Perhaps one of the least intellectual of game shows, Deal is very simple in its format. A contestant, who is in every way the very definition of an average American, must select out of 26 identical metal briefcases the one that he or she believes to hold $1,000,000.
Deal Or No Deal is an incredibly straightforward game, so the show's drama is not in its intricate challenges or heady trivia. The contestant's primary task is to repeatedly call out for the other briefcases to be opened, each of which is held by an attractive female model, a bevy of updated Barker's Beauties like those seen on the classic game show The Price is Right. So far, very simple, right? Instead, for a jolt of suspense, Deal Or No Deal relies on one of human kind's more perverse delights: Watching someone writhe in emotional agony under circumstances beyond their control. That, then is where the contestant's challenge in Deal or No Deal lies, not to mention the show's drama.
Each briefcase contains a dollar amount, ranging in value anywhere from a single penny to $1,000,000. Right next to the assembled models is a huge tote board that shows, in ascending order, the dollar amounts in each briefcase. When called on to do so, each of the cautiously enthusiastic models opens her case, revealing the dollar amount it holds, thus eliminating the dollar amount from the tote board. Now, remember, the contestant chooses his or her case at the beginning of the show and since each case is numbered, 1-26, the contestant often takes comfort in choosing a case that is labeled with a number of some personal significance: "My anniversary is on the 14th, so I'm going with case number 14!"
The contestant hopes that the fates have provided him or her with the case that holds $1,000,000. There is no real skill or method to choosing the case, just the hope that as luck would have it, the contestant has chosen the $1,000,000 case.
Thus, Deal or No Deal proceeds in the following manner: As briefcases are opened and dollar amounts are eliminated, those amounts are also stricken from the tote board. So, if say, the first two cases are opened, revealing dollar amounts of $5 and $200,000, then those two dollar amounts are no longer in play, meaning that the contestant's brief case holds neither of those two amounts. The game is divided into rounds, during which the contestant opens up a specific number of cases, anxiously holding his or her breath as each case is opened, literally praying that the $1,000,000 is not revealed. In the earlier rounds, the contestant opens several cases, but as the game progresses, the contestant opens only one case per round. At the completion of each round is when the tension really begins to mount.
After each round, the contestant receives a phone call from the "Banker." The Banker is a figure shrouded in mystery. He sits perched high atop the tote board, in silhouette, so that his identity is hidden. Yet, we see him through a large glass window, busily crunching numbers on a calculator. His high-tech, gadget-rife enclave resembles an airport control tower or a shopping mall security hub.
It would behoove me to mention that Deal is hosted by the comedian Howie Mandel who, for the purposes of this job, has undergone a sort of transformation of public persona, which he has carried with him onto other projects. He is no longer the affable family funnyman and creator of that cute animated children television series Bobby's World; the same guy that even my old Jewish Grandmother found so charmingly funny. Instead, Mr. Mandel is the stereotype of what the Devil himself often looks like in movies when he assumes a human form: Subtly sinister, in a tightly tailored suit, bald-headed with a small "soul-patch" under his chin, and light on his feet while he sashays confidently back and forth across the stage, in a manner that always unnerves the contestant.
Anyway, it is Mr. Mandel who answers the phone when the Banker calls and relays to the contestant the Banker's offer. Playing the odds that the contestant does not hold a briefcase worth $1,00,000, but well aware that he or she might- provided, of course, that the $1,000,000 case has not yet been eliminated -the Banker makes an offer to buy the case. The offer is some approximate average of the dollar values that are still in play, also taking into account the possibility that the contestant holds either one of the larger amounts in play or one of the smaller amounts. So, if some of the big dollar amounts have yet to be revealed, including the $1,000,000, but many of the smaller dollar amounts have been eliminated, the Banker's offer will be quite substantial, often in the area of hundreds of thousands of dollars. The offer fluctuates after each round depending on which dollar amounts are still available. While the grand prize on Deal is $1,000,000, there are still dollar amounts in the hundreds of thousands to play for, so the payout figures to be lucrative and well worth playing for, should the grand prize be eliminated.
This is when the action gets really tense for the contestant. After hearing the Banker's offer, Mr. Mandel repeats the offer to the contestant, looks him or her straight in the eye, and utters the phrase "Deal, or no deal?"
This decision is very stressful for the contestant. They have the chance for guaranteed money as opposed to what could either be much more money or much less money than that being offered. As long as there is some likelihood that the contestant can make the maximum available he or she will usually refuse the deal and stay in the game.
If any of the circumstances from Deal, or No Deal sound familiar to you, it is probably because holding a stock position is in many ways just like a game of Deal, or No Deal. Traders always take on positions in the market wanting the best possible outcome. Each trade, we then hope, will be our very own $1,000,000 briefcase. On the television show, however, it is highly unlikely that the contestant has procured seven figures simply by plucking a briefcase at random out of a collection of 26 briefcases. In the trading arena, it is also highly unlikely that any single trade will deliver our retirement money. In Deal, a greedy, over-zealous contestant runs the risk of walking off the show's set with a shamefully small sum of money by continually refusing to take the Banker's offers. A similarly-minded trader risks the sobering possibility of either taking a larger loss or a smaller gain than he or she otherwise might have, by not covering a position at the appropriate juncture.
What's Luck Got to do With it?
It is absolutely amazing how little responsibility many people take for their own achievements and abilities. Many people believe that even when engaged in an activity at which they feel competent, their success has as much to do with factors beyond themselves, many of which are abstract, as it does their own ability. For example, how many times have you heard an athlete credit God for their on-field accomplishments? Not that I have anything against religion; I do, after all, believe in God as well, and a little modesty is definitely a virtue. But, there is also nothing wrong with acknowledging the fact that your triumphs may have more to do with your own hard work and skill-level than anything else. To that end, they may even consider themselves to be lucky, rather than good. Just for clarity's sake, let us look at the standard definition of the word luck, as brought to us by our good friends at dictionary.com:
When crossing the street, a very simple task that so many of us do countless times per day, many external factors beyond our control fit within the reasonable realm of possibility. Other pedestrians are beyond our control, but their existence is well within reason while crossing the street. We do not know how many pedestrians there will be, what their physical limitations and capabilities are, or what any of them might do at any given moment. Still, because we cross the street numerous times per day, each time encountering any number of pedestrians, we know through experience that the scope of insurmountable obstacles we can associate with pedestrians are very, very minimal. Sure, maybe another person will get in your way, at which time either you or he will just walk around the other. Someone may stop you to ask for directions to someplace, upon which time you may have to momentarily delay your progress to give that person the directions she seeks. Even if someone tries to sneak up on you and steal your wallet or your bag while you cross the street, you will still likely be able to find some way to avoid critical detriment and make it across the street unless the perpetrator inflicts physical harm. Even if your pocket is picked, for example, you probably will not know it until well after you have crossed the street, meaning that the initial task of crossing the street did, in fact, go unhindered.
Certain eventualities are easily anticipated and therefore easily dealt with, all of which comes from obtaining the skills necessary to become good at whatever it is we do.
