Table of Contents
Volatility…………........................................................3

Pursuing a Trading Education…………………………4

Treating Trading as a Business………………………..5

Searching for the Key………………………………….6

The Insidious Nature of Greed………………………...8

Standing Aside is a Strategy…………………………...10

How Many Positions to Hold …………………………12

Managing Trading Account Money…………………...13

Do Traders Really Die Broke?.......................................15

Finding a Stock………………………………………..16

How Much Should I Be Making? …………………….18

Have a Plan…………………………………………….19

Holy Grail……………………………………………...20

 
 

Volatility
What a wild market we've seen. Volatilities reached levels not seen for 5 or 6 years. The Dow was down
almost 800 one day and up nearly 500 by the close of the following day. These have been hard, fast swings
and they can be very difficult to trade. Straight directional trades have been dangerous. What can a trader
do in circumstances like these to protect himself or herself? In "Trade Your Way to Wealth" I described
some strategies that can save the day in circumstances such as these. I personally use protective puts to
"insure" stock positions at times and I often place collars on high priced stocks. Collars, as I describe in the
book, can even be set up with zero risk and even with an assured profit at entry. As an example, back in
June, I bought shares of Baidu.com (BIDU) at just over $323 a share. A couple of days ago, I sold the stock
for $230 a share. It had gone down more than $90 a share, but I made a profit overall. When I bought the
stock, I also bought the $320 puts and sold the $340 calls. The call premium just about paid for the puts I
bought. Between June and the end of September, I bought back then resold calls against my position about
7 times, making a profit on the individual trades each time. When I closed my positions, though I took a big
loss on the stock, I realized a big gain on selling the protective puts. In these transactions, I initially used
the premium I was paid for the call to pay for the protective put. Thereafter I traded the calls depending
upon movement in the stock price to achieve an overall gain from the stock and option trades.

I describe the BIDU collar to illustrate that there are strategies by which we can protect ourselves on the
one hand and earn good profits even when we are in a market that is as wildly unpredictable as our current
situation. In order to accomplish those trades, we need to acquire the knowledge. I cringe to think what may
be happening to the fellow I recently wrote about who was going to learn by doing. I have no doubt that
recently he has learned quite a lot about what markets can do. Circumstances like those we have been
experiencing can provide a much more costly education than what one may pay to buy a good trading book,
or a DVD, or a seminar, or for private coaching.

Another way to work wildly volatile markets such as those we have seen recently may be to sell option
premium. When implied volatility is high, that means that option prices are high relative to their norm.
Selling options to open a position when prices are high and then buying later to close the position after
volatility has dropped and some time has passed can lead to some very profitable trades. The trader, for
example, could do that by selling naked options with the risk attendant to those strategies or he can sell
spreads (though they somewhat negate the high volatility) for pretty decent potential returns on a
specifically limited risk.

Investors who are not familiar with volatility trading or who don't know how to place and trade collars or
who don't understand or won't buy protective puts may best be served by remaining on the sidelines until
volatility diminishes. I always remind myself that being in cash is a position, too. Depending upon your
level of knowledge and individual risk tolerance, that may not be a bad place to be when volatility is
soaring.

Good Trading!
Bill Kraft

 
 

Pursuing a Trading Education

As many readers are probably aware, I am a great believer in advancing my trading knowledge and
advocate ongoing trading education for anyone who wants to become and remain a successful trader.
During the last week, I had a short dialog with a subscriber on the blog who adamantly takes the position
that he is going to learn for himself. Good for him! That is what I did and that is what most traders must do.
However, the subscriber further explained he wants nothing to do with books, seminars, coaching, DVDs,
or services that are sold. I am not sure what that means except that he is going to the school of REALLY
hard knocks. I have no idea how much money this person has to risk, but with an attitude that he can do it
without assistance from those who have gone before, my bet is he won't have it long. It's a little like
deciding to be a doctor, but not be willing to put out the cash and effort to attend medical school --
potentially hard on the patient -- and in this case, the subscriber is his own patient.

