"What is the difference between a winning trader and a losing trader?"

[lemonjello]

Sounds typical BJ. In the old days they would have tarred and feathered those snake oil salesmen or worse. Now they get to be regulars on Fox TV.

lemon,
Funny you should mention Schaeffer. Did you notice who got last place with a pick that was -63.01% this year in the celebrity division of the Pick of the Year Contest ? I don't think I could pick that bad if I tried. It was right down the toilet for MWY from January--December. I've noticed after a particularly bad year these guys often change the name of their newsletter and mention some great pick from their past. Out of the hundreds of symbols they list at least one or two will do great each year.


---------------billyjoe

[Runner]

A while back I got a trial subscription to some of Price Headley's newsletters. His trades were just awful and he misrepresented his track record. Same with Bernie Schaeffer and Tobin Smith. Just awful. They must have trained at the the same boiler room. PT Barnham would be proud.

IN all honesty I’ve never herd of Price Headley. I simply came across this article, liked what I read and thought it was good enough to post. In fact someone may possibly learn something from it…

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

[Runner]

Money Management and Reward to Risk

Unless you're a pure gambler, "betting it all on black" or putting all your trading money into one position definitely isn't the way to go. Money management can be critical to long term success in stock and option trading and investing. "Diversify." "Don't put all your eggs in one basket." Who hasn't heard those words of wisdom? Yet, time and time again, people forget that wisdom. They put all their savings into one stock -- often the company where they work. Apparently they believe the company can't fail so they don't perceive the risk until it is too late. Talk to people who owned Worldcom, Enron, United Airlines, Qwest, GM over the last 5 or 6 years, and see how they feel that strategy worked. Clearly, many stayed until the all too bitter end in some of those stocks and suffered the life changing results. For companies like GM where the stock topped out around 94 in the year 2000 and as of mid March 2006 trades around $21 or $22, the old "it'll come back" refrain will require over a 400% move. Suppose you owned 5000 shares of GM since the year 2000; your asset value has gone from about $470,000 to $107,500. Suppose today was the day you planned to retire and those shares of GM and Social Security were it! First, you can see how important it would have been to have used an exit (see our Trend Trading materials on our website), but also quite importantly you can see how leaving all the eggs in that one basket worked out. I don't mean to pick on GM. Stock in many companies have suffered a similar fate. I just want to illustrate the dangers of failing to manage money.

What do I mean by "money management"? How is it done? When someone trades stock (or options) he should set aside a specific amount to trade. The money set aside should be risk money; money that isn't needed to pay the bills, the mortgage, the car payment, groceries, etc. Since all trading involves risk, the amount set aside should definitely be considered to be at risk. Once the amount is identified, the trader has the option of making equal dollar amount trades or trading a fixed percentage of the risk money on each trade. Someone with a relatively small stake may initially make equal dollar amount trades. So, for example, if the trader has $10,000 in risk money, he may make each trade $500 (or $750 or maybe even $1,000) thus if everything is lost in one trade, there is still $9,500 (or $9,250 or $9,000) left to trade. He is still in the game. Even better, in my view, is making equal percentage trades. I prefer something in the 3% to 5% of risk money in any given trade. Let's say our hypothetical trader starts with $100,000 and trades 3% per trade. The first trade is for about $3,000. Let's say that all is lost on that trade, now the trader has $97,000 and the next trade would be only $2,910. Again, the $2,910 is lost, now there is $94,090 in risk money and the next trade would be about $2,800. Finally, that trade makes a nice gain of $2000. Now, there is $96,090 and the next trade would be for $2,900. Again, there is a gain, and this time a big one for $6,000. Now the risk money is $102,090 and the following trade would be for about $3,060. You get the point. As the fund diminishes, the trades are getting smaller and as it gains, the trades get larger. Several wins in a row will result in more money traded so dollar gains should be greater. If there are several losses in a row, less and less money is traded so potential losses are smaller and smaller. The chances of staying in the game are greater with this method of money management, and you can't make money trading unless you are able to trade. Of course, there is the old bridge players story of the Duke of Yarborough who purportedly went years without having a single point in a hand of bridge. If you are the stock trader's equivalent of the Duke of Yarborough, I guess nothing will help, but proper money management could give you a better chance.


While many people who trade are aware of money management principles, they fail to use them. Though money management makes sense, greed sometimes takes over. I once had a trading student who was doing very well. He'd call me and say "I made "x" today." The next day he'd tell me he made twice as much as the day before and the following day he did well again. The calls went on for some time, each one more excited, and then they stopped. I was concerned so I called him and asked how he was doing. He was crestfallen. He had five winning trades in a row on a particular stock and then guess what he did. He put all his money on the next trade. As fate would have it, the stock gapped down hugely the following morning and my friend not only lost all the profits he had claimed, he was out of the trading business. The market is a stern teacher and "Murphy" is always near at hand. Knowing that every trade involves risk, do everything you can in your trades to try to put the odds in your favor. Proper money management is one of those things that could help.