It is very important to consider such seemingly mundane ideas as reasonable factors beyond your control in juxtaposition to unreasonable factors beyond your control. It is the balance of reasonable factors to unreasonable factors that help dictate the effects of luck. You can also anticipate traffic as a reasonable factor beyond your control when crossing the street, or even construction, and you can basically handle each in stride. If you see traffic approaching from not too far off, you will usually wait until it passes before proceeding across the street, or simply wait at the light, and wait for the signal to walk. If you notice a crew of workers repairing a water mane, then you will cross the street from a different spot. However, if perhaps a recklessly driven car comes careening around the corner, right at you as you cross, a relatively unreasonable circumstance, then you will have to break from your initial course of action and make necessary adjustments in order to achieve your goal which, in case you forgot, was to simply cross the street (don't you love how complicated I make such easy tasks seem?). Still, you are not without resources in order to avoid the car out of control. You can duck, dive, jump out of the way, run really quickly. True, luck has now sought to impede your success and you well may be struck by the car. But, even still, you have the skills and ability to reach your goal. Now, in order to avoid getting carried away, I will not concoct the scenario of instead of a water mane repair, an earthquake were to suddenly send a pillar of molten lava up through the road, again testing your mettle as you try and make it across the street. I think you get the idea. There are a myriad of numerous factors beyond our control which are present in all that we do. Those factors beyond our control are what comprise the concept called luck.
The more experience we have in any particular situation or activity the better equipped we are to deal with factors beyond our control, particularly those within reason but also those beyond reason, thus minimizing the effect of luck on the outcome of that situation or activity.
I only discussed the crossing the street analogy so thoroughly because it is vital to understand our abilities to do certain things well in relationship to those who cannot. If you observe a toddler who has only just begun to walk, you will see what I mean. For a toddler, simply walking across the living room can be an adventure full of accidents waiting to happen. If a toddler is not tripping over his own two feet, he might very well do so over the lip of the carpet or on some toy lying in the middle of the floor. He may stop out of curiosity to pick up a penny that dropped out of someone's pocket and rolled into a corner of the room, falling flat on his face before he sticks the loose change in his mouth. Watch out, of course, for the table top and chairs, or the edge of the amoire, all of which are right at the level of his head, as he is liable to not look out for where he is going and whack himself in the face on any one of these. You see, for a little toddler the living room in an otherwise safe home is practically a minefield of factors beyond his control- most of which do not even move -and because of a lack of experience with and proficiency in walking, it is very unlikely that he will navigate his way, completely unhindered, through the living room. An adult, on the other hand can walk into any living, obviously without having had any control over how the furniture is laid out (unless it is his or her own living room), and make walk across without any effort. That said, given time to become better and walking and more familiar first with the living room in his own home and then other living rooms, a toddler will make across much more safely.
You Are NOT Born a Good Trader
Anybody familiar with the markets knows that certain pieces of information can move the markets one way or another. Earnings reports, key economic data, and scheduled announcements and testimony from politicians, the federal reserve, and/or other important economic figures are only a few examples of factors beyond a trader's control that take place regularly and fall within reason. Therefore, a good trader should be able to make winning trades regardless of how the market reacts to these various indicators. However, sometimes events take place that can throw the market into chaos, such as the first realizations of the subprime mortgage crisis, when investment bank Bear Stearns warned that many of its funds were hemorrhaging money at the hands of subprime, or when the bank finally folded and was absorbed by J.P. Morgan Chase. Although nothing is outside of reason in volatile market, those events that can cause chaos, like the Bear Stearns situation, is not something that you can expect to happen from day to day or on a regular basis, and are therefore not within reason. But, when the factors beyond your control that are also not within reason, do in fact occur, the market usually reacts violently and the less-savvy trader stands to take a big hit if he or she is not careful. So, the trick for you as a trader, is to know, in general, how you will react when extraordinary situations do occur. For your information, most successful traders will tell you that when the market reacts violently to events or pieces of data, you are best advised to stay out of the market until it makes sense to you. Sometimes, the best trades are the ones you don't make and all good traders know that.
The term good is one of the most overused in the English language, and therefore one of its weakest adjectives. Those who describe everything as "good" probably were either so unaffected by whatever they are referring to that they cannot conjure up a suitable description, are trying to feign politeness in spite of disappointment, or possess only a rudimentary vocabulary:
Q: "So, how was your weekend?"
A: "It was good."
Well, maybe not everybody has the lexicon readily available to incorporate words like "delightful", or "exhilarating", or even "fantastic" into everyday conversation. It would hardly benefit you to be overly critical in that matter. At the same time, traders aspire to be more than merely good at what they do. A trader at the top of his or her game must be innovative, or creative, or aggressive, or intuitive... perhaps each of those things at once, among many others. Whatever adjectives a trader believes best describes him or herself will do, so long as he or she can consistently turn a profit. For our purposes, though, let's just stick with that very bland adjective in order to describe a consistently profitable trader because ultimately, a good trader doubtlessly possesses a plethora of qualities that lead to lasting success.
If it seems as if I repeat information that I discussed in previous sections, then I apologize for my redundancy. But, a trader who seeks to maximize his or her abilities always re-evaluates, re-analyzes, and revisits ideas, techniques and philosophies. After all, practice makes perfect and eliminates our dependence on luck. Therefore, the more practice you have in the markets, the better read you will get on the markets. For example, I know that I have illustrated the importance of paying attention to the market and being aware of market conditions and other circumstances that effect the markets. Doing so will allow you to get a better read on the market and have a better feel for how you ought to trade in any given situation.
In that case, a "good" trader is one who, taking into account the circumstances that effect the market and given any of those circumstances, can trade successfully. Needless to say, any circumstance that effects the market is beyond your control, be it the overall economy, an economic indicator, an earnings report, a typhoon in the South Pacific, or a war, just to name a few. The only thing you can control is how you respond to the market. Those who most often have the proper responses to any given situation become good traders. It would be difficult to pinpoint right here and now, what the proper responses to the market are. Different situations call for different courses of action and in this case, hypothetical examples will not prepare you for live trading. Let us just say that the skill comes from experience, from seeing situations repeat themselves time and again, like how NFL teams practice the two minute drill, the Hail Mary, or the lateral drill over and over again because should the situation dictate the use of any one of those, a team will be ready to utilize it in an actual game. The disadvantage for the trader, is that practice comes at a price. A football team can practice a drill with the only consequence being that a player could get hurt, however at that instant, a game will not be won or lost. On the other hand the active trader might lose money while practicing.
Another quality of a good trader is the ability to admit when you are wrong. Admitting being wrong goes beyond simply knowing when a position is a loser and liquidating for minimal loss. The ability to admit being wrong also refers to when one has a wrong opinion on the market in general. You may very well be bearish on a particular day and were convinced that the market would go down. But, you come to realize after the day had started, that the market is much stronger than you had anticipated. You may not get the opportunity to sell because the market immediately violated support and you did not have your orders in. Or, maybe you did get short only to see the market go against you, setting off your stops. When, then, do you look for the opportunities to start buying? How easy is it for you to switch from a bear into a bull? If you are a good trader, you will be able recognize your error in judgment and reverse your thinking in order to trade in tune with the market.