I remember when I first became interested in trading. I at least bought a book and that piqued my interest
which led me to attend a free "come-on" seminar where I knew I would be solicited to pay for a more
comprehensive seminar. I went to the free seminar fully determined not to pay for the seminar being sold.
Thankfully, I re-thought my decision and did pay for a two and a half day seminar. I made back the cost of
that seminar within a week using information I had gained at the seminar and from that time forward never
hesitated to pay for my education. It was far less costly than trying to get everything for free. Though I
speak at events on occasion (usually without pay) I no longer give seminars so I am trying to sell nothing
when I say that the many I attended have helped me succeed as a trader. Without them, I might possibly
have been out of the trading business years ago.

In my own case, I read every trading book I could get my hands on, watched umpteen VHS and DVDs, and
still attend seminars with some regularity. I read several trading books a year. In short, I make sure I devote
substantial time each year to enhancing my knowledge. I know several would-be traders who, like the
subscriber, absolutely refuse to pay for any educational information regarding trading. Not a single one of
them has been successful and most lose their trading money within the first six months. Education only
makes good sense and why shouldn't the educator be paid? Should you buy a stock, for example, if you
don't know how you might limit or remove risk? Would it be helpful to know a strategy that will make you
money if the market or the stock moves in either direction, just so long as it moves? Though not currently
the case, would it be helpful to know strategies that provide a nice return in a flat market? How likely is
someone to stumble upon these things as a new trader unwilling to read a book, go to a class or watch a
DVD?

I realize I'm probably preaching to the choir here, but when I see folks like the subscriber who evidently
resents authors or lecturers and begrudges them payment for passing on their knowledge, I feel a need to
reiterate that successful trading requires work and study, it does not come from bull sessions with other
unsuccessful traders. Serious trading, in my view, requires a foundation of knowledge first and then the
acquisition of experience. Trading real money before obtaining the basic knowledge seems like a perfect
recipe for failure.

Good Trading!
Bill Kraft

 
 

Treating Trading as a Business

How do you think of your trading and investing? Is it a hobby? Is it gambling? Is it something you do when
Uncle Fred gives you a tip or when you see something exciting about a company on television? Have you
devoted time to learning strategies or do you just buy a stock when you "think" or "feel" it is going to go
up? Do you have any exit strategy? Are you a buy and hold investor, and if you are, until when will you
hold? Do you make your own investment decisions or do you rely completely on someone else? Have you
defined certain times that you will devote to your trading or investing?

The bottom line is it is your money and you can do whatever you want with it. As hard as people work to
make money, it never fails to astonish me how little time and effort so many are willing to devote to
becoming good at investing. It seems like a lot of people I've spoken to about investing over the years do
treat it as a hobby or as a gamble. In the sense that all trading involves risk there is some gamble to it, but if
done properly, the trader can try to give himself an edge and he certainly can manage risk if he is willing to
make the effort. It is beyond me why so many people seem to make no effort to learn or understand
investing or even their own investments when the truth is that they are risking hard earned money and have
the opportunity to enhance their quality of life and potentially their retirement through sound investment
practices.

If you were to open a business, it is likely that you would have done your due diligence. You would have
studied the business, formulated a plan, determined where the risks lay, estimated the likelihood and size of
potential successes, and decided when and how much time you would devote to the enterprise. Why?
Because you wouldn't want to lose your investment and you would want to work to make the business
profitable. How is trading any different? It isn't. The investor who treats his investing or trading as a
business has an important leg up on most others. It does mean some work as does the creation and
development of any business, but the rewards can be fantastic.

In my first book, "Trade Your Way to Wealth", I emphasized the importance of making your trading a
business. I set out, in detail, a way to create your own specific business plan and discussed specific
elements to include in that plan. I explored risk awareness and risk aversion and concepts of money
management. All of these things can help you work to become successful. Who has a better chance to be a
successful investor -- the person who has made it a point to learn at least the fundamentals of investing and
who has created his own plan or the person who heard something about a company and buys the stock?
Anyone can be lucky with an individual stock pick, but it is the knowledgeable trader who cuts losses,
applies appropriate strategies, and exercises money management skills who is more likely to prevail in the
long run.

