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It is a simple truth that we never know what the markets are going
to do on any given day or for that matter over any given week. About
the time we think we know, some event occurs that results in a change of
direction. We do have quite a lot of historical information, however,
and that can give us some clues to how the markets or individual
equities may behave. I’ll discuss some clues in later articles. For
now, though, for example, we know that over extended periods of time
markets have risen. That phenomenon supports the “buy and hold”
strategy of investing. In the long run, the buy and hold investor seems
to have a pretty good chance of success, but of course, as has been
said, in the long run, we’re dead.

One problem with buy and hold investing is that there is no defined
end. Hold until when? As I have often said in my seminars and
mentoring: “Hold until death? Great for the heirs, but not necessarily
for the initial investor.” The pure “buy and hold” investor does not
define how long he will hold; it is defined for him. Indeed, he may
hold until death and that probably means he had enough money without
ever having to tap his investments. On the other hand, he may encounter
an emergency and have to sell all or part of his position. In that
case, and I suspect that is the more common situation, he is completely
at the mercy of the moment. If the investor bought when the market was
low and was forced to sell when it was higher, all well and good. But
what if he bought at a peak, like QQQQ in early 2000 and had some need
to sell in the latter part of 2002. If he bought shares of the Q’s
around the top in 2000 and sold at the bottom in 2002, he would have
lost more than 80% of his investment. Even today, 7 years later, that
year 2000 Q’s buyer would not be back to even. How do you suppose he
currently would feel about his buy and hold investment? That is not to
say that over time he may not profit, it is only to say that “buy and
hold” has pitfalls as well as any other strategy.

I would never discourage a person from utilizing the “buy and hold”
strategy so long as they recognize what they are getting into when they
enter the position. They have no exit, period. If they need to exit
for some extraneous reason, they are at the whim of the market. For
that reason, it seems that money invested in “buy and hold” positions
should be money that the investor believes will not be needed for
anything in the future. If there is going to be any anticipated need,
“buy and hold” needs to be modified in my opinion.

Why sit through the two year plummet of QQQQ and wait more than 7
years for a return to your entry price? I suggest that an exit strategy
be set before the position is ever entered. Suppose you decide you want
to buy a stock because it has been in an uptrend. You like it because
it is moving up. Wouldn’t it make sense to determine that you will exit
the position when it is no longer in the uptrend. If it breaks the
uptrend, it is no longer performing in the way it was when you decided
to buy so why hang on? In that situation, when you entered the position
you knew you would exit if the stock broke down through the uptrend
line. Now all you have to do is buy and hold UNTIL the trend is
broken. You have set yourself to cut your losses if the price changes
direction and you have kept yourself in gaining more and more profit if
the stock price continues to trend up.

Now, you don’t have to stay in a bullish position during the
downdrafts. What if you really like the company, though? Well, suppose
you did get out when it broke down through your uptrend. There is no
rule that says you can’t buy the same stock down the road. Do you want
to continue to hold it if it keeps falling? Get out and wait until it
starts back up and repeat the original procedure by buying shares and
setting a new exit based on a new uptrend line.

I don’t mean to suggest that trend lines are the only way to set
exits, but they are a way. Some people may use moving averages or
moving average crossovers or crossovers of indicators. Test exit
strategies yourself by paper trading and see what works best for you.
The bottom line, for me, is to adopt a buy and hold strategy, but for
each trade define the “hold ’til when” exit strategy using something
other than undefined time.

Bill Kraft, Editor

P.S. Bloggers! Subscribe to my Trend Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

P.S. Bloggers! Subscribe to my Under $10 Stock Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!

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Bill Kraft
Eric Aafedt

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It is a simple truth that we never know what the markets are going
to do on any given day or for that matter over any given week. About
the time we think we know, some event occurs that results in a change of
direction. We do have quite a lot of historical information, however,
and that can give us some clues to how the markets or individual
equities may behave. I’ll discuss some clues in later articles. For
now, though, for example, we know that over extended periods of time
markets have risen. That phenomenon supports the “buy and hold”
strategy of investing. In the long run, the buy and hold investor seems
to have a pretty good chance of success, but of course, as has been
said, in the long run, we’re dead.