Those are just a few examples of being a good trader and are representations of the skills that a good trader possesses; and of course there are many more. Such skills will eventually lead to creative and intuitive trading; anything more specific than being merely good.
Now For The Sad Truth
The real shame in watching the contestants on Deal, or No Deal is that they often actually think that they are good at what they are doing. In fact, if a player has by chance eliminated many of the small values but still has many of the large values in play, Howie Mandel will tell them that they are playing a "really good game."
Can he be serious? It is impossible to do anything well at all if you have no control over any of the circumstances that effect you. Even the initial task, that of selecting the briefcase, which the contestant thinks is in his or her control, is in no way within their control. What? Just because you picked a briefcase that bore a number corresponding to your wife's birthday it means that you have $1,000,000? There is absolutely no skill whatsoever in Deal, or No Deal. Nothing is within the contestant's control. It really is pure comedy (however tragic) as the contestants try to apply some type of strategy to winning the grand prize. They might choose cases from right to left, or top to bottom. Maybe they eliminate all odd numbers first. Who knows? All the while, they pace nervously about the stage, studying each identical metal case, perhaps for some flaw or defect that will give a clue as to its value. Maybe they are trying to awaken some long-dormant power of X-Ray vision, by staring very intently at a particular briefcase. For dramatic effect, the models who open each case will open them a crack, inspect the value inside herself for one or two agonizing beats, before revealing it to the contestant and viewers. Sometimes (and this is great) Howie Mandel will send the show to commercial at the most intense of moments, right before opening the next case, prolonging the suffering and anticipation for another three whole minutes.
Compounding fate, the contestants bring along a few close friends and family members to offer moral support and aide in decision making at critical junctures. This aspect of the game is even more ridiculous than any other because not only does the contestant believe that he or she is a skilled player, but that those in their entourage are capable offering any real insight.
Yet, in some ways, the assembled loved ones do serve a purpose. They can help the contestant use better judgment by convincing him or her to take the deal if it appears that the contestant does not have more money than that being offered. The problem is, there are almost always conflicting points of view. So, while mom might urge the contestant to take the deal, her husband might insist on No deal! making a vital decision tougher to come by and confidence harder to muster. In the same way, a new trader with limited exposure to the markets might rely heavily on advice and wisdom from more experienced traders. But, the ability to think for one self and read the market correctly on one's own is the only true way to develop into a good trader. Going into 2009, after four seasons on the air, there had never been a $1,000,000 winner on Deal, or No Deal. Facing the overwhelming likelihood of having much less than $1,000,000, the contestant usually takes whatever deal will allow them to exit the game with at least some dignified amount of cash. A contestant will run into trouble when by way of sheer stubbornness, they keep playing for the most money available even when there is a much greater percentage of taking home a lot less. If many of the largest amounts are still in play, meaning that the banker will have to make substantial offers, it pays to keep playing. But if the contestant is naive enough to actually presume that the factors beyond his or her control just somehow happen to be in his or her favor, the contestant will insist that they have the richest case available and keep playing regardless of there being evidence to that contrary.
They may say things like: "Well, Howie. I came here for the $1,000,000 so I'm not leaving here with anything less. I KNOW my case has the million." Oh, yeah? Well, what makes them so sure?
Other times, if the contestant was greedy and squandered away all of the most valuable cases before taking any of the banker's offers, meaning that the highest amount they can still win is, say, $10,000, he or she will often go for broke. Perhaps they think: "what's the difference between $10,000 and nothing?" and then play down to practically nothing, the spouse looking on, acting supportive and heartbroken for her husband, but really wanting to choke the life right out of him.
In that sense, there is some skill involved in Deal, or No Deal. Like the trader who must develop the ability to admit being wrong and exit a particular trade even if it means forfeiting the chance for huge profits, the contestant often times would be better off just taking the deal. That is where one can actually be good at Deal, or No Deal. The good contestants know coming in that all factors in the game are beyond their control. They give up on the pretense of skill and realize that the only aspect that they have control over, ultimately, is whether or not they take the deal and knowing that some profit is better than no profit, they finally take the deal, becoming satisfied with something other than the maximum.
Just Take the Deal!
The second you take on a trade, you have unwittingly entered into a game of Deal, or No Deal.
You are long 500 shares of stock and immediately the price pops 20 cents. You hear a phone ringing somewhere out in the distance (although it is really only in your mind) and then, like some creepy menacing puppet from a horror movie, Howie Mandel, with his bald head, mischievous grin, and troublesome glint in his eye pops up on your computer screen and delivers the following message:
You are long 500 shares of stock and currently have a profit of $100. You can cover the whole thing right now, which would be enough to pay your cable and internet bill for a month. Or you can take off some of the position in order to protect a portion of your profits. Of course, the BIG MONEY may still be out there, so you can let the WHOLE POSITION RIDE. Deal, or no deal?NO DEAL! you instinctively yell out (again, this is all in your head). You have not even come close to your profit goal and cutting any of it short right now would ruin your chances for maximum gains. So, you stay in the whole position. A few minutes go by, and you acutely watch your position tick up bit by bit. You are now up 50 cents! Then, a phone rings and there's Howie again:
OK. Decision time. You have a chance to either take partial profits on what is currently $250, by taking off part of your position, or cover the whole thing and book the entire profit. Not bad for one trade and you have guaranteed money. On the other hand, you are halfway to your goal of $500 and who knows how much higher this position can go? Maybe, this stock can go even HIGHER than you originally had hoped. Deal, or no deal?
NO DEAL! Your goal is in sight! You are almost there. Why give in now? In order to make money in the market, you need to be in the market. Covering your position will only lead to forfeiture of the better profits that you are sure will come.So, you wait. The market ticks up a a bit more, stops and basically holds a particular price for a few minutes, and then, to your chagrin, begins to sell off... hard.
Yet, despite not covering any of your position when it was at its highest point from when you entered, you still have a 20 cent profit as the market melts down, $100 in the books. NO DEAL!
Still moving down. Profits have all but evaporated, but you have 10 cents in the position and a profit of $50; lunch for the week; better than nothing, right? NO DEAL!
Down we go, further still. You are now operating at a loss. The market has really given back much of whatever it gained throughout the day, and now the position is 20 cents against you, a loss of $100! NO DEAL! You had a profit a little while ago. Maybe you should have taken the deal when you had the chance and a $250 profit. But, sometimes a trade that will eventually be a winner will fluctuate a bit and you have to expect a little pain every now and then.
And, so, you sit with your position as both it and the overall market go further against you. Then, just as it topped out, stopped, and quickly reversed earlier on, the market catches its breath, and starts moving up! Just like that, you are back to being even on the trade! At that moment, that far-off phone rings and a second later, Howie Mandel pops up on your screen and stares straight into your eye:
Now this can make or break you. It can be the most important decision you make all day, or even for the FORESEEABLE FUTURE! A few minutes ago you were up some pretty decent money. Then, all of a sudden, it was gone. Now you have a chance to break even on your trade. If you take the deal, you will not walk out of here a loser. Yet, you will not have any chance of making any money at all on this particular trade, meaning you will have to look elsewhere for profits. However, should you decide to keep playing, you just may get in on the move you had been waiting for and will still have a chance to make all the money you had hoped for, if not MORE! So, with that I ask you, Deal, or no deal?