Next weekend, I'll discuss a few simple principles that have helped some of my students improve their
trading skills.

Good Trading!
Bill Kraft

 
 

Searching for the Key

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.

Good Trading!
Bill Kraft

 
 

The Insidious Nature of Greed

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, "Trade Your Way to Wealth", 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.
 
 
And as a last note, if you don’t yet have plans for October 26, why not come and hear me speak at the
Traders' Library 2008 Traders' Forum in Chicago. In my session, I will use current examples to show you
how to make limited risk and even no risk trades to protect capital while putting yourself in a position to
enjoy significant profits. Featuring some of the top minds in the investment world, this 2-day event will be
a great place to learn more tricks of the trade and to meet and mingle with smart active traders. I would be
pleased to meet you there—visit www.tlforum.com for more information and to register today.

Good Trading!
Bill Kraft

 
 

Standing Aside is a Strategy

Over the past several months, I have received a number of emails and heard from many
traders how hard they consider the markets have been to trade. In talking to others, I have
heard many sad tales about significant losses. In a sense, these complaints echo those I
heard when the markets turned south in 2000. I always try to ask these folks what they
are doing in the markets and the answer most often is that they are buying stock or taking
bullish positions. The problem, of course, is that the markets have been decidedly bearish
in general and unless a trader was focusing on oil and energy, the chances for success
weren't very good. Markets are going down because most of the stocks in that market are
going down so why be surprised that we lose if we are playing against the market?

I am convinced that most people are bullish by nature or training. The consensus, wrong
though it may be, seems to be that we need to buy stock or directional options to make
money in the markets. I once knew a man who literally made millions in a few short
years trading the markets only to lose it all when the tech bubble burst. Of course, there
were many reasons why he went broke including failure to manage money and failure to
discipline his trading, but most importantly, he refused to do anything but continue to
make bullish plays as the market turned more and more bearish.

It is fine to be bullish, but my suggestion is that if you are bullish by nature and only like
to make bullish plays, then stand aside when the market turns bearish. Going to cash and
just watching when a market is bearish is a lot better than watching our assets melt away
as we try to pick the bottom.

There are many ways to make money in bearish and sideways markets. I discuss several
of those ways in my book, "Trade Your Way to Wealth". In Appendix D to that book, for
example, I specifically set out bearish and neutral strategies along with the bullish and
describe things like their relative risk, capital required, time likely to be in the position,
potential rewards, etc. However, just because those strategies are available doesn't mean
everyone knows them or knows how to use them. If you are among those whose bent is
bullish and who neither knows nor cares to use bearish strategies, the best strategy is
probably to stand aside until the bull returns.

Awaiting the return of the bull requires patience and many would-be traders are very
impatient to say the least. Patience, though, is a great asset for a trader. Rather than
rushing in to catch the falling knife as so many do, how about waiting until a bullish
move is confirmed and then invest. That certainly seems better to me than watching the
portfolio race toward zero.

 
 
As the paid subscribers are aware, I have been addressing the bearishness for months
now, and, in the bullish services have sent out many fewer alerts than when the markets
were moving up. My efforts for the bullish services have been to try to find the
occasional position that looks like it has reversed up and get in with a reasonably tight
stop in case I am wrong on the direction. In general, though, I have spent much more time
"standing aside" than I normally would in a bullish market. During the same period, the
Option Trader service has had more trades simply because of the ability to make bearish
and neutral trades.

The markets or a stock can only go one of three ways -- up, down, or sideways -- and
there are strategies for each, but we have one other option available when we are
unconvinced about direction or just uncomfortable with a market; we can stand aside and
wait until we find the conditions we like. It may take time and require patience, but it is
better than the alternative.

