Survival Guide

It was during a Freshman psychology class, my second semester at University of Cincinnati, and for some reason we were talking about physical diseases, when the professor cheerfully posed the question:
"You can survive every illness, every disease, except for which?"
Hands immediately shot up.
"AIDS?" one reticent student asked, quite sure of her answer yet sensing a trap, a trick question.
"Well, perhaps," replied the professor. "But that's not what I had in mind."
Some hands that were raised went down, the students obviously disappointed and bewildered, while others, seeking opportunity, quickly raised their's.
"Terminal Cancer," offered a boy, confident in his answer, especially since he had taken care to emphasize terminal.
"No," said the professor. "Not that, either."
Silence. What else could there be?
"Meningitis," came the voice from the back of the room. "Bacterial meningitis!"
"No, no. Not that one," said the whithered professor, feigning disappointment, but taking obvious delight in this riddle, perhaps one of the few parlor-trick questions that he still hadn't grown tired of asking after decades of giving basically the same seminar, because not even his brightest students ever got the answer right.
So, after a few more half-hearted replies, running the gamut of fatal illnesses that the class collectively knew about, the old and learned professor gave the answer.
"You can survive every disease," (he paused for dramatic effect) "except the LAST."
The professor leaned over the lectern when he said this, gripping its edges, and eyeballing the whole class with a foreboding glare, proud of the fact that for one more semester he had stumped a room full of bright, confident, over-caffeinated, and under-rested adolescents. Age still able to have a go at youth.
That being at the end of class, the students shuffled out silently, disappointed and defeated, feeling sucker-punched; each waiting with baited-breath, anticipating that they might actually learn about some newly discovered menace that even their freshman orientation STD seminar had not prepared them for, yet walking out empty-handed.

***

The way the economy has been for much of the past year, many Americans feel empty-handed as well. With the current economic crisis, spurred on by massive losses tied to subprime loans, (POSSIBLY!) coming to an end, we are left to wonder exactly which economic crisis will be the one that we do not survive. The answer, depending on who you ask, is: This one, the last one, the next one. While an economic downturn is the ugly bi-product of a period of grand prosperity, during which many a fortune was made, we are always hit with the grim and sobering fact that many a fortune can easily be lost (gratuitous trading joke: How do you get $1,000,000 from trading? Start with $2,000,000). Yet each time we are hit with an economic bust, anyone from politicians, to CEOs, to mathematicians, to investors, to economists, and so on and so forth, vow to learn from the mistakes that led to the mess and find ways to prevent such a horrible situation from ever happening again. Yet, just as the good times roll during the inevitable economic booms, we are left licking our wounds or, worse, going broke, when the boom times go bust.
So, if we, as a society, pledge that we will strive to be more careful, more economically responsbile, and invent ways to make our economy more fail-proof and more reliable than ever, why do the bad times keep on coming?