You are tempted. You try to let your powers of reason and better judgment overtake your emotions and desires to stay in the market. But, alas, you cannot. So, with teeth clenched and eyes tightly shut, you emphatically pronounce to yourself that fateful phrase: NO DEAL!
Now you are in it for better or worse. You had your chance to come out of the trade no worse off than when you entered. In many situations, that, in and of itself, is a victory. But, you felt compelled to continue with putting the fate of trade in the hands of factors beyond your control. From this point, the market could go up and make you a winner, but in this particular circumstance, there is an equal chance that it slips away from you again. The best trades are the ones that decisively go in your favor fairly soon after you enter the market. Anything else is entirely a matter of luck, left up to chance. As a general rule, most traders will tell you that they would rather not make money than lose money, meaning that they would rather cut a profit short and watch it go further in their direction after they covered the trade for a small profit, than watch that profit turn into a loss. Such a philosophy always seems better in hindsight. After all, who wouldn't admit that a trade that had small profit, when it actually was a profit, was better than the loss it ended up as? For me, that is the hardest aspect of trading: Managing a profit. The error of judgment that seems to most frequently plague my trading is that I do not cover my trades appropriately. I repeat the mistake of letting my losses run. The psychology behind this behavior is forgivable. I am reluctant to take a profit because I am convinced that I have taken on the proper position and that it's current upswing is evident of such. So, covering for a small profit will undermine a legitimate position. On the other hand, I ride my losers because I am afraid that they will become winners and I will miss out on the profits when the trade does eventually turn in my favor. In each situation, I let fear govern my actions. The fear, in both cases, is of not making a profit. The dichotomy is, that if I cut the winner short, although I did in fact make some money on it, I am indeed losing a profit by not taking as much out of the trade as I could have. Likewise, if I ride the loser, I am certainly not taking a profit either because while I may hope that the market will recover, as it continues to work against me, I most certainly am NOT making any profit in the meantime.
You can never tell for sure what the market will do. Nothing that the market ever does is within your control and anything can happen at any time that can sway the market one way or the other. Many of the circumstances that move the market are within reason, but there are also countless events or other circumstances that are not within reason, that can happen at any moment, throwing your position into chaos. If anything, the market controls you. You should only enter or exit the market with a clear sense of what you expect to happen and you must know what actions you will take should the market not behave as you had expected it to, whether it be, for example, by putting in a stop order or by taking profits off the table. That is what I mean by the market controlling you. As much as you would like the market to move exactly as you would expect it to, it almost never does and you will have the best opportunity to make the most out of your trades if you are willing to trade within the parameters of the current market. So, if the parameters of the market were that it was not in your favor and you have a chance to get out with either small losses or small profits, sometimes you are just better off taking the deal and covering your position. The short answer would be that as long as you have made some money in a trade , you should never be disappointed in its result. So, cutting profits short is obviously always better than letting losses run. As a newer trader, though, you will undoubtedly notice traders who seem to be able to make many thousands of dollars in a single day. These must be the "good" traders, you tell yourself. And, while it is easy to be satisfied with a few hundreds of dollars of profit each day, and a few small losses every now and then, in the beginning, it will be very difficult to make a living out of trading if you are not going to try and be one of those traders who can make thousands of dollars each day. When you factor in your losing days, income taxes, your commissions- which can get pretty steep -and the possibility of having to pay for your own health benefits (the norm for independent traders) the frustrating reality is that you will not be very well off at all if you are satisfied with earning a few hundred dollars on the days that you make money.
People are often indecisive because they know that a final decision negates other opportunities, at least for the time being. You might not cover a position you have on in the markets that is going against you being doing so means that you definitely will not make money in that position. Since a trader who enters the market is first and foremost an optimist, who thinks that a position will turn out positively for him or herself, it is often difficult to reverse form and acknowledge that they may be mistaken in their judgment of the market. So, even when there is strong evidence that the market will never really be in our favor, we hold out faith that our original inclination is correct, and stay involved until it is abundantly obvious that we were wrong.
What separates a good trader from someone who has simply involved himself in a game of Deal, or No Deal is that the good trader knows that his acquired skills will help him confidently withstand the many factors beyond his control that he may encounter. The Deal player might well believe that they are applying skill to their challenge, but in no way do they have control over any element of the game except for when they choose to stop playing; every other matter of success or failure is completely subject to circumstances beyond his or her control, or luck as you might prefer to call it.
It might become likely that when trading, you do not feel like you will be able to navigate the factors beyond your control for a particular period of time. You may be overwhelmed by volatility or perplexed by the market's direction and just feel like you cannot get a handle on it; it can happen to even the most experienced and competent of traders. Similar to the only way in which contestant on Deal, or No Deal can claim to be "good" at that game, a good trader knows to exit the market, or at least lighten their positions, should he or she become confused or unsure, thus eradicating any effect that luck might have on the trade's outcome. While a good trader can consistently turn a substantial profit, a good trader also recognizes when a substantial profit will be difficult to come by and can either find a way to substantial profits despite market conditions or be content with smaller profits.
In sports, there is a term called taking what the defense gives you, which basically means that if your opponent's defense is making it difficult for you to advance in a particular way, you would be better off trying to find a different way, rather than forcing yourself to go against its strength. If you are a quarterback of a football team, for example, you always want to be able to throw the deep touchdown passes to wide-open receivers, way down at the other end of the field, and score a lot of quick points that way. But, maybe the other team's defense has a lot of your deep receivers covered and you therefore do not have the opportunity for the big play. In that case, you may have to look for other options, either by completing short passes, handing the ball off to a running back, or resorting to trickery.
A good quarterback, or a good coach for that matter, knows how to creatively execute plays according to what the defense is giving, perhaps by picking up a few yards at a time, moving the ball bit-by-bit, eventually scoring, although possibly not as much or as quickly as desired. In the same respect, a good trader can take what the market gives him. We all would love for each trade be an absolute winner. It would be wonderful to be able to buy 1000 shares of stock, watch it shoot up $5, cover the position, and then leave for the day. While such things may sometimes happen, they cannot be counted on, at least not for the average independent day trader. More often than not, the market will be much less than ideal. The quarterback or coach has no idea what an opposing team's defense will do to try and stop it, such is a circumstance beyond their control. All that the quarterback and coach can do is control how they go about overcoming the defense and if they are good at their job, they will do so effectively. The same can be said for a trader who wants to score big in market. The good trader can devise an effective gameplan to make winning trades based on whatever it is that the market gives him, knowing full well that he will have to make adjustments throughout the day.
