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Tradecraft – No Thanks for the Memories

On March 19, 2010, In Good Articles, by ElfLord

BETWEEN THE NEW York, Nasdaq and American exchanges, there are literally thousands of stocks available to trade. It’s a good thing there are so many to choose from, because like an old lover or ex-spouse, certain stocks carry memories that will never go away. And just as emotions can wreck havoc on good judgment, having a history with a particular investment can be particularly debilitating to your bottom line.

The fact is that those who dwell on the past often live there as well. The problem having vivid memories about a stock’s history is that it often clouds any analysis of its future. And while we often point out that trends tend to persist, none last forever. Yesterday’s chopped liver is often today’s filet mignon. So when the market’s fashions change, you’ve got to be flexible enough to change along with them.

For example, consider technology stocks. Over the past five years or so, we’ve seen technology stocks go from red hot (1998-2000) to ice cold (2000-03) to red hot again (2003-?). There’ve been opportunities to trade both long and short — but only if you’ve been able to keep an open mind.

Yet many people still remember getting burned on technology or dot-com stocks, which is exactly what has made them so difficult to get back into over the past few months. If you got taken to the cleaners on Cisco (CSCO) during the boom, for instance, it’s darn near impossible to consider owning it again, even at a significantly lower price. Losing money hurts, and when it comes to a particular sector it’s often once bitten, twice shy. (more…)

Tradecraft – Get Rid of That Gut!

On March 17, 2010, In Good Articles, by ElfLord

THE THING ABOUT trading is how incredibly easy it is to wreck your entire portfolio in no time flat. No matter how many years of education or experience you might have, every day presents a new opportunity to screw things up royally. Such is the nature of life: It only takes one really bad decision to ruin everything.

Good trading technique isn’t difficult to master. Using it consistently over time, however, is quite a bit more difficult. Whether it’s setting proper stop-loss orders or trading appropriate size, the rules of the game never change — it’s discipline that ebbs and flows.

It’s for this reason that I’m positively, unequivocally and unwaveringly against “going with your gut” when managing a portfolio. Human instinct tends to lead people straight to the poorhouse.

Disciplined trading comes from the head, not the heart. When you follow your instinct and go with your gut, it’s usually your feelings that are leading the way. Emotional trading tends to be more irrational — and more expensive. When XYZ is 10 points against you and you’re stricken with fear about taking a loss, it’s your gut, not your brain, that foolishly encourages to you add a few thousand shares and hope for a comeback. (more…)

Tradecraft – Let’s Get Technical

On March 15, 2010, In Good Articles, by ElfLord

AT ONE POINT OR another, we’ve all gotten Web or direct-mail advertisements promising outsized gains from trading systems using technical analysis. The claims are always enticing, since boasts of mediocre performance wouldn’t elicit much response.

But think about it: If someone really had an airtight, foolproof method of consistently making money in the market, why on earth would they share it with you for a mere $39 a month?

That being said, I do think technical analysis is inherently superior to more traditional investing methods. Technical analysis is focused on analyzing the market itself rather than other fundamental factors we assume will influence the market. And because markets are generally not chaotic, but rather tend to move in trends, I believe the best indicator of XYZ is often XYZ itself.

It wasn’t too long ago when technical analysis was dismissed as pure voodoo. That’s changed in recent years. Not only has the advent of computer technology allowed price charting to become far quicker and more cost effective, but the limitations of traditional fundamental analysis have been evidenced during both the late 1990s boom and the early 2000s bust. (more…)

Tradecraft – The Early Bird Is Overrated

On March 12, 2010, In Good Articles, by ElfLord

ONE OF THE toughest aspects of trading is that in order to make money, you’ve got to be right on a number of different fronts. Risk control, position size and timing must all be taken into account if you want to profit on stock trades. Of all these elements, timing tends to stir up the most controversy.

According to a recent and widely publicized study from research firm Dalbar, most mutual-fund investors are unable to time the stock market successfully. In fact, these investors aren’t even having much luck at keeping up with the rate of inflation. But as traders (read: active investors), like it or not, timing plays a role in investment decisions. Because it’s not just enough to know what to buy — the question of when to buy is arguably even more influential to the bottom line.

