5 Trading Reports!

Table of Contents

Trading Report #1:Business Plans for Traders and Investors........1

Trading Report #2:Trading Do’s and Don’ts..................................6

Trading Report #3: Disciplined Trading ........................................10

Trading Report #4: Learning To Trade...........................................14

Trading Report #5: Using Subscription Trading Services...............18

Trading Report #1Business Plans for Traders and Investors

I teach seminars on stock and option trading. In the basic class, I always begin with the necessity of hav-ing a business plan. Trading and investing are busi-nesses. We need to treat them that way. If you were going to open a retail store or a medical practice or an oil exploration company you’d certainly have a business plan, wouldn’t you? So why wouldn’t you have a trading or investing plan? Clearly, each of us who trades and/or invests should have a plan, but many don’t. In all the seminars I’ve taught, I’d guess

1

that less than 1% of the attendees had a business plan before they came. Now, I hope they all do.

Emotion is the enemy of the trader and the investor. If that investor doesn’t have and abide by a plan, don’t you think the chances are high that his trad-ing will be controlled by emotion? Fear and greed take over and generally seem to lead to poor deci-sion making. The undisciplined traders often enter at exactly the wrong place and exit just as badly. One of the ways to avoid the dangerously undisci-plined approach is to have a plan. I remember being on the trading floor of a large brokerage house in New York when I first began trading for my living. I was fortunate enough to meet the head trader and he asked me what I was doing and I excitedly ex-pounded the trading plan I was following. I hoped he would acknowledge the obvious brilliance of my plan. He didn’t. What he said, however, has stuck with me for many years. He said it wasn’t so impor-tant what my plan was; it was important that I had a plan. He told me that most of the retail traders and investors he knew had no plan and that almost any plan was better than having no plan.

As I began to teach trading, I tried to incorporate that message to my students. Generally they would glaze over when I went into my sermon on having a business plan. They were waiting for the “good stuff” about how to make money. Well having and mak-ing a business plan is definitely a huge part of that “good stuff.” Without it, making money is infinitely more difficult. One of the perks of our basic trading

2

class is that everyone is entitled to a free retake and many of the students wisely avail themselves of that opportunity. We throw an awful lot at them in the initial two day class and repetition helps them final-ly own the knowledge. Anyway, I began asking the retake students whether they had completed a busi-ness plan and they never had. When I asked why, I learned that they had no clue how to formulate the plan. Now, in class, I take some time and go over some detailed suggestions as to what the business plan should include.

While the following is not intended to be complete or exhaustive, it is intended to give the reader a start-ing point in formulating their own personal busi-ness plan for investing or trading. Here are some of the elements of a business plan that I suggest to my students:

1. Will I trade full or part time?

2. How much risk money will I assign to the busi-ness? (I define risk money as money you can lose that will not affect your life or lifestyle. It does NOT include mortgage payment money, rent money, gro-cery money, car payments, insurance premiums, clothing money, or any other money you absolutely can’t afford to lose).

3. What will be the size of my trades? (Equal dollar amounts, or equal percentage amounts).

4. How will I make my trading decisions?3

5. When will I make my trading decisions? (In the evenings? Only on weekends? Once a month? It de-pends on what is going on in your own life).

6. How will I enter?

7. How and when will I exit?

8. What strategies will I employ?

9. What are my business hours? (In my view, this is very important. If we had a store, we would be open certain hours. If we assign business hours to ourselves, they should be treated as exactly that -- business hours. It is not a time to play with the dog or have non-essential interruptions. The business needs to be treated like a business).

10. What is the maximum number of trades I’ll have in place at any one time?

11. What type of stops or alerts will I use?

12. What are my specific trading expectations?

13. What will I do to increase my trading knowl-edge? (Reading, seminars, paper trading, DVD’s, etc.).

Again, these questions are intended as a starting point only. Other questions will occur to you as you develop your plan. Remember, the business plan is always a work in progress. It is expected to change

4

over time. You may start trading part time and ul-timately go full time. You may learn new strategies over time and that could change the strategies you are going to employ. You may begin with only a small amount of risk money and not have enough money to make equal 5% percentage trades at first so you may decide to trade equal dollar amounts. Later, when your account grows, you may switch from equal dollar amounts to equal percentage amounts.