Able Chicken or Successful Egg
Does ability lead to success? Or is it the other way around? It may not be quite like the classic debate about whether it was the chicken or the egg that preceded the other. Generally, the answer is agreed upon, if not abundantly clear:
Ability leads to success. The better able you are to perform a particular task, the more likely you are to succeed at it, like an adult crossing the street. But, it can also be argued that success also leads to ability. There is no motivator like success. Many find motivation in defeat, yet repeated defeats can surely way heavily on one's psyche. Therefore, it is through our victories that we build trust in ourselves and in our abilities, perhaps pushing ourselves even further, to succeed at even higher levels.
From experience comes ability. Each experience that you have as a trader will make you better able to make winning trades in the future. I am not necessarily differentiating between positive and negative experiences per se because, at the risk of sounding cheesy, a negative experience turns into a positive one down the road if it is not frequently repeated and if it can be used as a point of reference for better outcomes in the future (like our reflective If/Then hypothesis). While it may be highly possible that a string of profitable trades were totally up to luck, it is very likely that consistently profitable trading is because of your ability to trade successfully. You may count yourself lucky for whatever success you have had in trading or in any walk of life, for that matter. But, if you are to succeed in the long run, you must recognize your ability and embrace the notion, so that you will be more trusting of yourself as you progress. That is what I mean by ability leading success. When we turn the corner in our lives when we realize that it is we who actually know what we are doing, rather than surmising that we are simply subject to "good luck" is when our success truly blossoms.
I really love to ski. I have been on ski trips all over North America with various friends of mine, most frequently with my best boyhood buddy Dan. Although skiing does not come naturally to me, I eventually became pretty good at it. Nobody else in my family skis except for me. When my younger siblings, my brother Max, my sister Sarah, and I were little kids, my parents decided that they wanted us to learn to ski, that it would be "good for us." So, while my parents waited either in the toasty lodge or the bottom of the chilly hill, Sarah chose ice skating as her preferred winter sport (which she soon abandoned), and Max, the youngest, frequently complained either of some puzzling injury or even more puzzling equipment malfunction. I, on the other hand, buckled up my ski boots, popped them into the bindings, and whooshed on down the bunny slope with my instructor. I enjoyed skiing, but did not get very far with it. Since my parents were not skiers, nor, apparently, were two of their three kids, the Kaufman family ski trips never got beyond two or three winters.
By the time I got to college, and had more freedom and ability to travel on my own, I rediscovered skiing. I went on a trip with a friend of mine whose family had a cabin near a small ski mountain in Michigan. It had easily been eight years since I had last been skiing yet I was fairly confident that I could pick up right where I had left off, which was to meander along the Green Dot trails, always the easiest on any mountain. One thing that fascinated me from my days of skiing as a child was the trail designations: the aforementioned Green Dots for beginner skiers, Blue Squares for the more experienced skiers, then the foreboding Black Diamond and even DOUBLE Black Diamonds for the experts. As a child, I was always very content on the Green Dots. The gentle gradients and generous widths made these trails well suited to my timid approach to the mountain, which included wide looping turns and sharp abrupt stops. Most importantly, though, I stayed vertical and felt like I knew what I was doing. At that time, it never occurred to me to try the harder trails and since it seemed like I was enjoying myself the way things were going, my parents never pushed me to try anything harder. They were just happy that at least one of their children was not rendering these ski trips a total waste. I was curious about the Blue Squares, always peeking my head over to the chair lift that primarily serviced such trails but assured myself that they were not for me. It just looked like what I perceived to be "a lot of grownups with girlfriends." As for the Black Diamonds, FORGET ABOUT IT! The way I looked at it, I would definitely turn to stone if I even shot a glance at the top of the mountain, where I knew the hardest trails were. I was certain that in order to ski such terrain your eyes must glow red from under your goggles, smoke must blast from your nostrils, and you would roar at any less capable skier who had the misfortune of cutting you off as you steamrolled down the 90 degree incline at Mach-4 speed. Oh, and you had to wear armor, too.
So, on the mountain in Michigan, I told my friend that he should go on without me if he wanted to get some sufficient skiing in. I had not been skiing in a while. I wanted to stick to the easiest trails as I reacquainted myself, but if he desired some more challenging terrain, he should go up without me and that I would meet him for lunch in a few hours. Well, I was right about at least one thing. I could handle my own on the Green Dots. In fact, they were almost a little too easy, which was encouraging since I expected to have at least a little trouble getting my "ski legs" back. Being about 30% taller than I was when I last skied and with more control over my body, if there was ever anything that seemed treacherous about the Green Dots, it did not seem that way anymore. In fact, the least navigable part of the trail was the little kids from the ski school, tiny oompa-loompas in down-substitute jackets.
With the small fries all around me, I became a bit tentative as I lumbered along the path, because I was certain that with my lack of practice and their lack of control, someone was going to smack into the other and the result, even at low speed, would not be pretty. I needed to get away from the Green Dot. I puffed up my chest and decided that I needed to try a Blue Square.
That brings me to the second thing I was right about, going way back to my days skiing as a child: A lot of grownups with girlfriends. Only this time, a lot of the "grownups" were like me, college aged, or older. While I felt a little out of place on those trails as well, seeing that I was skiing without a girlfriend (or any friend, for that matter), I figured that I would at least be amongst those who had some awareness of those obstacles that they may encounter, notably other skiers.
It is just like the pedestrian crossing the street, who will come across various factors beyond his control in the few seconds that it takes to make it across the street. The skier will also come across countless such factors on the slopes. I felt, on the Green Dot trail, that the factors beyond my control, which were the clumsy little kids, who seemed to dart every-which-way along the trail were an impediment to me, just as I felt I was to them. I was too concerned that there might be a collision. So, just as I felt a little lack of control over my skiing ability after years away from it, I took control over one aspect of the situation that I actually could control, which was choosing whether or not to stay on the that particular set of trails. In that sense, I felt like the Deal, or No Deal contestant who wisely decided to take the deal, or the trader who knew that his current trade would probably not be a winner: I got out.
However, traders know that they can always get back into the market once conditions change or they have a better understanding of the market, which is exactly what I did while skiing. I was right in thinking that a few runs on the Blue Squares would help me redevelop my skiing ability without worrying about hurting little children. I had to negotiate getting off of the ski lift, which can be a bit dicey if you are not prepared, but that went off without incident. Then, down the hill I went. What I encountered were a whole lot of others like me: Adults who wanted to have a relaxing go at skiing. They were not the clueless beginners on the Green Dots, nor were they the extreme adrenaline junkies on the Black Diamonds. They were folks who wanted to take their time and take in the scenery. Sure, there were parts where the trail was a bit steeper than on the Green Dots, or sections where it veered off to the left or right, forcing me to make a more pronounced turn. But, all in all, the terrain was easy and I could not remember the last time I had a more pleasant experience, as I looked out at other snowy peaks on the horizon, crystalline branches encased in ice all around me as I made my merry way down the hill at slow speed. Pure Bliss.