Good Trading!
Bill Kraft

 
 

How Many Positions to Hold

Last weekend, in response to a subscriber's question, I discussed the issue of how much money a trader
needs in a trading account. As is often the case with trading, the answer is "it depends" on the individual
and his or her goals, needs, risk tolerance, time available to trade, and so on. That same subscriber had also
asked how many positions to hold in order to have a good mix of issues. Again, the answer is completely
dependent upon the individual.

One of the most important, if not the most important, factors to examine in answering how many positions
a trader should have is how many can that individual manage. I often have as many as 30 positions working
at one time, but I certainly would not recommend that high a number for the vast majority of traders.
Trading is what I do, so I am devoting a significant amount of my time to monitoring, entering, exiting, and
adjusting positions. Clearly, that is a much different scenario from someone who can only look at the
markets on the weekend or at night. I once had a student who traded for a living and only had one position
at a time. I have lost contact with her, but the last I had heard, she was a successful trader.

Many factors influence how many positions a trader can manage at one time. They include the trader's level
of knowledge, the strategies he is employing, and the time he can devote to his trading. Obviously, in terms
of monitoring, it is one thing to buy a stock and place a trailing stop and quite another to trade near the
money naked puts which might require relatively quick action to adjust, close, or roll the position. In
Appendix D of my book, "Trade Your Way to Wealth", I set out 15 strategies and compare things like the
level of monitoring required for each as well as things like relative risk, capital required, time frame,
desired market direction, and expected time frame.

Depending upon capital, a true buy and hold investor who has a full time job could hold a fairly large
number of positions while that same person who pursued a different strategy like swing trading long
options would probably hold a smaller number of positions. As I have written in the past, these are
considerations the individual investor should address when creating his individual personal business plan.
The conclusions may well differ for each trader, but it is an important decision. Trying to manage too many
positions can result in missing something on one or another -- believe me, I speak from experience. In my
early years of trading, I was so excited about what I was doing that I did make the mistake of having more
positions than I could effectively track and I burned myself. That episode taught me to limit the positions to
a number I can manage and I have been faithful to the concept ever since.

In the coaching sessions, I sometimes encounter students who have not considered a limitation on the
number of positions and find it difficult to keep up with themselves. I try to suggest that they establish a
comfort zone both in terms of risk and in terms of manageability. It is my personal belief that traders
should confine themselves to strategies and amounts of risk that permit them to sleep comfortably at night.
Inability to manage positions whether it be from lack of knowledge, lack of experience, or just too many
positions to manage does not lead to relaxed trading in my estimation and that, in turn, can lead to
emotional and bad trading decisions that we all want to avoid.

I hope you are enjoying a wonderful 4th of July weekend!

Good Trading!
Bill Kraft

 
 

Managing Trading Account Money

A couple of weeks ago, a subscriber wrote asking how someone who trades for a living manages money in
their trading account. The subscriber was interested in whether profits are plowed back into the account or
taken out or exactly how the money is managed. One of the most essential points of my book, "Trade Your
Way to Wealth", is the importance of an individualized plan. In the book, I emphasize the importance of
personalizing your plan and set out in depth guidelines to assist the reader in the construction of his or her
own plan.

Since each of us has differing amounts of money, different risk tolerance, different levels of knowledge,
prefer different strategies, has different amounts of time to devote to trading, and so on, I believe it is
important to create a trading business (whether full time or part time) that meets the specific needs of each
individual.

It is the same for those, like me, who trade for their living. I use a specific plan that is designed for me and
might not be appropriate for many others. For example, unlike most subscribers, I don't have a job other
than trading. I do devote time to individual coaching, speaking engagements, and writing things like these
articles, but my real job is trading. Therefore, when it comes time to answer the question will I trade full
time or part time, the answer for me is full time.

I can give you an idea of how I go about handling money in my own trading account, but just because I
trade for my living does not mean or even suggest that others who trade for their livings are going to do the
same thing or even anything similar. First, I want to note that I believe money management is a critical
element to successful trading and I devoted time to that concept in "Trade Your Way to Wealth" as well as
in archived articles here. There are many ways to manage trading money as I have set out in those writings,
but, for me, at least, the important point is to have a money management plan that keeps a trader in the
game. Betting it all on one position, for example, may be a money management plan, but it may not be a
very good one. If you "bet it all on black" and black doesn't hit, you are no longer in the game. I've seen
people do exactly that expecting to hit a home run only to lose it all. So, the first thing I do with my own
trading account is have a money management plan.