Up Next? Uh, I don't know... It's complicated
If my college psych professor's answer to his self-indulgent riddle is that "you can survive every disease except for the last one" then perhaps the solution to the mystery of the recurring economic turmoil is "you can prepare for every economic bust except for the next one."
Think about it: Has there ever been an extended period without some sort of economic downturn? From the fallout from the 17th century "Tulip Mania" to the "Subprime Mortgage Mess" of today, history is fraught with economic bubbles just waiting to be burst. And, while we have consistently picked ourselves up and dusted ourselves off once the tragic events had passed and we resolve to reclaim our economy, armed with the wisdom from the lessons of our failures, all we really know how to do is prevent what had just happened.
But, alas, while there has never exactly been another Tulip Mania, or Great Depression, or Hunt Brothers run on silver, or Crash of '87, or Dot Com bubble, or Housing bubble since each had occurred, the lessons gleaned from each catastrophe did not do any good in preventing the next.
We may have developed precise financial instruments and lending policies that can prevent an exact repeat of the events that led to the Great Depression of the 1920's and 30's. However, nothing that happened then could have prepared us for the inaccuracies in price quotes when new technology, overwhelmed by massive volume, delivered stock prices that were so out of sync with live trading, that it caused a panicked frenzy of selling, leading to the Crash of '87. In our very nature we, as humans, with all of our supreme intellect can only prepare for and prevent that which we know of and cannot even anticipate the pitfalls of the unfamiliar; and that is why economic busts keep occurring.
A fantastic book that clearly illustrates this point is A Demon of Our Own Design (Link 1) by Richard Bookstaber. In his book, Mr. Bookstaber, a long-time Wall Street risk manager and executive at the now-defunct hedge fund Long-Term Capital Management in the mid 1990's, discusses the numerous, random, and seemingly insignificant intricacies that lead to economic collapse. One of Bookstaber's arguments is that the very methods put in place to both regulate the economy and make it less risky carry their own set of consequences that may end up being the very catalysts for unforseen economic disaster. He makes several real-life analogies to this end, discussing a recent airline tragedy in which an over-looked safety check, one in a long list of tedious safety checks, led to the horrific ValueJet explosion. Mr. Bookstaber's assertion is that some of these safety checks may have been unecessary in that they served to over-complicate the process of making sure that the plane was fit to fly, the point being that simplicity may be better than thorough over-regulation. We can draw a similar comparisson to automobile airbags. Although airbags are intended to save lives by cushioning the impact a person endures during a car accident, there have been numerous accounts of unintended deployment (perhaps a result of faulty, intricate, computerized wiring), failure to deploy when needed, and the horrible deaths of infants, either smothered by an airbag or made to suffer fatal injuries brought on by the force of the airbag. There is no doubt that the airbag is a well-intended safety feature now found in all new automobiles. But, they carry many risks of their own, risks that would not exist if they did not exist.

Yet, after each economic crisis, we scramble to overhaul certain aspects of our financial system, developing new wrinkles and adding new guidelines, in order to safeguard against future calamity.

Recession, the "Natural Choice"

An economic slowdown is met with such urgency because it is proof that productivity is down and jobs may be lost, among other things, signalling a possible recession. Just to be clear, not every economic crisis leads to recession. Usually, like in the case of the Crash of '87, the disaster is an isolated instance; shame on those who supposedly caused it, own up to your mistakes, atone for your sins, and move on from there, all of us the better for it. But each time an event occurs that reveals our economy's vulnerabilities, we sound the alarm, knowing that these are the types of situations that could lead to an extended, drastic economic downturn. Therefore, we try and plug the wound, not wanting it to fester and contaminate the larger economy. In A Demon of Our Own Design, Mr. Bookstaber also discusses how small, singular events can be the trigger-point for a major meltdown. He cites chaos theory and "the Butterfly Effect" to show how any particular circumstance can set up a chain reaction with far-reaching results.

While we should take some responsibility for the economy and acknowledge the fact that our actions in the markets can carry a wide-range of unforseen consequences, of indeterminable impact, should a recession really be something that we, as a society, fear?

Well, in a word, yes, we should fear a recession. After all, a recession is living proof that we have exhausted certain financial resources and that people might not necessarily posess the personal resources to uphold the economy.

But, is a recession necessarily the destructive parasite that we make it out to be? Or is it simply a very natural and necessary part of our economic cycle?