When I met my friend back at the lodge for lunch, I told him how great it was to reintroduce myself to skiing and how much I had progressed since the last time I skied, eight years ago. When he offered to ski a few runs with me after lunch, I told that I did not want to hold him back, that I was enjoying myself on the intermediate runs, and that I would not mind finishing the day alone if it meant that he could ski with his brothers on the most advanced trails. In fact my friend had a sweatshirt on with phrase "Attack the Black" printed on it, over an image of a skier rambling down a steep incline in waist-deep powder, which made me know that although he was being gracious in offering to ski with me, I knew that he craved action. I on the other hand, took satisfaction in my own new slogan that became my personal skiing mantra: "Cruise the Blues" which was exactly was I was content to do for as long as I wanted to.
Back to the Blue Squares for a last few post-lunch runs. My confidence swelled along with my enjoyment. While I knew I might never become Jean-Claude Killy, I at least felt, at that point, like a real skier!
One thing that makes the Blue Squares a bit more challenging than the Green Dots, besides having slightly more variable terrain, is that they intersect on the mountain with various other trails, even, sometimes, Black Diamonds. So, it was at the end of the day, with my comfort level and trust in my skills at their pinnacle, that I decided to venture off on to some other trails, other Blue Squares, that is. I made an easy left turn off of the trail I was on, and began down the next one, when a desperate fear gripped me. There was the sign. Black Diamond. I became paralyzed. I stopped dead in my tracks. Sweat fogged up my goggles, I felt an unbearable shooting pain and pressure in my feet, which seemed to swell to three times their size in the constricting ski boots. I panicked. What a cruel Pavlovian trick; that blasted sign and that sinister shape on it!
I looked up the mountain, towards the intersection to the trail I had just come from. It was late in the day, most skiers were completing their last runs before heading home. I saw a few ski hats glide by along the precipice from where I made my turn, but I could not have expected any help from anyone else. I was all alone. It was a good 15 yards back up to the previous trail. I could try and traverse my way back. I turned myself across the mountain, dug my up-hill pole in the snow, leaned on the pole and tried to drag myself up the hill. The pole gave out under my weight and I slipped. Now I had to deal with getting up. It was like trying to dig out of quicksand. I knew the only way off of the Black Diamond was to actually SKI the Black Diamond. I struggled back onto my skis and mapped out my strategy. I would make a slow line across the trail, stopping myself against a snow bank on the other side, where I would grab onto trees for support, before turning myself back the other way and down the mountain. I did not care if it took me hours to get down, or if they had closed all the lifts and needed to send ski patrol to get me with a snowmobile. Actually, I might prefer that. I would be lucky to make it to the bottom of the trail alive, I thought to myself.
I pushed off towards the snowbank. I felt like I was walking a plank and about to be shoved into shark infested waters. A lone skier zipped past me, effortlessly moving his hips from side to side, making it to the bottom in what seemed like 10 seconds. I hated him. Just as I made my tentative way towards the snowbank something happened. An involuntary shift in my body weight caused me to spin the opposite way and I had started to actually get down the mountain! I was heading straight for a set of moguls that I sought to avoid when mapping out my original route, and petrified of getting ensnared in them, I leaned awkwardly on my downhill ski and made an unsteady turn the other way. All of a sudden I had somehow completed two turns on my way down the hill and I was still standing! I peered up towards the trail I had fatefully turned off of. It must have been a good 45 yards up, I could not see any skiers going along the the trail. I would never be able to get back up there, but it did not matter. I was going to get to the bottom via the Black Diamond Express.
I steadied myself. Turned a bit abruptly, whipping myself to face the other way and then found my rhythm. I recalled the skier who had passed me a few minutes ago on that very trail, how he so subtly shifted his hips to gain momentum, and tried doing the same thing as he. I remembered a tip that a ski instructor gave me all those years ago, that in order to turn down the mountain, you should pick out a spot on the mountain two turns away, and go towards that point. I gave it a shot. It worked. I was nervous and careful but I was making my way. Two more turns and I was halfway down the run. Two more after that, and I could see the bottom, only a few feet away. With that, I pointed my skis down the hill, bent my knees, tucked my poles under my arms, and shot down to the flat part at the end of the run like a slalom champion who had just set a world record for time in taking the gold. At last, I was right about one more thing: There was a red eyed, smoke snorting, armor wearing beast roaring down the Black Diamond. It was me.
Getting back to the chair lifts, most every other skier was heading back to the lodge and then to their cars after a long day on the slopes. But, there were still a few noble souls gearing up for one final run, as the lifts would still be open for another 10 minutes. Without hesitation I quickly jumped back in the lift line. One more shot down the run I had just completed would, in my mind, confirm the identity that I had previously never thought I would ever bestow upon myself: That of Black Diamond Skier. Up the lift and then down the trail was the plan I had. The mountain was practically empty and I was determined to make the run quickly, without even giving doubt or anxiety a chance to set in. The strategy worked. The second I got to the top of the run, I pushed off on my poles and descended, negotiating the mountain with ferocity. Attack the Black! Not only did I complete the run without incident but I think I made it down almost as quickly as that one skier who effortlessly passed me by when I was struggling to get down the first time. At one point I resented that skier. Yet, in my moment of triumph, I felt a kinship to him.
It was really almost anticlimactic; just one hill out of many that I have skied. Since then, I have skied mountains of all sorts. The truth is, that small mountain in Michigan would be a mere foothill to some of the places I have been. To be sure, I have been on Green Dots at some mountains that were almost as difficult as that first Black Diamond I conquered. Yet, the symbolic significance of my feat carried a lot of weight. You see, by getting down that run twice, I knew that I could ski the more difficult terrain. When at first, I would have counted myself lucky to make it down the run without significant injury, I could now consider myself good skier. Yes, it would take some time to become completely competent on all sorts of Black Diamonds, and I definitely took a few tumbles on some of the other such trails that I skied at various other resorts. But, in making that successful run down that Black Diamond in Michigan, I proved my abilities out to myself and thus became confident enough to attempt more challenging terrain on other mountains. In that case, success led to ability. Had I resigned myself to slide down the run, or if I had tried to ski it but failed, toppling over in an entanglement of ski poles and snow, I would probably have called it a day, and might not have tried that run again, or any Black Diamond for that matter. For all I know, I was lucky to make it down in one piece the first time. But, for whatever reason, I quickly noticed how disaster did not strike as I had expected it to and that led me to develop my ability further and become an even better skier.
The truth is, I would not have made it down that run if I was not able to, meaning that my success in completing the run had everything to do with ability, whether I realized it at the time or not. There were potentially more factors beyond my control at play in that situation than I could even conceive of. What might had happened if someone even more hapless than myself had also been on that run and accidentally ran into me? What if there was a branch or uncovered rock in my way and I flipped over and got badly injured? It is impossible to tell how that situation might have played out should anything have happened differently. Regardless, of what might have happened, the truth was, I was in fact equipped to persevere through whatever factors beyond my control that that situation did entail and my perseverance bid me to bigger and better experiences on the slopes.