One problem with buy and hold investing is that there is no defined
end. Hold until when? As I have often said in my seminars and
mentoring: “Hold until death? Great for the heirs, but not necessarily
for the initial investor.” The pure “buy and hold” investor does not
define how long he will hold; it is defined for him. Indeed, he may
hold until death and that probably means he had enough money without
ever having to tap his investments. On the other hand, he may encounter
an emergency and have to sell all or part of his position. In that
case, and I suspect that is the more common situation, he is completely
at the mercy of the moment. If the investor bought when the market was
low and was forced to sell when it was higher, all well and good. But
what if he bought at a peak, like QQQQ in early 2000 and had some need
to sell in the latter part of 2002. If he bought shares of the Q’s
around the top in 2000 and sold at the bottom in 2002, he would have
lost more than 80% of his investment. Even today, 7 years later, that
year 2000 Q’s buyer would not be back to even. How do you suppose he
currently would feel about his buy and hold investment? That is not to
say that over time he may not profit, it is only to say that “buy and
hold” has pitfalls as well as any other strategy.

I would never discourage a person from utilizing the “buy and hold”
strategy so long as they recognize what they are getting into when they
enter the position. They have no exit, period. If they need to exit
for some extraneous reason, they are at the whim of the market. For
that reason, it seems that money invested in “buy and hold” positions
should be money that the investor believes will not be needed for
anything in the future. If there is going to be any anticipated need,
“buy and hold” needs to be modified in my opinion.

Why sit through the two year plummet of QQQQ and wait more than 7
years for a return to your entry price? I suggest that an exit strategy
be set before the position is ever entered. Suppose you decide you want
to buy a stock because it has been in an uptrend. You like it because
it is moving up. Wouldn’t it make sense to determine that you will exit
the position when it is no longer in the uptrend. If it breaks the
uptrend, it is no longer performing in the way it was when you decided
to buy so why hang on? In that situation, when you entered the position
you knew you would exit if the stock broke down through the uptrend
line. Now all you have to do is buy and hold UNTIL the trend is
broken. You have set yourself to cut your losses if the price changes
direction and you have kept yourself in gaining more and more profit if
the stock price continues to trend up.

Now, you don’t have to stay in a bullish position during the
downdrafts. What if you really like the company, though? Well, suppose
you did get out when it broke down through your uptrend. There is no
rule that says you can’t buy the same stock down the road. Do you want
to continue to hold it if it keeps falling? Get out and wait until it
starts back up and repeat the original procedure by buying shares and
setting a new exit based on a new uptrend line.

I don’t mean to suggest that trend lines are the only way to set
exits, but they are a way. Some people may use moving averages or
moving average crossovers or crossovers of indicators. Test exit
strategies yourself by paper trading and see what works best for you.
The bottom line, for me, is to adopt a buy and hold strategy, but for
each trade define the “hold ’til when” exit strategy using something
other than undefined time.

Bill Kraft, Editor

P.S. Bloggers! Subscribe to my Trend Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

P.S. Bloggers! Subscribe to my Under $10 Stock Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!

P.S. Bloggers! Subscribe to my Option Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

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Bill Kraft
Eric Aafedt

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In my conversations with retail traders, I find that they have very
high expectations for their returns. I suspect that the expectations
are often unrealistic and can lead to some poor decision making. A
couple of years ago while teaching a trading seminar, I had shown the
class a spread trade I had entered on QQQQ. The Q’s have strike priced
$1 apart and I had entered a credit spread in which the market paid me
20 cents a share at entry. If you are unfamiliar with options, you
don’t need to know the specific mechanics to get the gist of this
article, I think my point will become clear as I discuss the simple
math. In any event, I had entered a 20 contract spread so I was paid
$400 before a small commission at entry. Since the strike prices were
only $1 apart, and since the market had already given me 20 cents, my
total risk was 80 cents. That is a return on risk of 25% (20 cents/80
cents), and since the options were scheduled to expire in just 3 weeks,
I had a potential return of 25% in 3 weeks. Personally, I don’t think
that 25% in 3 weeks is a bad return.