I read a New York Times article a few years ago (Link 2) that discussed forest fires, their impact on the environment, their function in nature, and how attempts to prevent them carry very dire consequences. Although forest fires pose obvious threats to humans who visit our woodlands and live in or near them; not to mention the fact that they ravage countless species of animals, their habitats, and other vital natural resources, forest fires actually have a very vital function in our larger ecosystem.
After years and years a forest's usefulness tends to naturally erode. Trees that were once home to numerous animals eventually get stripped of their resources, making them unable to sustain their own lives, let alone those that they had nurtured. At the same time, soil becomes less nutritious, losing the minerals and nutrients that helped to make the forest such a lush and healthy environment. As things in the forest dry up and die, they become more prone to a naturally occurring fire. The sun, hitting a patch of dried, decaying leaves and tinder at just the right angle and with just the right intensity can be enough to ignite an inferno that can consume acres, if not miles of forest land. Although the destruction left in the wake of an intensely burning fire is considered a tragedy, the fire was, in fact, a very important part of the forest's life cycle.
Each forest has what is called a burn cycle, a period of around 100 years, give or take based on the size and density of the forest, at which point the forest will naturally combust. The burn cycle invariably takes place when the forest begins to die on its own and its resources become dry and more prone to burning, as explained earlier. What happens after the forest has caught fire and burned, is that it becomes prepared for new life. With its soil returned to vitality by the debris of burnt matter, the forest can now sustain brand new trees, animals, insects, and other species that will, in time, make their home there; like a new canvas ready for a masterpiece to be painted on it. Had the fire never occurred, the forest would not have been able to purge itself of dead and useless resources, and would not be fit for cultivating new life.
Both environmental conservationists and others who utilize our woodlands for living, business, vacationing, and other forms of recreation are keenly in tune to the dangers of forest fires, with the conservationists also emphasizing the dangers of deforestation. While the National Parks Service also recognizes these dangers, it is more concerned about the effects that irresponsible humans have on the forest. A lit cigarette butt carelessly tossed into a pile of leaves or an unattended camp fire left to burn-out over night are a couple of the ways in which people can cause forest fires, practices that environmentally conscious citizens and our government agencies work hard to discourage. The same can be said for reckless and irresponsible removal or vandalism of trees.
However, most of those involved with the forests know that a fire and/or the removal of trees can be very beneficial. Citing the immense benefits that the forest and all of its natural resources have on life in general, conservationists favor the complete preservation of our forests. However, if a forest is completely protected and never purged of any trees, it will most certainly become overgrown. Then, when a fire does occur, either by nature or by the careless acts of people, it will burn all the more ferociously, wreaking even more destruction than it otherwise might have. Furthermore, if forest fires are to be prevented in any way possible, the same is bound to happen: the fire will just burn hotter and longer when it inevitably does take place. To this end, the National Parks Service will often take matters into its own hands by systematically starting small, contained fires in our forests and by strategically removing trees so that a fire of catastrophic proportions is less likely to take place.
So, where does this fit in with the economy? Well, if the metaphor was not clear (you didn't think I turned all Smokey the Bear on you and just started ranting about the forest, did you?), then look at it this way: If a sudden economic crisis is a blazing forest fire, then a recession is simply what can be perceived as a vast wasteland that the forest has become after the fire has settled and the smoke has cleared. However, as we now know is the case after a forest fire, an economy that may look like a depressed, dead nothingness is actually a brand new landscape; fresh, upturned, and waiting to breed new wealth and opportunity!
Ask any economist, and he or she will tell you that a recession is a vital component to our economy. Just as a forest sometimes needs to purge itself of waste and over-abundance, the economy must do the same. Much in the same way as forests have a burn cycle, the economy has a recession cycle, occurring every seven years or so. While it is only natural that a recession will in fact happen from time to time, its extent and impact is very much based on the extent of the prosperity that preceded it and the ways in which we went about preventing and preparing for it. Therefore, consider yourself forewarned that aggressie attempts to forestall a recession will only increase its intensity when it finally occurs.