The critical point is that you do develop a business plan of your own for your own trading and invest-ing. The act of devising the plan will require some thought and will reveal important information to you about yourself. Completing the plan will give you a foundation for better trading. Abiding by the plan once you have completed it will put you in a rare class of trader and investor.

Good Trading!

5

Trading Report #2Trading Do’s and Don’ts

Anyone could become a better trader just by becom-ing or remaining aware of some simple but impor-tant “do’s” and “don’ts.” Markets trade on emotion so if we can learn how to play emotion or group psy-chology without being ruled by our own emotions, we increase our chances to become better traders. If we can remove emotions from our trading and, at the same time, develop an awareness of how the group behaves we have given ourselves a leg up on the crowd.

6

Some Don’ts

Don’t trade more than you can afford to lose. The “bet it all on red” theory could yield a huge profit, but more than likely over the long run, it will lead to bankruptcy.

Don’t enter a position without a predetermined exit in case the play turns against you. When someone buys a stock and it drops, the tendency is to believe that “it’ll come back.” It may, or it may not. Remem-ber, though, if a stock drops 50% it has to increase 100% just to get back to even. The saying is that “the first loss is the best loss.” Why? Because the average trader holds on too long when a play goes against him. Instead of having a predetermined exit, he waits for it to come back or waits for it to come part way back until ultimately he sells in frus-tration (and that’s often near the bottom). Mean-while, he is wasting opportunity and time.

Don’t exit prematurely if the move is going in your direction. Just because there is a good profit doesn’t mean that the stock can’t go higher. Instead of sell-ing during a good move, consider trailing a stop loss order, or use a violation of a moving average or a trend line as an exit.

Don’t let emotion rule your trading. Learn how to enter and exit at points that are determined by pre-set rules. For example, some advocate exiting a po-sition when there is a 5% or an 8% loss. If you have a plan in advance - and follow it - you can help

7

remove the emotion.

Don’t be impatient. So often people subscribe to an advisory service and think it is their way to get rich quick. Truth is, that isn’t usually the way it works. Knowledge of risk, risk to reward, knowledge of strategies, money management, and following a carefully devised plan are essentials to getting rich steady, but even then, there are no guarantees. Successful trading and investing requires work and time.

Don’t enter a trade unless you fully understand and appreciate the risks.

Some Do’s

Do learn as much as possible about trading and trading strategies. Knowledge is, indeed, power.

Do have a money management plan in place and follow it. I fully believe that money management is critically important to success.

Have reasonable expectations. Sure, a given trade can yield 35% or 150% in a month, but that doesn’t mean you’re going to make that rate annualized (420% or 1800% a year). Can it be done? Of course it could be done, but is that a reasonable expecta-tion? Probably not.

Do make your own decisions. No one cares as much about your money as you do. No one. Apply your

8

own knowledge, gain knowledge, use your common sense and don’t blindly follow others.

Do understand how much is at risk in each trade and compare that to the potential reward when you make the judgment to enter that particular trade or not.

Remember that the first exit is generally the best exit when a trade goes against you.

Listen to those who are profitable traders and don’t listen to “Uncle Louie” who probably hasn’t had a profitable trade since 1999.

Treat trading and investment as a business.

Good Trading!

9

Trading Report #3Disciplined Trading

We often hear that the markets trade on fear and greed and that is doubtlessly true. Rumor has it that amateurs often buy near the top and sell near the bottom. Why would that be? As a stock begins to move up, there often is little hype so only a few are buying. As the price moves upward, there is often more and more buzz so the public becomes aware of the stock and its movement. Many are still reluctant to buy, however, for fear that it will turn down. As it continues up, it is often accompanied by more and more volume. There is more and more hype. Finally, there may even be magazine articles about it; brokers may be cold calling and touting a

10

buy. About then, there is a deluge of buying and the stock soars. Suddenly, however, the volume dries up. All who wanted to get in are in. Someone has to be the last one in and I suggest that those late to the party are jumping in because greed has finally overwhelmed their fear. Of course, the timing is aw-ful.