One of the seminar students thought that was just a terrible trade
because I only got 20 cents ($400). He said he wouldn’t bother with a
trade for only 20 cents. He said he would not think about entering a
trade unless he got at least 50 cents. I asked him what he thought a
good annual rate of return on risk might be and he replied: “20%.”
Well, I had just showed the class a trade where I stood to enjoy a 25%
return in three weeks, but the student still didn’t understand. He was
hung up on 20 cents, yet I believe that $400 extra a month would mean a
great deal to many people.

If I look at the $10 Trader, for example, I see a number of
relatively small wins. Say, for example, that I am trading $10 and
under stocks. What if I were to gain 50 cents a month. Does that meet
reasonable expectations or not? If I were trading 100 shares, that
would only bring in $50 before commissions (and commissions could be $20
or $30 or more). What if I bought 1000 shares of a $5 stock and made
the same 50 cents? Now I would have made $500. In either case,
however, my return would be 10%. Is 10% a month a satisfactory result?
If a trader expects to make $500 a month, is it likely he can do that
with a 100 share trade of a $5 stock? Clearly, that would require a
500% return and while those may occur every so often, it is not
something one would reasonably expect every month. On the other hand,
could a trader reasonably expect to make 10% a month? Undoubtedly, that
would be a much more attainable goal than thinking he could make 500% a
month.

When I ask seminar attendees what they think is a good annual
return, the answers usually range from 10% to 20%. What do you think is
a good annual return? When you make a trade is your expectation in line
with your definition of a good return? Suppose you are trading $5,000
of risk money. How much would you reasonable expect to make in a year?
How much in a month? What risk are you willing to undertake to attempt
to achieve that end? Once again, let me refer you to my archived
article on business plans and suggest you formulate your own.

In my estimation, it is critically important to have a realistic
expectation for your trading results. Unrealistic expectations lead to
frustration and disappointment. Success in trading often comes in many
small bites rather than a single killing. The single killings do occur,
but I think it is much easier to succeed taking the smaller bites.

Bill Kraft, Editor

P.S. Bloggers! Subscribe to my Trend Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

P.S. Bloggers! Subscribe to my Under $10 Stock Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!

P.S. Bloggers! Subscribe to my Option Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

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Bill Kraft
Eric Aafedt

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In my conversations with retail traders, I find that they have very
high expectations for their returns. I suspect that the expectations
are often unrealistic and can lead to some poor decision making. A
couple of years ago while teaching a trading seminar, I had shown the
class a spread trade I had entered on QQQQ. The Q’s have strike priced
$1 apart and I had entered a credit spread in which the market paid me
20 cents a share at entry. If you are unfamiliar with options, you
don’t need to know the specific mechanics to get the gist of this
article, I think my point will become clear as I discuss the simple
math. In any event, I had entered a 20 contract spread so I was paid
$400 before a small commission at entry. Since the strike prices were
only $1 apart, and since the market had already given me 20 cents, my
total risk was 80 cents. That is a return on risk of 25% (20 cents/80
cents), and since the options were scheduled to expire in just 3 weeks,
I had a potential return of 25% in 3 weeks. Personally, I don’t think
that 25% in 3 weeks is a bad return.

One of the seminar students thought that was just a terrible trade
because I only got 20 cents ($400). He said he wouldn’t bother with a
trade for only 20 cents. He said he would not think about entering a
trade unless he got at least 50 cents. I asked him what he thought a
good annual rate of return on risk might be and he replied: “20%.”
Well, I had just showed the class a trade where I stood to enjoy a 25%
return in three weeks, but the student still didn’t understand. He was
hung up on 20 cents, yet I believe that $400 extra a month would mean a
great deal to many people.