Traders need to take risks if they are to ultimately become successful. Without risk, there is no reward. While some trades are better advised than others, no trade is totally unreasonable if it carries a clearly defined risk- and every trade carries at least some level of risk. Often times, traders will make speculative trades, betting on a move when way or the other. A speculative trade is a risky trade because it might not necessarily be based on clear technical analysis or reliable fundamental information. Still, if your risk is defined, meaning that you know where you will cover the position if you are wrong, then there is no reason not to try a speculative trade. After all, while you may know how much you are willing to lose, you never really know how much you can make on a position. A limited loss against an unlimited gain means that there is a good chance the trade ends up in your favor.*
Getting off of the Green Dot trail in favor of the Blue Square, after eight years away from skiing was definitely a risky move on my part. I did not know exactly what to expect on those trails, whether they would be too difficult for me, or what types of obstacles I might encounter. But, my risk in elevating myself to the Blue Squares was clearly defined: Should those trails have proven too challenging, I would just go back down to the Green Dots and either stay on those trails, build my way up to the Blue Squares, or stop skiing at least for the time being. Of course the possibility existed that I might get injured on any trail, but particularly the Blue Squares, on which I previously had no experience. Injury, both mild and serious, is a common aspect of skiing, often resulting from factors beyond one's control. However common, I did not see injury as a particularly reasonable risk while attempting the Blue Square. I figured that at worst, I would slide down the run on my bottom, take off my skis and try to carefully walk down, or perhaps just slowly and tentatively ski down. In that case, not only was my risk clearly defined, but my approach in attempting to minimize whatever damage I might incur was carefully calculated as well. I was not going to necessarily let luck dictate the result of my experience. I was going to leave the result up to whatever ability I possessed, even if that ability was to scoot down the run on my butt.
With my risk clearly defined and my options for damage control soundly reasoned, I embarked on the foreign terrain. I was not afraid to realize my risk or apply any of my damage control techniques; If I was willing to accept the possibility that any of those might occur. As a result, I skied the Blue Squares confidently and it paid off in the end.
What you will find, from time to time when you trade, is that you seem in over your head. You might be short some stock, figuring that the market would go down, but then find your position swallowed up by a huge rally. Perhaps you had been trading relatively small volume to that point, had begun to consistently make money, and was ready to step up your position size. Then, just as you entered your largest position ever, the market abruptly began trading against you and you were down more money on that one trade than you had ever been in an entire day.
Welcome to Black Diamond trading. The truth is trading can be either very simple, like a Green Dot, or very difficult, like a Black Diamond. Eventually, with practice and patience, you will be able to handle any trade confidently. In theory, there should be nothing particularly difficult about trading. Markets go up and markets go down. Enter trades where you think you ought to and exit where you think you ought to, hopefully book a profit. Skiing is not so different. Start at the top of a slope and make your way down. In fact, when I am perched on a ski lift, I often survey the trails below me and try to map out which runs I will take once I get to the top of the lift. From that particular vantage point, many of the runs look the same; the unique gradients and obstacles on each trail not particularly evident to me. I may decide that I will take a trail off to the right that I saw, that looked narrow and winding, with trees over-hanging. Yet, upon embarking on the run, I realized that while it may have been narrow and scenic, it was quite flat, and was really only a thoroughfare to another set of equally unchallenging trails. Other trails may look very manageable and pleasant from far away, like a nice, wide, easy run down that I might take either before lunch or as my last run of the day. However, once on the trail, I am confronted by a level of steepness I had not anticipated, moguls, patches of ice and (even worse) rocks and patches of bare earth. Unfortunately, my lunch will have to be well-earned. Although I tend to be somewhat cavalier when skiing, without much regard for what a particular run would entail, it is not really too difficult to get an accurate read of the landscape. After all, the mountain will not change (except subtly, of course, when you account for the weather, grooming, and occasional renovations), so once you have been down a run a couple of times, you will know whether or not it is suited to your ability and disposition. Trading, on the other hand, is a totally different situation altogether. The market's environment changes day by day, even second by second in some cases. So, even if you feel like you have an understanding of how to approach the market or trade a particular stock, you can never tell from day to day what might take place in the markets. If you are reckless and try to take on a huge position in a market that you do not understand very well, in the hopes of making a quick buck, then chances are your trade will fail miserably and you will have to endure some significant injury to your P/L. It is almost as if you tried to ski a run that was way too advanced for you in order to impress your friends; kind of like when John Cusack's character Lane, from the movie Better Off Dead, has to ski the daunting "K-12" mountain in order to win back his girlfriend. As discussed previously, that kind of stuff may work out to a happy ending in the movies, as it does in Better Off Dead, but rarely in real life.
There will be times, however, when you are trading quite prudently, taking risks as you see fit, but the market just goes against you and you do not understand why. Keeping with our example that you got caught short in an overwhelming up swing, you might reason that even as the market goes up, it is bound to eventually come down. So, confident in your short position, you decide to get short even more. Now, getting short above recent highs or long below recent lows once you are already in a position can be a calculated move that many good traders employ. But, doing so just to get a better average price will only invite disaster. I only bring this up as an example of ill-advised trading practices that can turn a bad position into a terrible one. A situation is often too difficult for you when you feel that you have to make hasty decisions that defy sense and reasoning in order for it to be overcome. When it is clear that the factors beyond your control have turned against you, you would be wise to take a moment to evaluate your current situation and try to figure out a way to make it through with minimal harm because doing so will leave you better able to succeed in the future.
Only YOU can Make YOU a Good Trader
Take Advantage of What You are Given
Sometimes, factors beyond your control will just turn up in your favor. Most people would call it being lucky. Should that happen, you then have a choice to make. Do you regard the luck as momentum and try riding the momentum for greater gain? Some might call that "pushing your luck". Or, do you cash in on your luck, and feel fortunate with what you had gained? There is no clear cut answer to that quandary. Different situations call for different courses of action. As a trader, a lot of your decisions regarding positions you are in will be based upon the market's behavior and direction as well as that of the stocks that you have positions in.
I had once taken a long-term position on 2,000 shares of the now-defunct electronics retailer Circuit City. The stock was trading at significant lows, at around $4 per share. I took on the 2,000 shares primarily because of the defined risk involved. I reasoned that while Circuit City did not command the market share that its chief competitor Best Buy (BBY) did, it still was the nation's second largest electronics retailer. So, at $4 per share, I figured it was pretty cheap and the worst that could happen would be that it fell to zero. At that time, it did not look likely that the company would have to file for bankruptcy, or that it would eventually fold. Should that have looked likely, I would quickly cover at least part of the 2,000 shares, meaning that I would never be down $8,000, the maximum I could lose if I held the position to zero. On the upside, I saw reason to believe, based on technical chart analysis, that Circuit City could at least get up to $12 with any sort of significant up move. Bear in mind, I bought the Circuit City stock during the height of the subprime mortgage mess, at a time when retailers were feeling the crush from diminished consumer resources, and were therefore struggling. So, although it made sense that Circuit City would be down and not yet knowing the true severity of the faltering economy, I figured that stocks were due for a rally.