The subscriber who wrote seemed most interested in what full time traders do with their profits and I can
only answer for myself. I have several brokerage accounts, but only one that I identify as a true "trading"
account. Among the things I do in that account is trade options and one of the issues with trading options is
how large can a trade be. If I am trading something like the "Q's" (QQQQ) (representing the Nasdaq 100
index) or the "Diamonds" (DIA) (representing the Dow) I might be able to take large positions because
there is a great deal of open interest. However, if I am trading options in some less liquid options, I need to
make sure that my position is not so large as to affect the market or spread in that option. For that reason, I
place a limit on the amount of money I keep in the trading account. By some standards, it is a fairly large
amount, but it only represents a portion of my liquid assets. I will transfer funds out of the trading account
to do things like pay some bills or enter other investments when the account gets above a specific level so I
do not reinvest all the profits back through that specific trading account. In another account that I think of
as longer term investments (not buy and hold since I always have an exit strategy even if I'm guessing the
asset will be a longer term hold) I generally do reinvest profits less living expenses as they are realized. I
also use dividend reinvestment plans in that account to accumulate larger positions without commission
over time. Of course, the funds in that account are also generally relatively liquid and are available for
other large investments like real estate or for emergencies.

 
 
As I indicated, that is my own method and is only an illustration of what one trader does. What each trader
does with his or her money is the product of their own plan. It may be similar or differ radically from what
I do. Trading plans and money management like choosing strategies truly are personal to the trader. I was
happy to read the subscriber's question since it is evident that he is giving thought to the issue of what to do
with profits. It shows that he is looking for at least a part of a plan and that, to my mind, is a good thing.
Once again, I believe a trader can increase the chance of success by taking the time and expending the
effort to create a plan that fits his or her individual circumstances.

Good Trading!
Bill Kraft

 
 

Do Traders Really Die Broke?

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." Since I am a trader, and since I
have a book out entitled "Trade Your Way to Wealth," the saying is of definite interest.

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. Since I have long been
concerned with people who trade with little or no awareness to the real risks they are undertaking, I wrote
"Trade Your Way to Wealth: Earn Big Profits with No Risk, Low Risk, and Measured Risk Strategies." I
also write these Newsletter articles with the hope that readers will incorporate things like business plans,
money management, exit strategies, and risk awareness and control into their own investing and trading.

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.

Good Trading!
Bill Kraft

 
 

Finding a Stock

Perhaps the question I am asked most often is how do I find what stock to trade. Quite honestly, I don't
think that is the most important question a successful trader can ask, but it is clearly one that is on the
minds of many retail traders. First, I should say that there are many ways to find trading candidates and that
the specific methodology should be chosen by each trader individually and become a part of his or her
business plan. In my book, "Trade Your Way to Wealth," I set out, in detail a way to construct a business
plan and I sincerely believe that having such a plan is much more important than the specific method a
trader may chose to select a particular candidate to trade.

That having been said, there are a few basics that may be helpful in narrowing the search for candidates to
trade. Narrowing, after all, is a key ingredient to ultimate selection of the specific trading vehicle. Do you
want to trade a whole market, for example, or are you interested in finding a specific stock or option to
trade? Trading the whole market can be accomplished with various Exchange Traded Funds (ETFs) and
removes some of the risk inherent in trading a single stock. Generally speaking, trading the whole market
may also level off volatility, but will result in a trade-off as does almost every decision one will make when
trading. A single stock may offer greater volatility or movement than a market and, therefore, may have a
greater potential for a higher reward, but, at the same time may provide higher risk as well. It is unlikely
that a market will go to zero but many stocks have done exactly that or at least lost an enormous percentage
of their value. The recent troubles of Bear Stearns bear witness to that phenomenon.