Now our hypothetical trader has entered a position and wants the stock to go up. He chose that stock and he is emotionally involved. He has no thought that the stock will drop and no plan if it does. In our example, the stock soared just as he entered and volume dried up. What do you suppose will happen to the price of the stock. Well, there are no more buyers at that high price so, in order to sell, the sellers must take a little less or sometimes a lot less. What is our friend doing now? I suspect he is worrying, and that makes him a grim buy and hold investor. He’s in so he’ll hold the position. As I asked in an earlier Report, hold the position until when? Until he dies? Maybe, but more likely until the fear once again rules his trading. As the stock drops, the drop is also often accompanied by in-creasing volume. Those who got in early are taking profits. Finally, those who got in late are making the argument to themselves: “I’ll get out if only it goes back to ‘x’.” But it just keeps dropping and as it falls on high volume our trader sells. Why? Probably be-cause he is afraid (fears) that it will fall some more. About that time, our trader sells. Now what? The sellers are gone. Everyone who wanted out is out so what will happen next?

11

Is that scenario a figment of my imagination or have you ever traded that way? Have you ever bought near the top and sold near the bottom? If you have, how did you arrive at your decision making? Have you seen others trade that way? Why did they do that?

As I have often opined, emotion is the serious en-emy of the trader. I suggest that successful trad-ers have made every decision before they ever enter a position. For example, if one is going to enter a trade because the stock is trending up, can you see any reason to stay in the trade if the uptrend is bro-ken. If the trend is broken, the stock is no longer in an uptrend. Why would a trader want to continue to own a stock that is going down?

Before a trader buys that stock, couldn’t he decide that he will buy it because it looks like it is going up, but if it turns down below the trend, he will sell it. Notice I suggested he could make those decisions before buying the stock. Now is there any emotion involved in getting rid of the stock? No, as long as it stays above the uptrend line, the trader rides it up. When it breaks (or closes below) the trend, he sells. Now, the decision is relatively easy and unemo-tional. It certainly doesn’t mean the trader will never lose; he will. There is no perfect trading system and all will have losses. One of the keys to successful trading is to cut losses. If the trader sells on a break below an uptrend has he cut losses? Another key to success is to let profits run. If the trader stays in until the trend is broken has he let profits run? Has

12

he done that without emotion? Can each of those decisions be made before ever entering the position?

Discipline is critical and it is tough to discipline oneself in the heat of battle unless a plan has been formulated ahead of time. As has often been said, plan your trade and trade your plan. One of the problems I have often seen with people who have come to my classes is that they do well when they practice trade or paper trade. They have a plan and follow it, but when they start to use real money, they forget their own plan and their own rules. Can you guess what happens when they abandon the plan that was so successful when paper trading? Sometimes they forget money management and after several good trades “bet it all on black.” Guess what happens then. “Betting it all on black” or XYZ stock is purely the product of greed. It is unlikely that a seasoned trader would do that. Sometimes, they plan their trade to have an exit at a specific place, but when the stock drops below they hang on saying to themselves: “It’ll come back.” Sometimes it does come back, but why tie up money with a stock that you want to go up is going down?

Refer back to my Report on the business plan if you want. Make your own plan. Continue your educa-tion. It’s your money and it’s your risk. Continue to learn as much as you can about discipline, about strategies, about yourself and about how to remove the emotion from trading.

Good Trading! 13

Trading Report #4Learning To Trade

I’ve never met anyone who has read “Rich Dad, Poor Dad” by Robert Kiyosaki who didn’t agree with the premise that in order to become rich it is necessary to have your assets working for them (unless they inherited wealth or won the lottery, etc.). Most of us work for a living and we, ourselves, are the only money producing asset. That is a very rare way to wealth yet it is what we are taught to do. I recom-mend Mr. Kiyosaki’s “Rich Dad, Poor Dad” to you. Hopefully it will inspire you to learn to utilize assets in addition to your own time to produce wealth for you.