The truth is, the big rally never came, at least not at that time. It just sort of hung around in a state of suspended animation, more to the downside than the upside. For the most part, I neither gained nor lost money in Circuit City. One thing about inexpensive stocks, they sure do not move very much. Maybe if I was a huge institutional buyer, I could have taken a few hundred thousand shares and book fantastic profits off of a 20 cent move; that is often how money is made with the cheap stocks. But, suffice to say, I was not quite at that level yet and 2000 shares, especially for a long-term speculative position, was pretty rich for me. Circuit City basically traded around $4 for weeks, never breaking too far out of that price range. My plan was, while always holding a base position of 1000 shares, to trade in and out of the other 1000 shares, buying the dips and selling the rallies as I saw fit. Well, like I said, Circuit City never moved much one way or the other. All told, I was ahead a little bit on the position and was currently holding only my 1,000 share core position, a bit frustrated that the stock had not moved as I thought it would, while I mulled my options for managing the position. Another thing I learned about stocks while holding that position is that they will not commonly triple in value very quickly. So, I was a bit naive to think that Circuit City, just because it appeared to had bottomed, would build some unobstructed "stairway to heaven" all the way up to $12. An eight point move in a $100 stock or even a $50 stock can happen quite regularly, on a day-in-day-out basis; but not in a $4 stock, no matter how far and how swiftly it came down; unless, of course, some sort of news comes out, propelling the stock upward or crashing it downward.
Then, one morning, as I was watching CNBC while getting ready for work, the type of news that could propel a stock upward came out about Circuit City. There was a report that the video rental chain Blockbuster had bid to take over Circuit City, offering a 54% markup on the stock. That meant, that if the deal were to go through, the stock would be valued at more than $6 per share. While I am no mathematician, I do know that a 50% profit on your equities portfolio is quite a return. In fact, a fund manager who can return half that amount to his customers would be considered a hero by many. With that in mind, I quickly opened up my trading software on my home computer, saw a $6.18, bid on the ladder, and covered my position in Circuit City.
It was great strutting into the office that day with more than a $2,000 profit in the books before the day had even begun. With my profits in hand, I wondered whether or not the buyout speculation surrounding Circuit City would be a catalyst for a strong move up. Or, it could have been that the price of the stock would bid up to the price offered in the buyout and then fail. I would be lying if I said that I did not wish I had kept even just 100 shares in order to see what might happen. Surmising that either could be the case, I bet on the latter of the two possibilities and covered my position for a guaranteed profit. Deal! Should the stock appear headed for an even further rally, perhaps up to my original target of $12, then I could always find ways to get back in on the way up.
Well, coincidentally, Circuit City started to trade lower in premarket activity, almost immediately after I had sold my shares. Shortly after the open that day, Circuit City had all but erased the upside gap it had so briefly left and came crashing back down to around $4. Circuit City filed for bankruptcy shortly thereafter, a victim of its own hubris in opening up so many store locations, as well as an ailing economy unable to support many of its retailers as stoutly as it once had. Before it was finally delisted, Circuit City was trading for nothing more than a few cents per share on the NYSE.
Boy, was I fortunate to have taken the deal in that situation. The factors beyond my control fell right into my favor and I was smart to snatch up the profit I was given. Besides, I had the right thought process in that I would take the guaranteed money and then look to take another position in the stock if the situation dictated doing so. There have been precious few circumstances during which I took complete advantage of my good fortune. More often than not, I manage to foul up my luck in one way or another, either by covering prematurely or not quickly enough.
More recently, I had been long a bunch of shares of the shipping company Dryships (DRYS). Dryships had been trading at around $130 in 2007, doubtlessly benefiting from the infrastructure boom in China and other developing nations, as it shipped iron ore, coal, and large industrial materials over to these ever-expanding countries. Indeed, Dryships was the shipping industry leader at that time, at least based on the value of its stock. Then, when the world economy fell into chaos, Dryships stock price plummeted. By late 2008 and in 2009, Dryships stock was trading at around $3 per share. I am no expert at how to value a stock. I cannot make much sense out of price/earning ratios and I cannot necessarily tell you whether or not a stock is cheap or expensive relative to the market. One thing I can tell you, especially when a stock has had a massive disparagement in price in a short time, as with Dryships, is that the stock is probably not worth what it was at the top nor what it was at the bottom. The true value lies somewhere in between. So, when Dryships was at $130, it might not have necessarily been a sale because with the way the market was going at the time, it could have gone to $200 in the blink of an eye. But, at $3, it most certainly has to be a buy. Was Dryships worth $130? Or was it worth $3? The answer is most likely somewhere in between and based on the range that the stock had created, you have to be a buyer at $3 and should the stock ever get back up to $130, you almost certainly have to be a seller. That is one way that I value stocks. I play the ranges, whether it be on the daily charts or the minute charts; I look to the daily charts to find stocks that might be coming into an optimal area of support or resistance, to look for long-term positions. I use the minute charts (5-minute, 15-minute) to find areas for day trades.
Anyway, based on the daily chart, Dryships was most certainly a buy at $3, if for no other reason, as with Circuit City, there was very little downside risk and there was almost $130 of upside potential. Would I expect the stock to get to $130? Absolutely not. That would be a pipe-dream. But, if the true price of the stock lies somewhere in the middle, then it would be reasonable to assume that Dryships might someday, somehow get to $50 or $60. Imagine owning 10,000 shares of a $3 stock, an investment of $30,000, and it goes t0 $60! That would be a profit of $570,000! You'd never hold that much of a position for that long, especially if you were primarily a day trader. But, it would be a real coup to get close to $60 on any part of a position. In any event, I bought Dryships at around $6 per share. Sure at $6, the stock was double the price it was on the lows, but I figured there was more upside potential than downside rsik.
In being long Dryships, I neglected to account for a very key fundamental aspect of trading: Dryships was no longer a $130 stock. It was a $6 stock and as such was up 100% from the lows. In that sense, such a stock is not necessarily a buy. To that end, the Dryships never got above $6 in the many months since buying it and has traded more near $4 the entire time!
Recognizing when you got a lucky break and properly capitalizing on it can be a matter of luck in and of itself; but, it can also make you a good bit of money from time to time, if you manage it correctly. The Dryships trade was not managed correctly. I should have recognized that it was not going up, rather than hoping that it would. Just because you know what you might lose does not mean that you have to lose it if you can help it. I got the lucky bounce in Circuit City. I did not in Dryships. One was a pleasent winner. The other was a bg waste of time. Although I did not lose much in Dryships, the fact that it was never a winner to begin with, likely kept my attention off of other positions that I could have taken for favorable results. A good trader would have quickly cut his loses and sought the better trade.
In the end, it all comes down to being prepared. That means you have prepared by studying charts, knowing the market, and can adapt to whatever market conditions arise. There will always be factors in play in the markets that you have no control over. They are impossible to predict and they can be overwhelming at times. Still, with experience, by learning from your mistakes, and by making sound decisions based on experience, you have the ability to hone your craft and become good at what you do. Trading is a skill like any other and no matter what factors are at play, you can indeed become good; it just takes hard work, and while it might not ever become second nature, like corssing the street, it can at least be as navigable as skiing the tougher mountains. Just don't turn you trading into a game of Deal, or No Deal? and expect to become good at it.
