit." I always say that to myself after I have gotten out of a position only to see it take off after I exited.

"You can't go broke makin' a profit" is only true if our profits are greater than our losses. The problem with the concept is that it doesn't recognize the importance of letting profits run. No doubt it is better to take profit than suffer a loss, but the real key is when to take the profit.

Should we pull the plug and exit a play as soon as it turns profitable? Once there is a profit, what should we do to avoid letting it turn into a loss? How long or far should we let the profit run before we close out? Again, as we examine the statement, it can result in the formation of an exit strategy.

It seems to me that we can follow the direction of the cliche by recognizing the importance of keeping a profit so we might want to trail a stop once our position is in the profit column or we may set an exit based on the crossing of a moving average or maybe follow Japanese candlesticks, but whatever we choose, we need to have a strategy first to preserve the profit and second to let it run or at least try to avoid exiting too early.

Another well-known market saying is: "buy on the rumor, sell on the news." I think this one is pretty valuable with minor modification. Buying on the rumor probably works pretty well as long as we hear the rumor and hear it fairly early in the game.

Hearing the rumor shortly before the news comes out may not work so well. The theory behind the saying is that the rumor generates excitement and excitement causes movement in the price of the stock. Generally, once the news comes out, the excitement is over. There is no more anticipation because we now have the information; we know the news. Once that happens, the run-up is often over as well and we may see a downturn.

I suspect the better saying is: "buy on the rumor if you believe there is a reasonable time before the news comes out and sell right before the news is announced." That pre-supposes we know when the news is going to be announced. In some cases, we may know when the news will be announced, in others, it can only be a guess. In either event, once again, we should have our exit strategy in place before we buy.

Is the trend really your friend and do you earn on the turn? If you're not sick of these cliches by now, we may take a look at those two down the road.

[kennynah]

i feel that at such times...when bull vs bear leads to unclear winner...

i would look at TA to decide on entry and exit points with short term trades... no point wasting time holding onto a position so far out that i miss all the upswings and tankings...which can make me millions (of pesos:) ) along the way...


but overall....i consider such general positions :

a) Long Ags...since BRIC is still floruishing; like MON, MOS, POT, IPI(new IPO)
b) Long selected techs...like Goog, AAPL (but i wana wait for lower volatility) or $170 at least...
b) Ready to do Calendar PUT on oily stocks, like APA ... but only when it is clearer on Crude weakness (must wait a bit)
c) if c) comes true, i'll maximum Short gold... but for now...i have shorted gold(jun) at $885 and plan to close off at $850 (if that happens )

[millionairemind]

Trading and making money in the market is tough business... perhaps the toughest one to do full time cos' you might still fail even if you put in alot of hard work..

I read in the book "Trading for a living" that 90-95% of full time traders flamed out within 6 months..

In the book "Trade your way to financial freedom", Dr. Van Tharp mentioned about the holy grail of trading.. which is inside you and it is the trader psychology that makes the difference in whether he makes money consistently or not.

He mentioned that we trade our beliefs about the market.. Those who believe the random walk theory will just buy the index funds... those who believe market can be timed will follow the rules set by the greatest stock traders like JL and Bill O'Neil.. those who believe market cannot be timed will buy good business at a large margin of discount and hold them forever..ie.. we trade our beliefs about the market.

I guess my view is that market is like a casino with a BIG POT of gold.. Traders and investors need to have an EDGE, however slight, over the market so that they can consistently win that pot of gold from the market.

The question is.. WHAT IS YOUR EDGE?

[winston]

And don't forget that if you are trading short term, you will be playing with the Big Boys..

[millionairemind]

And don't forget that if you are trading short term, you will be playing with the Big Boys..

And they have big financial muscles that you don't have..

They can move the index to gain from the futures...

[winston]

Do Traders Really Die Broke? -- by Bill Kraft

Last week, in response to my invitation to submit market sayings, one anonymous commentator who identified himself as one who had spent 16 years on the floor of the NYSE suggested a saying he attributed to folks who worked there. The saying is: "Traders die broke." Of course, I've heard the saying before as well as its companion: "Traders drive Fords, investors drive Cadillacs." Incidentally, I DO have a Ford (along with 4 other vehicles and 5 homes) so I am speculating on how it will come about that I will die broke because I am a trader.

First, I should note that trading does involve risk and the trader who trades as a gambler is, I agree, quite likely to die broke. Trading, however, can be done with limited, measured, or, at times, even no risk depending upon the strategy utilized.

In general, it is probably fair to say that the lower the risk, the lower the potential reward. A trader who uses no risk or very low risk collars, for example, may not make as much as fast as someone who chooses a very high risk strategy like simply buying a stock with no exit for example.

However, the high risk trader stands a greater risk of dying broke than the risk aware or risk controlled trader. A trader can take wild swings hoping to hit the home run (that seems to be what most do) or he can use an approach with a lesser measured risk and attempt to generate wealth in a safer manner.

Personally, I chose the latter. Success comes in trading the market much like the way one would eat an elephant, one bite at a time. The wild swinging trader may, indeed, hit the home run, but in my experience coaching and speaking with traders, it is the wild swinger who is most likely to go broke. Even if they do connect for the home run, they seem to take yet another wild swing with the proceeds of the first success and let it go down the drain.

It is important to understand who we are listening to. When someone who worked the floor of the NYSE (assuming not as a janitor) says "traders die broke," who is this person? Is it the broker who recommended you hold Enron to the bitter end? Is it the person who was urging you to continue to buy tech stocks coming into the 2000 crash, or is it one of the brilliant minds at one of the big firms that recently have had to write off billions of dollars because of the stupidity of their investments in the sub-prime markets?

When did the saying arise? Was it at a time when a trader had no chance to make a buck on a spread because commissions were so outrageous, or was it in more recent times when commissions were much more manageable? After all, it would be awfully difficult making any money writing covered calls if you had to pay a $200 commission on a single contract. Today, it can be done with a $5, $10, or $15 commission, giving the trader at least a better chance.

Finally, I do agree that traders may die broke if they trade like gamblers, do not discipline their trades or do not know how to discipline them; if they fail to incorporate principles of sound money management, or fail to enter positions with an exit strategy. On the other hand, I believe traders who apply discipline, money and risk management, and don't constantly swing for the fences do have a decent chance of doing well provided they expend the effort to educate themselves -- at least as a trader who has done those things successfully so far, I hope so.

[HengHeng]

Basically my mentality to trading is very simple. I think all of you guys know it already.

Beh Ki jiu Lou.

Why ?

We just use a simple analogy.

Given one has 10k will he punt everything in hope to get 20k with that one bet of 10k or will he place multi bets of 2k gains for the risk of 1k.

Given the chances is 50% 50%. You either win or lose.

Over the long run , you are still going to lose be it which ever way you are playing.

But if one can indentify a trade with a high probablity of hitting more than 30% based on investment amount yet the risk is just 5% and with discipline and a strict strategy in only investing when this kind of trade happens. I believe over the long run you will make money. Personally this works for me.

Thats the reason why i trade multi platforms. I don't mind pumping half or even higher of my portofolio whenever i indentify this opportunities as the only downside is just 5% as compared to the potential 30% that you might be able to win.

Most of the time , people are only concentrated on particular markets , yes no doubt being proficient in one is good but sometimes it also limits one's vision to see what is the underlying and more often than not committing silly mistakes due to impatience and greed.

To me trading is a waiting game. Thats why i've said the ablity to waste your time meaningfully is important.