Clearly, it is important to know what the market is doing even if one is going to search for a specific stock.
A trader is really playing against the odds if he is buying stock in a continuing bear market. Fact is, a bear
market is a bear market because most stocks are going down. A bullish play in a bear market is contrarian
and while contrarian plays certainly can do very well, picking a bottom can be very hard to do. A bullish
play in a bearish market may succeed, but it is less likely to do so than in a bull market. If the overall
market is bearish, why not look for bearish candidates. If the trader does not like to short stocks or employ
other bearish strategies, why not stand aside until the bull returns? Bearish plays (and I discuss a bunch in
"Trade Your Way to Wealth") can be very profitable and sometimes very quickly, but they are not for
everyone. Some people will not make a bearish trade because their overall philosophy is bullish; others
avoid the bear plays because they do not know how to profit from a bear move. Any reason an individual
may have to avoid bearish plays in a bearish market can be fine, but that does not mean it is necessarily a
good idea to try the bullish plays in a falling market. Waiting for the upturn is perfectly acceptable.

I prefer to make bullish plays in bullish markets and bearish plays in bearish markets. If I am going to make
a bullish play in a bearish market, I would at least like the stock I am buying to be in a bullish sector even if
the market is bearish. It is quite rare for all sectors to be bearish even in a bear market so if one is bound
and determined to make a bullish play in a bearish market, why not look for stocks in sectors that are
bullish. Obviously, the reverse holds true as well. If one likes bearish trades better than bullish trades and
the market is bullish, how about looking at a bearish sector to find a candidate for a bearish trade.

The fact is that it is impossible to be right all the time in the markets. Almost everyone who trades will
have losing trades. The successful traders are the ones who give themselves an edge, who take what the
market will give them rather than try to fight the markets, who know how to manage risk, and who continue
to educate themselves. Over the years, I have coached some traders and still do on rare occasion. One of the
things I have noticed in my own trading and in my coaching experience is that those who can exercise
 
 
discipline and trade in the present rather than worrying about the past or trying to predict the future are the
ones who are most likely to be successful. Learning ways to give yourself an edge, even a slight edge, is
key. Just look at the casinos in Vegas. They don't make money because they are right on every bet; they
make money because they make sure the odds, however slight, are in their favor.

Good Trading!
Bill Kraft

 
 

How Much Should I Be Making?

In my conversations with retail traders, I find that they have very high expectations for their returns. I
suspect that the expectations are often unrealistic and can lead to some poor decision making. A couple of
years ago while teaching a trading seminar, I had shown the class a spread trade I had entered on QQQQ.
The Q's have strike priced $1 apart and I had entered a credit spread in which the market paid me 20 cents a
share at entry. If you are unfamiliar with options, you don't need to know the specific mechanics to get the
gist of this article, I think my point will become clear as I discuss the simple math. In any event, I had
entered a 20 contract spread so I was paid $400 before a small commission at entry. Since the strike prices
were only $1 apart, and since the market had already given me 20 cents, my total risk was 80 cents. That is
a return on risk of 25% (20 cents/80 cents), and since the options were scheduled to expire in just 3 weeks,
I had a potential return of 25% in 3 weeks. Personally, I don't think that 25% in 3 weeks is a bad return.

One of the seminar students thought that was just a terrible trade because I only got 20 cents ($400). He
said he wouldn't bother with a trade for only 20 cents. He said he would not think about entering a trade
unless he got at least 50 cents. I asked him what he thought a good annual rate of return on risk might be
and he replied: "20%." Well, I had just showed the class a trade where I stood to enjoy a 25% return in
three weeks, but the student still didn't understand. He was hung up on 20 cents, yet I believe that $400
extra a month would mean a great deal to many people.