Another thing I believe a trader should analyze is the reward to risk ratio of a trade. I am a firm believer that I should know my initial exit before I ever enter a trade. I should also have a "first target" for the move I am trying to play. That does not mean that I will exit just because my position hits the first target. I'll see what the stock is doing if it gets there. If I'm bullish, I won't sell automatically if it hits that first target -- it may keep going, you know. If I sold just because it hit the target I may cut my profits by getting right out. I'll have my stop close, but unless the stock turns back at that point, I'll stay in the position.


My "first target" is important in determining the reward to risk ratio I am looking at when I buy the stock. Suppose the stock is trading at $50 and my initial exit is $1 below that at $49. My risk, for the purposes of this calculation only (the real risk is $50) is $1.00. Further suppose that my initial target is $53. My reward to risk ratio in this scenario is $3 to $1 ($3 potential profit to $1 potential loss) or 3:1.


Let's say, for purposes of this Article, that my reward to risk criteria for entry into a position is 2:1 and that I do 10 trades. Here is the hypothetical Trade Table:




Trade 1 +2
Trade 2 +2
Trade 3 +2
Trade 4 +2
Trade 5 -1
Trade 6 -1
Trade 7 -1
Trade 8 -1
Trade 9 -1
Trade 10 -1
____________
Total +2

In that example, I could have lost 6 out of 10 trades and still come out ahead if I lost my anticipated risk in 6 and gained my initial target in the other 4 trades. So I can theoretically lose 60% of the time and still make money if I am trading positions with a 2:1 reward to risk. In actuality, I try to find trades that have a 2.5:1 reward to risk ratio.

Money management and reward to risk awareness can make all of us better traders and help try to enhance our trading.


Good Trading!
Bill Kraft

[Runner]

Ailun Zhan


Being an individual investor, I neither have a huge army of analysts doing work for me, nor do I have the smartest talent money can buy doing complicated strategies for me(strategies that work, Long term capital management doesn’t count). In this sense, it appears that we individual investors are at a disadvantage.

Not quite. In an ocean of investments that is growing in size every day, there are many opportunities for us individual investors. We are small, thus we are agile and mobile. To the contrary, institutions are way too big to fully take advantage of the many opportunities the market presents. People like Warren Buffett are faced with a problem—namely too much money and too few big enough ideas to be worth trading on.

Without the huge amount of resources the mammoths in the financial industry control, individual investors must develop their own approach to the market that is neither time and people intensive and is not doable by institutions(though it may be best to follow the institutional money in the long run.)

What kind of approach is that? The top down approach.

By utilizing a top down approach, I am to achieve the following:

1)Saving time, by doing research on different markets, and investing only when the broad market is bullish.

2)Find opportunities quickly. For example, a recent short in my newsletter and Investopedia simulator MTH was found in 15 minutes or so. I felt the Nasdaq was bearish then, and I looked through the best performing industries in the past few years. Metals was one, housing construction was another. I saw it had broken below the neckline on an H&S on a weekly chart. Then I looked through all of the charts in the sector, found MTH to be ready to go into freefall. 9% profit realized in like 2 weeks.

The advantages of my approach are

1)Less time spent

2)By analysing market direction first, I can avoid bear markets/corrections and enter near the beginning of bull markets.

3)I can jump in and out rapidly, acting on short term opportunities, increasing profits and lowering risk.

Here how I go about using my top down approach to the markets.

1)I look at the charts of the Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite Index. I look for chart patterns, get a feel for the movement in the market indicies. I use some other commonly used technical indicators to analyse the data(though they are relatively unimportant in the decision process). I also use market breadth indicators, i.e. New high/New low ratio etc etc. Also, pay attention to where we are in the current market cycle. I believe that we will be in a consolidation area for nearly another decade.

2)Do my own macroeconomic analysis. Right now, I’m focusing on the prediction of where future interest rates will go. This will need analysis and prediction of inflation. Thus I would look at commodity prices and other inflation indicators. We have also seen high money supply growth rates before the release of the numbers was terminated. This would be good for interest-rate sensitive stocks. Led me to BOT, entered at 92 and 105 and sold in the 110s.

3)I also utilize intermarket analysis. I.e. using bonds as a leading indicator for equities. John Murphy’s “Intermarket Technical Analysis” is a good book on the subject.

4)Look at the charts of the different sectors. Pay close attention to the financial sectors and utilities, which usually lead the broad market, as they are interest rates sensitive.