Most investors worry that they’re getting in at or near the top, especially in situations where a particular stock or sector has already risen substantially. Whether it’s low self-esteem or lack or confidence, they believe that as soon as the order hits the tape the market is bound to plummet. (more…)

Tradecraft – A Mind Is a Terrible Thing to Lose

On March 10, 2010, In Good Articles, by ElfLord

WATCH RUKEYSER, CAVUTO or any other investing-related television show, and you’ll notice that most prognosticators aren’t merely confident — they’re downright cocky. No matter how volatile the market might be, their forecasts are always infallible.

Although I’m usually opinionated, I’m never overconfident. In fact, I sometimes feel so completely out of touch with the market that I don’t know what to think. Sorry to disappoint you folks looking for a quick tip, but when it comes to the next move in the market, I often don’t have a clue. Considering the wild swings we’ve seen this year, perhaps in your weakest moments you can admit to the same.

As we often point out, a trader’s biggest strength isn’t necessarily finding winners, but dealing with losers. Still, feeling lost and unsure about an investment approach can be extraordinarily frustrating — and mighty expensive.

It usually starts innocently enough. A few favorite trades fall apart. Then sectors you had previously dismissed seem to spring to life virtually overnight. Your buy list gets smaller, more erratic. And the trading strategy that only a few weeks back seemed foolproof now seems foolhardy. You’re not just losing you’re lost. We’ve all been there at one point or another. (more…)

Tradecraft – It’s Consistency That Counts

On March 8, 2010, In Good Articles, by ElfLord

UP UNTIL MARCH, the few fund managers who were able to keep their portfolios in the plus column were heralded as investment geniuses. But with the markets up sharply this year, anything less than double-digit returns seems embarrassingly tame. Some sectors haven’t just performed well — they’ve kicked tail. For example, Internet stocks, which we first highlighted last fall, have taken top honors with 100%-plus gains.

But while we’d all like to see our investments on the “top performers” list, what traders should strive for isn’t necessarily the biggest return, but the most consistent.

Let’s define our terms. Consistent trading doesn’t mean that every trade is a winner, or even that in every quarter one is able to achieve a positive return. It does mean, however, that over any statistically meaningful length of time — say, a rolling 18-month period — your overall investments will have gained in value.

The return doesn’t always have to be stellar, but it does have to be positive. With all due respect to Legg Mason fund manager Bill Miller, consistently beating the Standard & Poor’s 500 doesn’t mean much when the S&P declines for three straight years. You can’t spend relative performance. (more…)

Tradecraft – Look in the Mirror

On March 5, 2010, In Good Articles, by ElfLord

OH HOW I WISH that each week I could come up with a list of investments guaranteed to rise. You’d make money, I’d look like a genius and everybody would be happy. If only it were that easy.

Because while the point is to buy stocks that go up, the reality is that no matter how good your research is not every trade is a winner. There’s no certainty in speculation, and as we often point out sometimes you’ve got to throw a hundred casts just to get a nibble, let alone a substantial catch.

As we wrote a few months back, the emotional strain in trading can be downright debilitating. And while losing money and dealing with uncertainty is tough, I’ve found the most difficult aspect also to be the most important: taking responsibility for your own actions in the market.

Like many elements of trading, it’s much easier said than done. The fact is that when we lose money in the market it hurts. And what makes trading losses especially painful is the knowledge that it’s our action — or inaction — that prompted the loss. In a free market, nobody forces us to buy or sell anything. To that end, win or lose, when it comes to our portfolios, we’ve got nobody to blame but ourselves. (more…)

ZF Capital

Tradecraft – No Thanks for the Memories

Tradecraft – Get Rid of That Gut!

Tradecraft – Let’s Get Technical

Tradecraft – The Early Bird Is Overrated

Tradecraft – A Mind Is a Terrible Thing to Lose

Tradecraft – It’s Consistency That Counts

Tradecraft – Look in the Mirror

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