If I look at the $10 Trader, for example, I see a number of relatively small wins. Say, for example, that I am
trading $10 and under stocks. What if I were to gain 50 cents a month. Does that meet reasonable
expectations or not? If I were trading 100 shares, that would only bring in $50 before commissions (and
commissions could be $20 or $30 or more). What if I bought 1000 shares of a $5 stock and made the same
50 cents? Now I would have made $500. In either case, however, my return would be 10%. Is 10% a month
a satisfactory result? If a trader expects to make $500 a month, is it likely he can do that with a 100 share
trade of a $5 stock? Clearly, that would require a 500% return and while those may occur every so often, it
is not something one would reasonably expect every month. On the other hand, could a trader reasonably
expect to make 10% a month? Undoubtedly, that would be a much more attainable goal than thinking he
could make 500% a month.

When I ask seminar attendees what they think is a good annual return, the answers usually range from 10%
to 20%. What do you think is a good annual return? When you make a trade is your expectation in line with
your definition of a good return? Suppose you are trading $5,000 of risk money. How much would you
reasonable expect to make in a year? How much in a month? What risk are you willing to undertake to
attempt to achieve that end? Once again, let me refer you to my archived article on business plans and
suggest you formulate your own.

In my estimation, it is critically important to have a realistic expectation for your trading results. Unrealistic
expectations lead to frustration and disappointment. Success in trading often comes in many small bites
rather than a single killing. The single killings do occur, but I think it is much easier to succeed taking the
smaller bites.

Good Trading!
Bill Kraft

 
 

Have a Plan
I recently received an e-mail from a subscriber who set out his plan for money management. In general, he
made each trade 10% of his capital and found that about 60% of his capital was in trades at any given time.
I applaud the subscriber. Not particularly because of the brilliance of his plan, but because he took the time,
made the effort, and understood the need to have a money management plan. Could he have chosen a
different money management plan? Of course, he could and, at least as far as I know, there is no perfect
money management plan. Some advocate making each trade 3% or 5% of risk money (that's my personal
plan), others advocate equal dollar trades, and yet others may say limit losses to 7% or 8% of your trade.

Any of these methods can work. One of the keys is to stay in the game, and money management helps us
do just that. If we have no plan to manage our money, we may throw a small amount into one trade and a
large amount into another. Suppose Trade A was allotted $1,000 and Trade B allotted $10,000. Trade A
turned out to make a 20% gain and Trade B resulted in a 10% loss. We would have made $200 on Trade A
but lost $1,000 on Trade B. See the diffference if we had made equal dollar trades, i.e. each trade $5,000. In
that instance, we would have made $1,000 on Trade A and lost $500 on Trade B.

Unfortunately, we may think we know which trade is going to be the blockbuster, but the fact is, no matter
what we may think, we never can know which trade is going to be the good one and which trade is going to
go south until the trade is over. We can help deal with that issue by using a money management plan.

Money management is not the only area in which we need a plan when trading. As the saying goes: "Plan
your trade and trade your plan." In my estimation, we should formulate our own personal trading plan
before we ever enter a trade. It should include things like money management, what strategy we will
employ, when we will enter, when we will exit, etc.

The very existence of a plan, no matter what the plan is, is a significant aid in removing emotion from our
trading. Though it has often been said (and certainly seems true) that fear and greed move the markets, we
are better able to profit if we can remove those emotions from our own trading and learn to benefit from
those emotions in others.

Plans are helpful in removing those emotions and they give us a framework in which to operate. However,
we must be careful to remember that none is infallible. I understand and accept that my plan will not work
every time in all situations. I know I will have losing trades, but I am confident that I will profit overall as
long as I follow my personal plan. If I perceive weaknesses in the plan, or find improvements, I can always
alter the plan.

If I had no plan, how would I proceed? How do you proceed? It seems that without a plan, we can only act
"as the spirit moves us," and that translates to me as following my emotions. I suspect that nothing can be
more dangerous to a trader.