A Loser for Every Winner
We seek to avoid recessions at all cost because when a recession hits we must face the fact that a large portion of our population will either lose wealth or have a difficult time gaining wealth, lives may be ruined, and we will lose market share in the global economy. As much as a market economy is predicated on there being a lower class, and acknowledges that there will be losers to go along with the winners, we still operate under this idealized notion that EVERYBODY can succeed. But consider that for a second; this idea that everybody can succeed. How awful would that be? Let alone impossible. If everybody was successful, if we all had our millions of dollars and all that we wanted at our disposal, then how would we even be able to recognize success for what it really is?
The fact that anybody makes any money in the markets is based on the fact that there is an equal number of wins and losses. It is the great equalizer that at the very end of the day, the balance at the Stock Exchange is exactly zero; a true zero sum endeavor. If a dollar is made, then a dollar is lost. We hear so much about hedge fund managers who personally make billions of dollars in capital gains and we become seduced by the idea that that can happen for us. Yet, we fail to consider the simple fact that in order for that fund manager to accumulate his billions, somewhere along the line billions of dollars were lost, not necessarily by one person (God, I hope not!), but throughout the entire market.
So, if we know that market loses are at the very foundation of a healthy and successful economy, we should not be so fearful at the prospect of an economic slowdown that affects all of us.

Because humans live more by intellect than by instinct, we tend to distance ourselves from nature or at least the natural order of things, as if we have somehow transcended nature. However, nature always finds a way to correct everything. In fact, Capitalism is, at least in my mind, the purest type of economy because it carries a system of checks and balances, and has successes and failures, just as we find in the natural world. The forest needs to regulate itself with fires in order to stay vital in the long run. Our economy does likewise through recession.
We cannot prevent a recession any more than we can prevent a forest fire. No matter what we do, each will happen sooner or later. And, as we have seen time and time again in our economy, the experiences from one economic crisis cannot necessarily prepare us for the unknown that is sure to come. So, while prevention may not be 100% viable, preparation is. Through selective deforestation and by starting small but contained fires, the National Parks Service does its part to anticipate a possible forest fire, thereby curtailing its effects on the surrounding area. Our government and central banking system does its part as well, for the economy. By raising and lowering interest rates, the central bank (aka The Fed) takes measures to control the economy and make sure that neither financial feast nor famine overwhelms us. Our government passes tax laws, provides funding, and grants subsidies to businesses, groups, organizations, and individuals in order to promote economic viability. In the end, though, it seems as if something always happens to derail our best efforts.

When "Win, Win" Becomes "Lose, Lose"
Aside from the simple fact that it is just natural that something will eventually work against anything in this world, economic prosperity included, we can, like our public servants, take some action in limiting the effects of that which work against us. First of all, we must acknowledge the vulnerabilities in our sophisticated financial instruments and realize that they leave us open for disaster in one way or another. Secondly, we can practice individual financial prudence and protect that which we have accumulated in the event that something goes wrong. Finally, we can allow our government and central bank to step in when they sense danger, such as a financial bubble about to burst, and take action.

Since it has had such a disastrous impact on our economy, the subprime lending crisis has been regarded by many as a gross malfeasance, in which an unsuspecting public was duped into some horrible bait-and-switch, where loans that appeared to be a lifeline to the American Dream somehow mutated into a financial leach that sapped people of whatever financial capital they had. Now, this may be partially true, only in that the banks who wrote the loans did not take the time to properly assess the risk that they would take on in those who were receiving the loans. Although the banks knew that some borrowers might have trouble repaying their loans, especially when the rates on the widely offered Adjustable Rate Mortgages (ARMs) went up, they lent money quite freely. The throught process behind the loose lending practices was that since the real estate market was so hot, borrowers, who at that time were pretty much guaranteed that the value of their home would skyrocket, could always use their fast building equity to pay off their debts should they run into a finaincial pinch. Originally, the basic premise behind a subprime loan was purely "win, win". With the housing market booming, residential construction at its highest rate in years, and cities all over the country expanding and developing, it only made sense that honest, hard working people who were throwing money away on rent should have the chance to own a home. This is where the good intentions lay; banks providing people the opportunity to build equity in a home, that most definitive of American assets, thereby adding strength to an already booming economy. For their troubles, the banks could charge a slightly higher interest rate (or one that was creatively structured to appear cheap), meaning that all involved were winners. The banks had more money and more people had homes.
What the banks failed to consider, it seems, is that the people to whom they were lending, many of whom had poor credit histories, would probably not be able to continue paying their mortgages after a while no matter what, especially when their rates went up. What made the subprime mortgage market such a mess was that it was perhaps one of the hugest rolls-of-the-dice in our history. Then, in what ended up muddying the picture and over-complicating the whole situation, was that the banks hedged themselves against the loans going bad by selling off parts of the mortgages to other banks; in such a way called Credit Default Swaps, a complicated practice whereby banks would package mortgage debt in bulk, slice it, dice it, sell it off to other banks, and collect interest payments in exchange for guaranteeing the debt. This meant that the mortgage money was not even necessarily coming from the bank at which the mortgage was signed, but may have come from some overseas bank, adding an element of confusion and over-regulation that Mr. Bookstaber warned against. Banks were literally betting that momentum from a robust economy would propel the average citizen into a new stratosphere of economic independence... and the world went right along with it! (So shame on everybody else, too!)
One maxim that traders often hear, one that my father has instilled in me time and time again, is that you should make a trade only if you think the market will work in your favor, never if you hope it will. Even if you think the market will go your way, you have to be prepared in case it does not go your way and manage your positions accordingly. Well, whether the banks were thinking the economy could support these loans or just hoping that it would is up for debate. In any event, the economy did not go as the banks had bet that it would, and it seems that they did not manage their positions in an appropriate way.