5)After I have a list of different sectors, I try to figure out a reason for their bullishness. Interest-rate sensitive securities and commodity-related securities are the easiest to figure out. Low interest rates and high commodity prices respectively, are good fundamental reasons to enter these industries.

6)Then I usually use two methods to look for stocks in the industries I’m bullish in. First way is to look at the charts of all of the stocks in the industry.Time consuming, but it’s worth it. Find a list of bullish stocks and then look at their fundamentals. The second method is to screen for stocks with good fundamentals, then look at the charts. More efficient, but sometimes small fish slip through the net.

7)Place a trade, size according to risk model and then you’re set .

[lemonjello]

Hey, it was free. Basically I used to use a trial to check their trading record which is usually not openly published. Then I'd check a few of their trades to see if they are reporting them correctly and if they're making any money. Mostly idle curiosity since I've never found one of the people that use a lot of marketing to be any good. A lot of them don't even report their trades correctly and if they were trading a real portfolio they would have tanked it. This is a very bad sign. Another one I'd avoid is Dr. J Najarian (sp?) or anyone associated with Tobin Smith. I posted the comments as a heads up to anyone reading this thread - maybe save somebody some money- not criticizing your reading selections.

I even took a free trial to Larry McMillan's service - didn't see him making any money and he wrote one of the top books on options. Not saying he's in the same hypster category as the others tho.

I've since gotten to the point where I don't even bother with trials since 99% of the time it's worthless anyway.

Agree with you on money management and position sizing.

IN all honesty I’ve never herd of Price Headley. I simply came across this article, liked what I read and thought it was good enough to post. In fact someone may possibly learn something from it…

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

[skiracer]

Lemon,
Try this one, www.morpheustradinggroup.com. Take the free 1 month trial on the Wagner Daily, Deron's daily ETF report, and The Stalk Sheet, his daily stock setups. You can get them both for 1 month free. The combo offer is $125 for both after the 1 month trial or $49.95 for the ETF report and $125 for the stalk sheet separately.
At least check out the website to see what the guy is all about. He details everything he does and is as legitimate as the day is long. I've been there for almost 2 years running and have made 10 times the subscription costs. Plus you'll get educated on a number of facets regarding position sizing, money management, and technical analysis for your bucks at the same time.

[lemonjello]

Thanks ski. I'll check it out.

Lemon,
Try this one, www.morpheustradinggroup.com. Take the free 1 month trial on the Wagner Daily, Deron's daily ETF report, and The Stalk Sheet, his daily stock setups. You can get them both for 1 month free. The combo offer is $125 for both after the 1 month trial or $49.95 for the ETF report and $125 for the stalk sheet separately.
At least check out the website to see what the guy is all about. He details everything he does and is as legitimate as the day is long. I've been there for almost 2 years running and have made 10 times the subscription costs. Plus you'll get educated on a number of facets regarding position sizing, money management, and technical analysis for your bucks at the same time.

[Runner]

Market Update for February 7, 2007

1-2-3 Model In Yellow Light Mode

By
Van K. Tharp

Look for these monthly updates on the first issue of each month. This allows us to get the closing month data. In these updates, we’ll be covering each of the major models mentioned in the Safe Strategies book: 1) the 1-2-3 stock market model; 2) the five week status on each of the major stock U.S. stock market indices; 3) our four star inflation-deflation model; and we’ll be 4) tracking the dollar.

Part I: Market Commentary

The market seems to be replete with conflicting information. On the one hand, I have sources that tell me people have cash that they just don’t know what to do with. For example, someone bought a New York building that was full (with ten year leases) at a rate of return that was about 4% (less maintenance costs). Why would one spend billions on an illiquid asset like that when you could do better with treasury bills? But this seems to be the state of the market. The baby boomers are still pouring pension money into the market (and that should continue through April 15th), so the market has lots of cash. In addition, the Fed has stopped raising rates (and may even start reducing them in the near future) and many pundits are saying that the market is undervalued at current levels.

At the same time, I hear other market gurus saying that the market is overvalued and due for a major correction at any time now. Just wait and see. This one might fit with the secular bear market scenario (which I believe) that says valuations (not prices) will continue to go down for the next ten years or more.

This is all the more reason why the best traders just watch the market and act based upon what it is doing right now. And right now the market looks pretty good. Our model portfolio, which I report on in the middle of each month, is mostly long and efficiency levels, as discussed later in the update, are positive.

Part II: The 1-2-3 Stock Market Model IS IN YELLOW LIGHT MODE and that’s good for stocks

As I said last month, the Fed stopped tightening a little over six months ago, so we can now say the “the Fed is out of the way.” And that officially occurred on December 29th. Under red light mode, stocks typically go up, although not massively. The average yearly increase in the S&P 500 is about 10.9% during yellow light mode.

