4/14/2007
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Weekend Newsletter for April 14, 2007 Please forward to a friend! (Subscribe)
Note: Tax Filing Deadline is Tuesday, April 17 (click for details)
The Week At A Glance According To The Charts
Controlling Your Money
Controlling Your Money -- by Bill Kraft
Copyright 2007, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor
Last weekend I wrote about some of the difficulties encountered when a trader begins the transition from paper trading to trading with real money. This article looks at the specific subject of money which may be the root of all evil, but is certainly the element that introduces the dangers of emotion when we leave the relative safety of paper trading and put our cash at risk.
The first and most important rule of trading real money is to use only "risk money." Risk money is money that you can afford to lose. It would not make you happy if you did lose it, but your life would go on without any change. In other words, risk money is money that is not needed for any necessity. As we transition from paper trading to real money trading, we must not use the rent money, mortgage money, grocery money, car payment money, insurance premium money, or tuition money. If that is all we have, it is not yet time to trade real money. Using money to trade that is needed for some necessity is dangerous and can cloud judgment. It places undue pressure on us. Lee Trevino, the famous golfer, once said something like: "Pressure is standing over a $50 putt with only $5 in your pocket."
As we begin trading, we must understand it is a business; successful traders rarely are gamblers. They do everything they can to put the odds in their favor. In addition to using only risk money, they carefully manage the money they are trading. One way to manage money for the beginning trader with a small account is to make equal dollar trades. If the trader is starting with $5,000 for example, each trade might be $500 or $250. What we don't want to do is make one trade $2,500 and the next $250. How could we possibly know which one is going to be successful? Generally, Murphy's Law goes into operation and we have a big loss on the $2,500 trade and a small gain on the $250 trade. Trading in that fashion soon takes the trader out of the game. Our first objective is to stay in the game. Making equal dollar trades helps us do that. Even if we lost all the money risked on one trade it would not be the end of the world. Of course, if we have a good exit plan, it would be unlikely that we could lose everything invested on the trade. On the other hand, if we placed a large portion of our money at risk on a single trade, it could end our career.
I once had a student who began trading real money and was doing quite well. He was making equal dollar trades and had six or seven winners in a row. He was calling me every day and telling me how well he was doing. "Bill," he would say, "I made $700 today." Or, "I just made $550" and so on. One day, the phone didn't ring. I did not hear from him for several days so I finally called and asked how he was doing. He told me he no longer was trading. When I asked why, he responded that after all the successes in a row he thought he had figured out what the stock he was playing was doing. He put ALL his money on a bullish play and the next morning the company issued some bad news, an analyst downgraded it and the stock gapped down several dollars. He had bought out of the money calls and was literally wiped out. He has never traded again.
That sad story is all about money management and greed. If we manage our money properly, we remove a large part of the risk and prevent our greed from enticing us to do what the fellow in my example did. As we begin to trade real money, we are still building our confidence. Our paper trading may have been very successful, but it just isn't the same. Now, something important is on the line. Take it easy. Build confidence with equal dollar trades. If you lose part of your money on a small trade, so what? You will have losing trades so keep the losses small.
I believe an even better way to manage trading money is to use equal percentage trades rather than equal dollar trades. That is difficult to do with a small account, but can definitely be utilized as your account grows. I personally favor making trades where only 3% to 5% of risk money is placed at risk in any given trade. When losses are incurred and the account value drops, the next trade automatically is made for a lesser amount and when gains are made, greater amounts automatically are invested.
This seemingly simple device of managing money can build confidence, protect assets, and enable the trader to stay in the game. When tempted to "put it all on black" please remember my friend's story.
Good Trading!
Bill Kraft
Mr. Kraft's past articles are posted on our website for your review.
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Chart by StockCharts.com
WAG (Walgreen Co.)
Company Profile
Our Success Trading Group closed another winning trade this week. We were in and out of Walgreens (Ticker: WAG) for a quick profit in 6 days. We believe WAG could be purchased again at its current price of $45.92. If purchased on Monday at this price we would be looking for an exit around $46.61 depending on the market conditions at that time.
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Chart by StockCharts.com
USU (USEC Inc.)
Company Profile
This one took off and enabled me to realize a 24% gain before commission in ONLY 3 DAYS! I bought the '09 $15 LEAPS calls for $5.40 on April 5th and sold them for $6.70 on the 10th.
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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.
Chart by StockCharts.com
NDAQ (NASDAQ Stock Market, Inc.)
Company Profile
NDAQ has been consolidating for some time after a drop to the March lows. Friday, it broke resistance at $30 on strong volume and may be ready for a move. I do have a bullish option position and may now consider adding some shares to my portfolio.
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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.
Chart by StockCharts.com
SLW (Silver Wheaton Corp.)
Company Profile
I bought this one at $9.70 a share on April 3rd and sent the alert to sell on April 11th for a 98 cent a share gain and over a 10% return in 8 days. Right now, it is looking like I may find a reentry on this recent strong mover.
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COVERED CALL SERVICE -- by the Covered Call Team
Chart by StockCharts.com
BUCY - Bucyrus International, Inc. is currently trading at $55.59. The May $55 Calls (HBUEK) are trading at $3.40. That provides a return of about 5% if BUCY is above $55 on expiration Friday in May.
Company Profile
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The foregoing is commentary for informational purposes only. All statements and expressions are the opinions of Online Investment Services, LP. or the associated editor. This information is not meant to be a solicitation or recommendation to buy, sell, or hold securities. Past results do not guarantee future performance. Stock investing is risky. Option trading is risky. Futures trading entails great risk where one can lose more than his account balance. We are not licensed or registered in the securities or futures industries. The information presented herein and on the related web sites is presented "as is" without warranty of any kind either express or implied. Although the information has been obtained or derived from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolios of writers for this issue may, in some instances, include securities mentioned herein and on the related web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors. No one associated herewith receives compensation in any manner from any of the companies that are discussed in this newsletter or on the related websites. By accepting emails, including various paid subscriptions and free email reports and newsletters, you agree to the terms of the MarketFN.com's website Disclaimer, Privacy Policy and Terms of Use provisions as such may be amended from time to time.
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