Good Trading!
Bill Kraft

 
 

Holy Grail
Online Investment Services, LP publishes a number of services including Option Trader, $10 and Under
Trader, and Trend Trader which I edit. Whenever an alert is sent out notifying subscribers of some trade I
have made or that I am considering, it is accompanied by a disclaimer. The first two sentences of the
disclaimer read: "These notices of Mr. Kraft's trading ideas are intended to provide opinions about and
analysis of the mentioned stock(s) and options. They are not intended to provide personalized investment
advice". There are many reasons for those statements in the disclaimer. Primary among those reasons is the
fact that I cannot and do not give you specific individual investing advice. I have no idea who you are, what
your experience is, what your risk tolerance may be, what your goals are, how much money you are using
to trade, or what financial education you may have. In addition, I am neither a broker nor am I a financial
planner. Taking all those circumstances into consideration, it is important to realize that the only thing I can
offer you is my personal opinion and information about trades I am entering or considering. You, in turn,
have the opportunity to see what I am doing and learn from both my successes and failures. If you are
considering entering the same trades as I do, you should not do so blindly. If a strategy is new to you, you
should trade it on paper before ever considering investing real money. Unless you are a seasoned trader,
you should consult with your own financial advisor, financial planner, and/or broker before entering any
trade. Trading can be very risky and losses are frequently incurred.

My purpose, in the services I edit, is to show you trades I do and try to expose you to a variety of strategies.
Since I trade for my livelihood, this information may be helpful but it is certainly not infallible. It should be
nothing more than a starting point for you to conduct your own investigation, make your own analysis,
consult your own professional advisor, and only after doing those things, make a decision. Nothing makes
me happier than receiving an email that questions a strategy or criticizes my trade. Those comments
demonstrate that the writer is thinking and analyzing for himself. That person is the one who is likely to
improve his trading, to understand the process, educate himself and ultimately succeed.

One of the major reasons that I am re-emphasizing these issues is that I so often see a new subscriber avail
himself of the free 30-day subscription and then quit the first week if I have not immediately had a
successful trade. This activity suggests to me that the new subscriber is missing the point. They are
searching for the holy grail of trading. Trust me, I am not the holy grail of trading. In fact, if I am
reasonably certain of anything, it is that there is no holy grail of trading. Every trader is going to have
losses as well as successes. Bouncing from one subscription service to another accomplishes little if
anything.

I can tell you that as I write this article, I have closed 14 winning trades in a row for the $10 Trader and that
I have only closed 1 loser since the service began. Impressive or lucky? That is history, but it does not
mean that I might not lose in the next 5 or 7 straight trades. The value, it seems to me is to see how I made
my entries and what caused me to exit. What level of risk was I exposing myself to when I entered a trade
and what did I do to manage that risk? It is the old story about giving someone a fish or teaching them how
to fish. I am not trying to give you a fish. That would only last a short time. I want you to learn how to fish
and, if you do, that can last you the rest of your life. In order to learn how to fish, though, don't you think it
is important to see where the fisherman has made mistakes so that you can try to avoid the same ones in the
future? As I trade, let me urge you to see the mistakes as well as the successes. That is the real value of the
service. I can offer no holy grail, only the opportunity to see how I approach trading. Sometimes, that
means you will see mistakes mixed with success. Those mistakes can provide even more important lessons
than the successes.

 
 
Of the trades closed since I started editing Trend Trader, 71% have been successful. Can you make money
with a 71% success rate? Of course you can. However, if you study the Trend Trader Table, you will see
that I took a couple of fairly large losses. The goal of every successful trader is to cut losses and let profits
run. It is important to learn how to do that. Studying the Trend Trader trades could be very helpful in seeing
where I have succeeded and where I have failed. The most common question I am asked about trading is
how do I find the candidates to trade. Let me suggest that the much more important question is how do I set
my exits for a trade. We have won or lost only after the trade ends so the exit and the exit strategy are
paramount in my estimation. Money management is also critically important, and both exit strategy and
money management come way before what stock to pick in my judgment. I have written earlier articles on
both exits and money management, so if you are interested, browse the archives.

Let me implore you to forget the quest for the holy grail of trading and, instead, learn as much as you can
about trading and then practice, on paper, what you learn before you ever place your hard earned money at
risk. If you aren't willing to take the time and make the effort to learn trading, you probably will not
succeed. It is that simple.

Good Trading!
Bill Kraft