We are now on some sort of witch hunt for bad loans, resolved to exorcise these demons and banish them from our midst, so that they can never again taint our pure economy and harm our innocent public. There is nothing wrong with jumping on the bandwagon and trying to cash in on a booming economy, as both the banks who wrote the loans and the people who received the loans did. After all, as much as nature is predicated on losers and winners, it is also predicated on competition and incentive; that we try to either use the resources available to us or invent new ways to get ahead (even at the expense of others, hence the losers), in hopes that we will be better off for it. But maybe there needs to be a red flag system in place where we can say "Times may be good and there is more wealth to go around than ever before. But, maybe it wouldn't be such a good idea to offer loans to people who have not provided clear evidence that they can actually pay." There needs to be some attempt to draw the line because we know that somewhere, somehow, we will suffer a downturn. Remember, subprime loans were well-intended because ideally they offered everybody a chance to own a home. But, as we know, the notion of everybody succeeding is unnatural and therefore destined for failure.

Ahoy Trader! I See Gold in That Market. Arggh!
These are GREAT times to be a trader! With the market so shaky, so sensitive to information and world events, there is great volatility and wide swings in the market that provide ample opportunities for quick profits. I consider us, as traders, to be pirates, raiding, pillaging, and looting a battered economy. Cheap stocks, mergers, commodity prices way above previous records, and the like have provided us the opportunity to simply come ashore and take what we please. But, as there is plenty of booty to be gotten, do we want to leave it all on the deck of the ship, where it can be snatched away from us by some other shrewd swashbuckler? Or do we want to bury some of the haul in a treasure chest at the bottom of the sea, where it won't be touched until we come and get it?

If you are not taking profits off the table when you are continuing to make money, you set yourself up for disaster. With the markets as volatile as they are, you had better be moving profits into a secure account on a daily basis, whatever the percentage may be. Therefore, if the market turns, if you just happen to be making losing trades for a period, or for whatever reason you begin to lose money, you can have some money in reserve in order to maintain your lifestyle. I don't need to tell you that there are numerous types of retirement funds, annuities, and interest bearing accounts that are available and you need to contribute to those on a regular basis as well.
The beautiful thing about a down market, at least from a trading standpoint, is that there is tons of money to be made. Mark Lane, one of the best traders I know (although he claims not to be), a titan from the Crude Oil ring on the New York Mercantile Exchange, told me that traders like action, no matter which way it is. Investors are the ones who need a direction, preferably up. These days, there is PLENTY of action. But, just as many a pirate loves to be in the middle of the action, they often meet a sudden and tragic, if not glorious demise because they were not careful. Hijacking that next ship or storming that next port can be deadly if the risks are not calculated and if there is nothing to fall back on in reserve should things not go as planned.

