Morning Market Thoughts
Good morning. Today is Amazon Prime Day and the stock is up about $8 bucks pre-market. That’s about 1%. With earnings due to be reported 13 TRADING days from today, it’s hard to imagine that the stock won’t move another 6% higher and test $800 before July 28th. As I’ve noted in my video, that’s not a “prediction”, it’s just a working theory that I’m using to trade the stock via options. If it does hit $800, I will be tightening my grip on the position and won’t be giving it much room. After all, holding a position for a very nice, profitable move and then taking profits at a key inflection point isn’t a bad approach. As with all positions, I don’t encourage just flat out dumping the entire profitable position at one time. Rather, you ought to take part of the position off the plate when it hits an important price level and hold the rest. Tighten your stops so that a fall away from resistance would prompt additional liquidation, but that would not be triggered if the stock breaks through.I believe that this approach allows you to “sell too soon” while simultaneously riding a trend for as long as it lasts — and they typically last longer than you might think. And it’s interesting how the mind works when you are holding a position.
When you have a profitable position in a trending stock, you tend to think the trend will last forever. You’re a bit nervous because you are trying to balance the urge to take profits and “ring the cash register” against the urge to rack up additional profits because you know that great trending stocks don’t come along that often. So you’re nervous, but optimistic that the trend will continue. And your bias can get in the way of your objective view of things when you are counting your money and calculating what your trading account will look like when you make…”just a little bit more money on this trade.”
When you have a losing position, things work differently. The mind has a tendency to not recognize the downtrend (read: $AAPL). Instead, we look at the chart and see numerous support levels that are going to catch the fall and cause the uptrend to resume its winning ways. But of course, the uptrend ended a while ago; so you’re seeing a phantom trend. Our tendency to hope for a change alters our image and our trading actions. After all, there is an aversion to losing money, and an affinity for thinking, “I’ll sell when I’ve made my money back.”
If I could magically convert all of my losing trades throughout the past 20 years and turn them into “break even” trades, I’d have at least another “0” on my net worth. I’d also be in the Trading Hall of Fame (though I don’t think one exists) as being the guy who has never had a losing trade in the past 20 years. I’d be the only trader besides Bernie Madoff who has never lost.
Think about that! It’s obviously absurd. So losing trades are a part of trading! You can’t get away from that, and it is foolish to try. Learn to accept losses as business expenses in the same way as a merchant views shoplifting losses. If you’re in the business of retail or trading (or almost any other business), “cheating” is an expense that you have to deal with. Some customers will steal your clothes; they’ll put some groceries in the bottom of the cart and hope the checker misses it. The list of possible ways for customers to rip off merchants is endless. You do your best to minimize the losses; but you know that the only way to eliminate the losses is to shut your doors. Since you don’t want to do that, you just accept that some stuff is going to walk out the door and do what you can to make it as tough as possible for the thief.
Isn’t trading the same way. Every trade you make is one that you hope to make money on. You’re a merchant. You bought stock or options at a “low” price relative to the price you wish to sell. You expect to profit from your business of buying and selling. But often times, the market rips you off. (Don’t get me started on high frequency traders). Stocks don’t do what you think they’ll do and you have to take the loss. Essentially, the stock market is shoplifting from you. The hard truth is that you’ve got to accept this part of trading and work to minimize the losses rather than eliminate them.
If you can’t stand to take any losses, then you’ve simply got to shut your doors. But if you can work to MINIMIZE them, then you’re in business! That’s where your risk management focus comes into play. You monitor your positions the same way that a merchant monitors the shopping floor. The merchant limits the number of clothes that can be taken into the dressing room, and often places a card with a number on the door to make sure that the items coming out of the room are the same as the items that went into the room. It’s risk management.
Be the same way in your trading. Make each position big enough to matter; but not too big that a loss will be more than an acceptable business expense.
I’m here to help you keep your doors open.
–Dan
(Oh, by the way, in the next week or two, you’ll be hearing about a sequence of courses that I’m putting together to help your business prosper. Watch for it.)
Market Update