ZF Capital > 2009 December

Tradecraft – Out With the Old

On December 11, 2009, In Good Articles, by ElfLord

I MUST ADMIT to being a bit of a pack rat. Even if I can’t remember why I owned it in the first place, I’m loath to part with any prized possession, from concert T-shirts to stacks of Clinton-era copies of Wired magazine.

These days, however, I’m giving some spring cleaning a try. And with your portfolio, just as with your closets, you should always start with the old and broken junk that you never use. In short, let your winners run, but cut your losses.

It’s a common misconception that the best traders always pick winning stocks. Every portfolio will have a healthy share of losing trades. And while nothing satisfies the ego like cashing in some chips, the correct way to cleanse your portfolio means starting with the losers.

Buying a stock is easy the real skill comes in having the ability to get out. Tell yourself it’s a tax loss if you must, but the real reason to “toss the loss” is that losing trades tend to stay losing trades, and usually for much longer than anyone ever expects. The best move isn’t to keep the faith with long-term losers, but discard them altogether. (more…)

Thought of the Day (December 11, 2009)

On December 11, 2009, In Thought of the Day, by ElfLord

What you believe about value and your reasons for believing it may be of highest quality, but if the market doesn’t share your belief, it doesn’t really matter how “right” you are based on your superior reasoning process or what you believe to be the quality of your information, because prices are going to go in the direction of the greatest force.

The point here is that right and wrong as you may traditionally think of them don’t exist in the market environment. Academic credentials, degrees, reputations, even a high I.Q. don’t make you right in this environment as they would in society. Traders, acting on their belief in the future by putting on a trade, are the only force that can act on prices to make them move. Movement creates opportunity to make money, and making money is what trading is all about.

– Mark Douglas, The Disciplined Trader

Thought of the Day (December 10, 2009)

On December 10, 2009, In Thought of the Day, by ElfLord

Don’t fall into the complexity trap. Some participants buy expensive chart systems to test, back-test, and optimize complex trading systems. While this process works well with specific tactics, it often reflects an inability to take personal responsibility for one’s results. The best opportunities always sit right under the trader’s nose. They set up now the same way they did 50 years ago and will likely book profits for our grandchildren in another 50 years.

– Alan Farley, The Master Swing Trader

Tradecraft – Bending With the Wind

On December 9, 2009, In Good Articles, by ElfLord

WHAT MAKES THE Sears Tower able to withstand 60-mile-an-hour winds isn’t its strength, but its flexibility. Although the building soars 1,700 feet into the sky and weighs almost half-a-billion pounds, it’s designed to sway gracefully in high winds — by up to a foot at times.

And so it is with trading. Most often it isn’t the market that hurts us the worst, but our own stubbornness and pride. Nobody is bigger than the market, and when an irresistible force meets an immovable object, trust me: The force will win every time. The best traders aren’t the ones who can throw punches, but the ones who can roll with them.

Probably the most important yet deceptively simple aspect of trading flexibly is maintaining the ability to keep an open mind about the market. Just as the girl you had a crush on in high school looks different 10 years later, stocks are like living, breathing animals that change over time. Yesterday’s leaders are often tomorrow’s losers, and while I’m no raging bear, it’s amazing to see how many people believe that they should hold onto losing stocks for the long term in the belief that they have to come back. As WorldCom (WCOM) demonstrates they don’t have to do anything of the sort. (more…)

Thought of the Day (December 9, 2009)

On December 9, 2009, In Thought of the Day, by ElfLord

The question “Why does a chicken cross the road?” is no joke on the Street; when someone asks, “Why is that stock going down?” the objective answer is, “More sellers than buyers.”

Therefore, if the law of supply and demand– the one thing you can keep track of objectively, the one tool that is devoid of emotion– tells you you’re wrong, it’s wise to accept it. You may think Kodak is going still higher for all those “becauses,” but if that support level gives way in the marketplace and the price falls to 125, don’t fight it. “Can I bear to take yet another loss?” “Suppose I sell and the stock goes back up?” “How can I sell such a nice company?” Can’t you just hear those echoes? But the rule is as applicable to the stock market as it is to real life: Do not rationalize failure.

If you root for stocks in the market game, there is nothing wrong with being a fair-weather fan. The decisive act of selling may turn out , with hindsight, to be a mistake, but the indecisive act of not selling can turn out to be a disaster.

– Justin Mamis, When to Sell

Thought of the Day (December 8, 2009)

On December 8, 2009, In Thought of the Day, by ElfLord

Patience is one of the most valuable attibutes in investing. I liken it to a great baseball hitter such as Wade Boggs nowadays or Ted Williams [R.I.P.] in my youth. The key to their success is to wait for the fat pitch to hit and not to swing from the heels at just anything. The idea is to work the pitcher into a hole and to get the count to 2-and-0 or to 3-and-1. That forces the pitcher to throw strikes…often fastballs. In other words, if the hitter is patient, he tries to work the odds into his favor. Then, and only then, does he take a real rip at the ball.

It’s about the same in the stock market. I try to “work the count” in my favor by waiting for the indicators to get very one-sided before “swinging from the heels” with an aggressive strategy. If I don’t find the indicators producing very good odds in one direction ot the other I’m content to play defensively and just bide my time.

– Martin Zweig, Winning on Wall Street

Thought of the Day (December 7, 2009)

On December 7, 2009, In Thought of the Day, by ElfLord

Nothing new occurs in the business of speculating or investing in securities.

Years pass; bull markets come and go. Yet the basics are still the same: Price, volume, and crowd behavior set the stage for all else.

– Jesse Livermore, Reminiscences of a Stock Operator

ZF Capital

Tradecraft – Out With the Old

Thought of the Day (December 11, 2009)

Thought of the Day (December 10, 2009)

Tradecraft – Bending With the Wind

Thought of the Day (December 9, 2009)

Thought of the Day (December 8, 2009)

Thought of the Day (December 7, 2009)

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