If I look at the $10 Trader, for example, I see a number of
relatively small wins. Say, for example, that I am trading $10 and
under stocks. What if I were to gain 50 cents a month. Does that meet
reasonable expectations or not? If I were trading 100 shares, that
would only bring in $50 before commissions (and commissions could be $20
or $30 or more). What if I bought 1000 shares of a $5 stock and made
the same 50 cents? Now I would have made $500. In either case,
however, my return would be 10%. Is 10% a month a satisfactory result?
If a trader expects to make $500 a month, is it likely he can do that
with a 100 share trade of a $5 stock? Clearly, that would require a
500% return and while those may occur every so often, it is not
something one would reasonably expect every month. On the other hand,
could a trader reasonably expect to make 10% a month? Undoubtedly, that
would be a much more attainable goal than thinking he could make 500% a
month.

When I ask seminar attendees what they think is a good annual
return, the answers usually range from 10% to 20%. What do you think is
a good annual return? When you make a trade is your expectation in line
with your definition of a good return? Suppose you are trading $5,000
of risk money. How much would you reasonable expect to make in a year?
How much in a month? What risk are you willing to undertake to attempt
to achieve that end? Once again, let me refer you to my archived
article on business plans and suggest you formulate your own.

In my estimation, it is critically important to have a realistic
expectation for your trading results. Unrealistic expectations lead to
frustration and disappointment. Success in trading often comes in many
small bites rather than a single killing. The single killings do occur,
but I think it is much easier to succeed taking the smaller bites.

Bill Kraft, Editor

P.S. Bloggers! Subscribe to my Trend Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

P.S. Bloggers! Subscribe to my Under $10 Stock Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!

P.S. Bloggers! Subscribe to my Option Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

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Bill Kraft
Eric Aafedt

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I really enjoy trading stocks that are $10 and under. Often they
provide the chance to enjoy high percentage gains and, of course, at
worst, the risk is limited to what I paid for the stock. In almost all
circumstances the real potential loss would be much less than that
because I would have an early exit in place in case the stock turned
against me. If you read my recent article that dealt with reward to
risk ratios, you can see how a less expensive stock might present a
great opportunity.

Ordinarily, if you are a fundamental trader you wouldn’t be crazy
about a cheap stock. Often, they are cheap for a reason, but don’t
think that the reason is always bad. Many times a cheaper stock won’t
even have a P/E (price to earnings ratio). When there is no P/E, that
means there were no earnings. Remember your middle school math —
anything divided by zero equals zero. There may be an excellent reason
why a stock has no earnings. It may have an important product in
development and has had to spend revenue and borrowed money on research
and development.

Just because a stock is cheap doesn’t mean a trader can’t make
money trading it. Don’t confuse a good company with a good stock.
Let’s look at some truly great companies and see how their stocks have
performed over the last couple of years. Merck (MRK), for example,
traded around 48 in June of 2004; in early March of 2006 it was around
35. 3M Company (MMM) hit 90 in June of ‘04 and was below 74 in March of
‘06. Pfizer (PFE) was over 37 in April 2004 and was $11 lower in March
of ‘06. DuPont (DD) hit 54 in March 2005, but a year later it got down
almost to 40. From July of ‘05 until March ‘06 Intel (INTC) dropped a
full 25%. IBM fell nearly 10 points from December ‘05 to late February
early March of 2006. These are just some examples from the Dow 30
Industrials. Just because it is a good or even great company doesn’t
necessarily mean the stock will go up.

On the other hand, some cheaper stocks with perhaps lesser
fundamentals have provided fantastic returns for investors in the same
relative time frame. From January to March 27, 2006, Level 3
Communications (LVLT) enjoyed a 61.5% move from $2.75 to $4.44. Not
bad, +$1.69 on a $2.75 stock. QIAO Xing Univ Telephone (XING) moved up
67% from October 2005 to March 2006; a +$3.53 on a $5.25 stock. Cell
Genesys Inc. (CEGE) climbed $2.75 from a low in October 2005 to March
‘06. That was a 58% gain. There are many other examples. Take a look
at the history of Finisar Corp (FNSR), a company with fairly high debt,
negative earnings, negative net income, negative ROE and negative ROA.
From August 2005 until March 2006 the stock more than quadrupled from
under $1 to almost $5.

The point is that often the lesser known and cheaper stocks can
provide very exciting returns. Traders and investors in these cheaper
issues are often “betting on the come.” Often the companies with
cheaper stocks may have great management and great product; they may be
just getting up a head of steam. They need not be ignored by the
careful trader or investor.