14

I teach seminars and mentor students concerning stock and option trading. One of the common mis-conceptions I see when students begin taking our seminars is that they think it is a way to get rich quick. That is definitely not the way I see it. Stock and option trading can, indeed, lead to great wealth, but it also has risk. Sometimes the risk is relatively slight and sometimes the risk is enormous. I’ve seen traders “bet it all on black.” In other words, I’ve seen people take all their money and put it into a single play. That’s scary to me. I’ve seen them lose all their trading money in a single day. That’s not investing, it’s gambling. I don’t mean to say that money can’t be made gambling, it can. Over the long haul, how-ever, the gambler in the markets usually goes broke. One of my own mentors told me not to try to get rich quick, but rather to try to get rich steady and that made a lot of sense to me.

In this series of articles, I’ve written about a number of things that I believe are extremely important to successful trading. Subjects I’ve touched upon in-clude having a business plan, money management, some ways to cut losses and let profits run, and various strategies. All of those things are important, but, most important of all, in my view, is knowledge. The more advanced trader can sometimes trans-form a losing position into a winning position if she knows some countermeasures or she can at least reduce the loss in a position that has turned against her. The beginner just doesn’t know what to do. Where do you fall in that continuum?

15

I don’t care who it is, your money is more impor-tant to you than it is to anyone else. You probably work very hard to earn it. Isn’t it every bit as impor-tant to learn how to preserve it and how to grow it? Only you can motivate yourself to do it. Is it easy? Is it get rich quick? Is success going to be handed to you? Probably not. Like almost everything that is worthwhile, it is going to take work. I think we’ve been schooled to believe that trading is too hard for most of us and we must rely on someone else. Horse feathers! How well did the experts running the mutual funds do when the market crashed in 2000? How well did the analysts pushing Enron do? With a little knowledge and the willingness to keep learning you have the opportunity to place yourself in a financial position you never thought you could achieve. The catch is IT’S UP TO YOU. I’ve heard it said that if you are willing to do what others won’t for 6 months or a year, you’ll be able to do what others can’t for the rest of your life. Wealth is not just about money, it is about quality of life. It is a wealthy man who can enjoy and spend time with his family. It is a wealthy woman who can devote time to what she loves. Money can help achieve the independence necessary to live the quality of life we seek; it can help free our time for the things that are truly important to us. Family, charity, activities that may be beyond our means now are within our reach if we choose to make the effort. It isn’t for everyone, but if it is for you, start now.

One of the first things that deter students is

16

vocabulary. “I’m going to open a diagonalized cal-endar spread” or “I think I’d like to adjust my bull-ish put spread since the stock turned bearish” may have little meaning to you at the moment, but with a little study you’ll become fluent. Did you ever study a foreign language? Remember the first cou-ple of days in class when you thought you’d never get it? After a couple of weeks, you were beginning to converse and understand some basics. It took some effort, but you gained ground rapidly. The same thing is possible in studying trading. Chances are you can do it. You just have to want it. If you don’t go after it, I doubt you’ll get it. If you do go af-ter it at least you’re giving yourself the chance.

Let me suggest that you set aside some time each day or each week or each month to study. Set aside the time and do it regularly. Use the MarketFN.com newsletter subscriptions to see what we are do-ing. Most of our reports have 30-day free trials. Use these free trials. (I’ve also placed some discounted rate links at the very end of this series of reports.) See if it makes sense to you. Learn from my mis-takes. Trade on paper without real money until you see how you are doing with any particular strategy. Don’t trade with real money until you have person-ally practiced a strategy and understand the risks and nuances. Keep learning, it’s worth the effort.

Good Trading!

17

Trading Report #5Using Subscription Trading Services

In my experiences trading for a living, as editor of stock and option subscription services, and in classes where I teach budding traders, I have seen many approaches to trading and to the uses of sub-scription services. I think it may be worthwhile to discuss some of the benefits and pitfalls of using those services.

Invariably in the trading classes I teach, I am asked how I find the stocks I trade. My standard answer is that there are many ways to find what to trade. Pure fundamental analysis is one way to select a

18

stock; using the list of 100 from Investors Business Daily is another; utilizing scans available on chart-ing services like Worden Brothers TCNet or various brokerage sites is another and of course subscribing to one of the MarketFN.com is yet another. Each of these methods can be quite valuable and may be a wonderful starting point for the trader or investor with any level of experience.