Let’s look at what the market has done over the last five weeks and compare that with where the averages were December 31st last year. This is given in Table 1.

Table 1: Weekly Changes in the Major Averages
Dow 30 S&P 500 NASDAQ 100
Date Close % Change Close %Change Close % Change
Close 04 10,783.01 1,211.92 1,621.12
Close 05 10,117.50 -6.17% 1,248.29 3.00% 1,645.20 1.49%
Close 06 12,463.15 15.58% 1,418.30 13.62% 1,756.90 6.79%
5-Jan-07 12,398.01 -0.52% 1,409.71 -0.61% 1,785.30 1.62%
12-Jan-07 12,556.08 1.27% 1,430.73 1.49% 1,844.81 3.33%
19-Jan-07 12,565.53 0.08% 1,430.50 -0.02% 1,796.81 -2.60%
26-Jan-07 12,487.02 -0.62% 1,422.18 -0.58% 1,772.97 -1.33%
2-Feb-07 12,653.49 1.33% 1,448.39 1.84% 1,798.13 1.42%

The market is continuing to rise and everything is up on the year. Last week included some excellent gains and my guess is that those gains will continue during February.

As of the close of the year, 71.4% of the market consisted of positive efficiency stocks. As of February 2nd, it was 77.3% positive efficiency, which is the strongest I’ve seen it since its prior peak in February 2005.

Part III: Our Four Star Inflation-Deflation Model

I strongly believe that we are in an inflationary bear market and that our inflation rate is simply masked by government statistics.

So far our models have been telling us, that inflation/deflation is pretty steady, with a slight inflationary bias, and that’s where secular bear markets tend to start.

So what’s our new indicator telling us about inflation? I’ve described the inflation model I’m using in these updates for over six months now, so instead of continuing to list the criteria here each month, click here to read more if it is new to you or you don’t understand it.

Okay, so now let’s look at the results for the last six months.

Date
CRB
XLB
Gold
XLF

December 30 2005 347.89
30.28
513.00
31.67

June 30 2006 385.63
32.10
613.50
32.34

July 3 2006 391.49
30.90
632.50
33.08

August 31 2006 390.95
32.19
623.50
33.52

September 30 2006 379.10
31.82
599.25
34.62

October 31 2006 383.92
33.33
603.75
35.43

November 30 2006 408.79
35.00
646.70
35.68

December 29 2006 394.89
34.84
635.70
36.74

January 31 2007 393.89
36.25
650.50
37.08


We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been.

Date CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
October Lower Higher Higher Higher Higher Higher Higher Higher


+1/2

+1

+1

-1
+1.5


The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom. The model once again shows that inflation is winning slightly.

However, let’s compare real inflation as measured by the CRB versus the government’s measure of inflation as measured by the CPI. These are shown for 2005 through 2006 in the next chart. Notice that the CPI has hardly moved, while the CRB has gone up about 33% over the two years. Click here to view chart.

Part IV: Tracking the Dollar

The U.S. dollar is still looking weak. It was relatively flat for about six months and then it started a major fall against the Euro, which is still going on. This is another reason why the Federal Reserve needs to keep rates high. When interest rates are high, people are attracted to the dollar. But when rates are falling, they will dump it quickly. The IMF has already said that the dollar, at current rates, is 35% overvalued. Can you imagine the impact of the dollar falling another 35%? Incidentally, I get my data from a government website. And to my surprise, the numbers had totally changed from the last time I looked at it. All I can do is assume that the government decided to change their measure in some way. I’ve changed the chart below to reflect the government’s updated figures. Perhaps the government was worried about critical support levels and did some statistical changes in the index.

The Dollar Index

Month
Dollar Index

Jan 05 81.06
Jan 06 84.29
Feb 06 85.05
Mar 06 85.01
Apr 06 83.88
May 06 80.63
June 06 81.51
July 06 81.94
Aug 06 81.18
Sep 06 81.59
Oct 06 82.36
Nov 06 81.49
Dec 06 80.89
Jan 07 82.37

Earlier, I pointed out that the falling dollar had attracted the Economist magazine to feature it on the cover. Covers tend to make good contrary indicators and the market is now higher than it was when that cover came out in November.

Right now there is no currency around to replace the dollar. It’s not going to be the Euro and I don’t think any major Asian currency is close to becoming the world’s reserve. However, my guess is that the Yen is a good candidate for becoming strong in the near future.

[Runner]

Some info contained in this thread is about all I have to offer. In closing maybe one new trader might read something that makes sense and helps him or her put together a better system or at least open one’s eyes…

[Tatnic]

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

You're missing one key element and that's diversification. If you keep your position sizes reasonable and own nothing but tech stocks you will lose your ass on the first downdraft. Position size is important but it means little by itself. Get it?