Since fundamentals may be misleading on the lower priced stocks, I
believe they are best traded using technical analysis. I can use Ciena
(CIEN) as an example. There was a pretty clear entry on December 23,
2005 after the stock had bounced off the 50 day moving average on strong
volume. The high that day was $3.11. Had a trader bought at the high
that day ($3.11) and used a close below the 50 day moving average as an
exit, he would still be in the trade as of late March (the 27th) with
the stock trading around $5.25. So far, the move has shown a 68.8% gain
in three months (from December 23, 2005 to March 27, 2006 as I write
this article).

High potential percentage gains are one of the things I like about
trading lower priced stocks. Another thing I like is that the risk is
often small. If I buy a stock for $2.50, that is my maximum risk —
$2.50. Even if the stock dropped to 0 (and I did nothing while that was
happening) the most I could lose would be $2.50. Contrast that to
something like Cisco (CSCO) that dropped over $14 in a week at the
beginning of the bear market or to Google (GOOG) that sometimes has
dropped as much as $25 to even $35 in a day! Even under $30 stocks like
Intel (INTC) have dropped $2.00 overnight.

I search the $10 and under stocks with a couple of proprietary
formulae I have developed. I am always trying to find relatively low
risk plays with a potential reward to risk ratio of 2.5:1 or better. Of
course, cheaper stocks can be risky. Companies can disappear quickly,
but so can their pricier cousins (remember Worldcom, Enron, United
Airlines before the bankruptcy). All trading involves risk (so does
living life). Each of us needs to know our own risk tolerance, each of
us must educate ourselves to understand the risk in any position, each
of us must manage our own money and our own risk. That being said, I
have found that trading the $10 and under stocks can limit risk and
provide a potential for very significant returns.

Bill Kraft, Editor

P.S. Bloggers! Subscribe to my Under $10 Stock Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

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Though I consider myself a technical trader, I don’t deny the power
of fundamentals. From the viewpoint of an investor as opposed to that
of a trader, fundamentals can be considered to be critical in the
determination of “what” to buy. Of the many fundamentals to analyze, I
believe that earnings may be the most important. The old saw “follow
earnings, follow earnings, follow earnings” is fraught with wisdom.
Earnings say a great deal about the health of a company. I look for
increased earnings year over year and quarter over quarter. In fact, I
regularly use a scan I created that incorporates increased earnings year
over year and quarter over quarter along with a requirement that the
company be in an upper percentile of all companies as far as earnings
go. (In that scan, I also include other criteria such as minimum
average volume, debt, P/E, etc.) If I can find companies that are
steadily top earners and also are increasing earnings, I am confident
that I have found strength and that strength could translate into
increased stock prices in the future.

The $64 question is “when” will the stock price increase and
fundamentals rarely answer that question. Is there a right time to buy
a stock? Though many say “you can’t time the market” there are some
methods to enter that I think give the trader a better chance of
success. I’ve always taught that a trader should make his exit “close
and clear.” By that, I mean that when a trader enters a position, he
*should have pre-defined his exit* and that exit should be fairly close
to his entry. Some teach that one should exit whenever the position
drops 8% or 10% or 15%; others teach that the break of a line on a chart
such as a moving average or a trend line should serve as an exit. I
prefer the latter, but the most important point is that the trader
should have (must have) a predetermined exit in the event the position
turns against him. If I use a bounce off the 25 day moving average as
my entry, then a close below that same line at least would be my
initial exit. If the stock bounced up and I bought, then I would sell
when the stock went below the line. As the stock goes up, line goes up,
but if the stock turns down, then I would get out. That’s a way to
determine the “when” of getting into a position.