In the case of the Investors Business Daily list, the trader has a starting point from which to narrow the search. So, too, the scans can incorporate criteria that the trader desires such as P/E, moving average crossovers, MACD, stochastics, DMI, and innumer-able other indicators that suits the particular inves-tor’s fancy. What these things may or may not do is tell the investor or trader when to enter and when to exit a trade.

The subscription service has the advantage of let-ting the subscriber know both what the editor likes and when the editor is entering or would like to en-ter. What a great starting point that can be! The edi-tor has already done a lot of the work. He has found a stock he likes and he has found an entry that is good in his mind. That doesn’t mean that the sub-scriber should take it as a personal recommenda-tion. It is a jumping off point for the subscriber. It is critical to remember that the subscriber is the one taking the risk if he enters a position so the trade must be one that fits the subscriber’s own criteria.

19

One should be selective in choosing a subscription alert service. Is the service designed for the way you like to trade? If you like day trading, is the service designed for the day trader? Does the subscriber want trades every day? What is the editor’s phi-losophy? Does the service limit itself to trading only large cap stocks or are all stocks fair game? What do you want to trade? Does the service only provide information on option trades? If so, do you have an understanding of the strategies that are going to be employed or are you willing to learn? Is that what you want?

Subscription services don’t recommend that you enter a position. That is extremely important to re-member. The editor tells you what he is doing or what he thinks is a good entry or exit. Should you follow that blindly and take it as a recommenda-tion to you? Of course not. You may not have the same amount of capital, your risk tolerance is prob-ably much different, your knowledge of strategies may not be the same, and your money management rules could be different from the editor of the ser-vice. What you do know is that someone with expe-rience trading likes a particular trade. Now, taking that, doesn’t it make sense to evaluate the risk in that trade? Does it fit your own risk tolerance. Can you enter the position without violating your per-sonal money management rules? Do you see the rationale the editor used when he entered the trade? Where is his exit if the trade goes against him?

20

Would your exit be the same? How fast can you move to exit a trade if things happen quickly? Does your broker allow the same kind of orders as the editor is indicating he is using. For example, if the editor is in an option trade and says his initial exit is contingent on the price of the stock going below “x” you need to know whether your broker provides for contingent orders.

Trading, for many, is an unfortunate exercise in greed and fear. I once had a new subscriber write complaining that I hadn’t done a trade in two days! What did that tell me about the subscriber? It told me that the person was impatient and impatience is an enemy of good trading. I have learned to try to take what the market will give me. I think it is a serious mistake to force trades. Suppose I get an email with the complaint that I haven’t made a trade in two days. Should I force a trade so that it looks like I am doing something or should I wait until I find a trade where I think I stand a good chance to profit? The answer seems obvious. I am trying to make profitable trades and sometimes it takes a little time to find one. Our impatient friend should realize that I am not working in his time frame and perhaps should seek another who is. I am not a day trader and do not have a day trader mentality. In my case, the prudent subscriber should read what I have written when I sent out past alerts, read my articles in the Newsletters and see where I am com-ing from. I am concerned about risk and about cut-ting losses if a position moves against me. I am con-cerned about money management and trying to

21

profit over the long haul. Though I am happy when I get them, I am not expecting huge profits from ev-ery position. I don’t expect to be “in the game” every minute. Like I said, I try to take what the market will give me. I know I can’t make the markets do anything.

No matter where you get the idea, always remember the trade is yours. The risk is yours. The ability to enjoy the profits is yours. It’s your money that is at risk so doesn’t it make sense to be aware of what you are doing. Subscription services are great. They provide a marvelous way to see potential trades and learn what a trader is doing. You can learn vast amounts from subscription services and you may often come upon terrific trades that fit your style, degree of risk aversion and time frame. Services can provide significant insight and can do away with a lot of time spent searching for trades. Just remem-ber, what they are unlikely to do -- that is make you rich with no effort at all on your part.

Good Trading!

22

©Copyright Makin’ Hay, Inc., All Rights Reserved

23