Stop That September 24, 2007

Another entry in Quint Tatro’s “Becoming a Better Trader” series, this one on using stops:

One of the questions I receive often when we go through a poor market environment is how I was able to sidestep much of the carnage. My answer is quite simple. Markets don’t get terrible over night. They typically start to act poorly before the real selling kicks in.

By watching your underlying positions and adhering to a strict stop loss discipline, you will immediately be selling stock and raising cash when your individual stocks start to break down. When this happens, my stocks are cut and very quickly my cash level starts to grow. As the market continues to wane one by one my stocks are cut as they cross their lines of technical health and most of the time, I have raised cash taking only small losses while sidestepping the true carnage that is coming. You see, most people who suffer significant losses do not cut stocks quickly. Rather they adhere to the buy and hold mentality and ride the stock all the way down for a terrible loss. Finally, when the stock is done going down and becomes lifeless, the trader decides to cut the stock and is now faced with a very large loss to make up. These losses are very hard to recover from and often significantly damage not only the trader’s financial capital but emotional capital as well.

Rather than fall into this trap, adhere to a basic stop loss rule and save yourself the headache.

Go check it out.

More Rules September 20, 2007

Quint Tatro has published a couple more ‘chapters’ in his series on ‘Becoming a Better Trader’.

Here are the latest: “Let the Chart Be Your Guide”, and “Legging In”.

As Quint says: “There are countless trading styles and I have seen many that work incredibly well. Typically a person’s trading style and their rules will correlate with their personality.” So that doesn’t mean you have to adhere strictly to his rules and his rules only. However, it can’t hurt to take his ideas into consideration when developing your own set of rules and discipline.

Position Sizing September 18, 2007

More on trading rules from Quint Tatro. Today’s lesson is risk management.

Rule #1 – Position Sizing.

Bottom line? Don’t put all your eggs in one basket. Or even two baskets.

Rules Rule September 17, 2007

In today’s column, Quint Tatro doesn’t tell you what your trading rules should be – just that you need to have some. As he says, most people either 1) don’t have any rules at all, or 2) even if they have rules, don’t stick to them.

Rather than trying to unlock the mystery of trading through the vast array of noise that surrounds our chosen craft, ask yourself a few questions.

1. Do I possess a set of rules by which I follow to execute each and every trade?
2. Are these rules written down and do I review them frequently?
3. Do I constantly review my trades against my rules as my first area of investigation for a trade gone wrong?
4. Am I constantly looking to improve these rules over time?

Most people could improve their results dramatically simply adopting and adhering to a simple set of rules. Picking up any book on trading will give you these rules to follow. Over time, the true professional will slowly start to build his own set of rules that better correlate with his personality and tolerance for risk and ultimately, this foundation will be the building blocks for the true success that I believe is available to all.

It’s up to you to decide how you want to trade and/or invest. But as we often say here at BMB, you need to have some sort of plan, some rules, or some discipline as to how you’re going to go about doing it.

Navigating the Noise September 10, 2007

Some good tips from Quint Tatro on how to survive in today’s world of financial ‘noise’ – how to find your way through the noisy media storm, and a few tips on how best to find your own investment footing – and keep it amidst the distractions:

As my mini-vacation was nearing an end, I started to think about how an individual who is not involved in the financial markets on a daily basis is supposed to decipher all of this information and make an informed decision. I found it extremely ironic, that I for one was clueless and confused by the time I found myself back at the trading desk. I pondered this further and thought it demanded some attention.

The fact is society today is littered with information. Any person exposed to any form of media can soak in multiple opinions each and every day, but despite the good intentions those with the opinions are not the ones making the final decisions for your portfolio. It is the individual who is ultimately responsible for their financial future.

Despite the fact that I am one who trades stocks day in and day out, and methodical investment management is no longer my cup of tea, I felt moved to compile a few basic guidelines that may just help a methodical investor navigate through the noise and land on that island we are all seeking called financial freedom.

Here are my five “noiseless” rules that I hope you will find helpful.

1. Turn It Down: Headlines draw us in whether they are in print or floating through the airwaves. Eyeballs or ears are what drive revenue so it is the pundit’s primary job to grab your attention. Many wise people will tell you to gather as much information as possible, but I don’t believe those who stated this quite understood all the information available to us today. Adopt moderation in your financial intake. Simply cutting back on the clutter will help you to keep things in perspective and strike a healthy balance between the unbelievable numbers of opinions that abound.
2. Stick With One Source: If you are reading this, chances are you gravitate towards financial information or opinions that may come from independent sources such as the ‘Ville. There are many wise individuals out there that have navigated the toughest of seas. Find a friend or two and stick with them. They are in their position for a reason, but will not always get it right. Find one that you identify with, who writes or speaks for your demographic or life situation, and adhere to this person’s advice for the long haul.
   
   If you have all your investment money in a 401K, I wouldn’t be reading a day trader. On the flip side, if stock picking fits your fancy, stay clear of those preaching the macro-economic scene. In my opinion giving a financial friend a five-year cycle to prove themselves is a must. Many people bail after the first wrong call, and never fully benefit from the vast experience of the individual. Stop hopping and find a friend.
3. Index It: I will leave this debate to Jeremy Siegel and those much smarter than I, but I do know that most people who fall into the passive camp could improve their results dramatically by just sticking with a few index-only vehicles.
   
   An index is a basket of stocks that fall within a certain criteria. Most of the indexes are rebalanced each year, which means your portfolio will constantly be dropping the laggards and adopting the winners, a basic strategy people have the hardest time with. Furthermore, indexing today has been made so very simple through the use of ETF’s or exchange traded funds. No longer does one have to utilize mutual funds and buy or sell at day end. They have the ability to purchase an index vehicle like a stock.
4. Add Rules: Once a person adopts the above mentioned strategy for all or a portion of their portfolio, I do believe a set of basic money management rules can easily increase your downside risk. Despite the fact that indexing removes much of the emotion and decision making from investing, it does not however limit the risk.
   
   The market always undergoes cycles and regardless of who you are, you will not be immune to a nasty downward cycle that can last for months to years. Adding a simple set of money management rules, such as selling half of an index once it breaks its 50 day moving average, can help not only improve your longer term results but also preserve your emotional capital and allow you to sleep at night. This is not as cut and dried as an article on such rules is to follow, but adopting some set of money management rules, which a person religiously adheres to, will definitely help you to navigate the noise and improve your results.
5. Leg In, Leg Out: One of the most important rules I ever learned was to always buy in pieces and sell in pieces. The premise is that attempting to catch the precise bottom for a buy, or a top for a sell, is a fool’s game and a waste of time.
   
   While I never give out stock ideas to friends or family, this is a rule I always relay. Many people always struggle with how to invest and nail down the timing. Let me tell you a secret: you can’t do it, so don’t try. Sitting with heavy cash on the sidelines can be frustrating, especially when a market moves higher. At the same time, it can be torturous to see a portfolio drop each and every day and have no idea if now is the time to sell.
   
   In addition to a basic set of rules as mentioned above, I believe each person should adopt a methodical and unemotional strategy for entering or exiting the financial markets. I often suggest a 1/3, 1/3, 1/3 strategy over the course of six months for someone who desires to put capital to work. Vice versa, selling something, would be done in a similar manner. This of course, should correlate with the rules you set above and despite any siren call or new noise, one should not break or alter these rules.

Good advice. You can decide whether they’re the right things for you or not.