As you can see, I now have a way of finding both a “what” and a
“when” to trade. However, I started by talking about earnings.
Undoubtedly, longer term, earnings can guide the movement of a stock’s
price. What about short term? It’s interesting to me that many times a
stock will announce pretty decent earnings and right away the price
drops. Have you seen that happen? Why? How does that make sense?
Well, first of all, I don’t think the market necessarily makes sense —
especially in the shorter run, but seriously, I believe the time around
earnings announcements is a time for cautious trading. I think the
price of a stock often drops when earnings are announced (even if
they’re pretty good) because of the old adage “buy on the rumor, sell on
the news.” The earnings announcement is the news. All of the
anticipation and excitement are gone when the announcement is made. The
excitement and anticipation occurred before the earnings were announced.
Notice how often there is significant movement in a stock price as the
earnings announcement date approaches. There may be a big run up or
down; the stock is often more volatile and so are the options.

I trade a fair amount of options and one of the methods I use is to
trade volatility. I like to sell volatility when it is high (and
overpriced) and buy when volatility is low (and underpriced). Many
times, as the earnings announcement date approaches, volatility
increases and may provide a time to sell options. After the
announcement, volatility may sink providing a chance to buy. For the
stock trader, there may be a buying opportunity as the stock begins to
rise in anticipation of earnings, or there could be a possibility of a
short sale if the stock begins to slide in anticipation of the
announcement. In each of these scenarios, be aware that there will be a
probable change when the earnings have been announced. If I am making a
play coming into earnings, I will frequently exit before the actual
announcement. I’m trying to “buy on the rumor, sell BEFORE the news.”

Of course, there is no sure thing in the market. No one without
insider information can tell for sure what direction a stock will take
going into earnings and following the announcement. Though volatility
many times can increase before the announcement and drop right after the
announcement, it also can do exactly the reverse, or it can do nothing.

What does seem helpful is the knowledge that there is an impending
event (i.e. the earnings announcement) and the fact that it is coming
leads to excitement, anticipation, even apprehension. That knowledge can
give the trader a little edge just by knowing the announcement is
coming. The trader may tighten stops as the announcement approaches or
he may exit a position shortly before the announcement, or he may place
a “buy stop” in case there is a sharp move following the announcement.

All of this leads to the conclusion that anyone who is trading or
investing in the stock and options markets should be aware of when a
company is scheduled to announce earnings. You should be able to get
this information from your broker.

Be aware, it’s mid-April, the first quarter has ended and now is
the peak season for announcements. At least check the date earnings are
scheduled to be announced. The information may help your decision
making process.

Bill Kraft, Editor

P.S. Bloggers! Subscribe to my Trend Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

P.P.S. Bloggers! Subscribe to my Under $10 Stock Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!

P.P.P.S. Bloggers! Subscribe to my Option Trader Service at MarketFN.com and use this link for $50 PER MONTH SAVINGS!.

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Anyone could become a better trader just by becoming or remaining
aware of some simple but important “do’s” and “don’ts.” Markets trade
on emotion so if we can learn how to play emotion or group psychology
without being ruled by our own emotions, we increase our chances to
become better traders. Over the past several weeks, I have written a
number of pieces that talk about various factors in trading from money
management to trading trends. Each of these little articles have one
thing in common and that is the attempt to remove emotion from trading.
If we can do that ourselves and, at the same time, develop an awareness
of how the group behaves we have given ourselves a leg up on the crowd.

At the risk of being redundant since I have spoken of many of the
same things in earlier articles, I want to reinforce some of the
principles that I think can lead to better trading.

Some Don’ts

I teach seminars on stock and option trading and in the basic class,
I always begin with the necessity of having a business plan. Trading
and investing are businesses. 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 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 trading will be controlled by emotion? Fear and greed
take over and generally seem to lead to poor decision making. The
undisciplined often enter at exactly the wrong place and exit just as
badly. One of the ways to avoid the dangerously undisciplined 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 expounded 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 important 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 making 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 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 finally own
the knowledge. Anyway, I began asking the retake students whether they
had completed a business 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 starting point in formulating their own
personal business 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 business? (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,
grocery 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?

5. When will I make my trading decisions? (In the evening? Only on
weekends? Once a month? It depends 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 knowledge? (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
over time. You may start trading part time and ultimately 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 investing. The act of devising the plan
will require some thought and will reveal important information to
yourself 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.

Bill Kraft, Editor

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Bill Kraft
Eric Aafedt

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