Passing on Some of the Responsibility
Mr. Bookstaber advocates against over-regulation because he feels that it makes certain situations more complicated than they need to be and therefore more vulnerable to failure. However, if we are to truly learn from our mistakes, those who are ultimately in power, and by this I refer to the government and its various entities, need to also recognize when enough just might be enough. We reject the notion of our government being too involved with our businesses because we feel that they will impose standards that will stymie our abilities to be as profitable and successful as we can be. But, just as the Parks Service will systematically ignite fires and cut down trees, doubtlessly killing the habitat of thousands of tiny organisms, in order to prevent a catastrophe in the future, maybe our government can step in from time to time and purposely slow our economy just a little bit if it seems like it is getting a bit "overgrown" so that we can avoid a major meltdown. Furthermore, the government should be on the lookout for those who act recklessly in the markets and exhibit careless and irresponsible behaviors that can ignite a dangerous chain reaction that may doom the financial landscape.

Our businesses and the public will never go for that. It's too socialist, too un-American, and we are all, at heart, quite greedy. So, while one of our inalienable rights is the unhindered pursuit of happiness, we would never allow our government to actually step in and control or limit our ability to accumulate wealth.
If this is the case, however, then we must own up to the idea of a financial bust somewhere along the line and while they may cause some pain, we need to accept them and see the opportunity for new life and greater prosperity that awaits. Otherwise, while we keep trying to avoid them, delay, prevent them, whatever the case may be, we are simply fighting nature, a fight that we will never win, and setting ourselves up for greater misery in the end.

To Your Health
So, if we know that a financial crisis is always looming, why do we even try to avoid them? Well, that would be like saying if we all know we are going to die someday, why even try to live a healthy lifestyle? The point is, to make things easier on yourself while you are here. Saying that economic prosperity should last forever is like saying that people should live forever. Maybe, we as a species can be around for millions if not billions of more years. But, like all things, our demise will come. Not to be too sad and grissly here, but knowing that our time on earth is very limited as well, we still try and do things to make our lives better while we are here, the whole time knowing that something will eventually get us in the end. We take care of our bodies, eat right, form loving and supportive relationships, get enough rest, cultivate hobbies, skills, and interests; all in the name of a healthy and fulfilling existence.
However grim, my college psych professor is right in that each of us will be gone sooner or later and there is no real way to tell which affliction will be the last. However, we still maintain ourselves properly in order to prolong our existences.
Grim as well is the fact that economic ailments come at us from all angles, usually when we least expect it. Still, our financial health can last at least as long as our physical health if we take care of it, recognize that dangers do exist even if we cannot always accurately identify them, and make sure that we are prepared to deal with hardship by protecting our assets while we have them. That way, even if we cannot always prevent the malady from arising, we can at least prevent it from infirming us beyond repair.
So which will be the last financial disaster that finally does us in? None. There does not need to be if we accept the risks that our economy is subject to and manage our finances in accordance.

To Be Lucky or Good

Have you ever seen the television game show Deal Or No Deal? If you have never seen it or maybe have only glanced at it once or twice while flipping through the channels, you should take some time to sit down and watch it one day. You just might take some guilty pleasure in what you see, if for no other reason than that it very well may hit close to your own experiences as a trader.

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?"

If the contestant takes the deal, he or she is betting against having the $1,000,000 case, or whichever case left is the most valuable. On the other hand the contestant will leave the show with guaranteed money. In almost every situation, unless the game is near its end, the most valuable cases have been eliminated, and there is a very real possibility that he or she is holding a case worth very little money, the contestant refuses to take the deal. Mr. Mandel always outlines the pros and cons of either decision, reasoning that the Banker's offer "will be enough to send your son to college" should the contestant take the deal, yet there are several more "life changing amounts" still in play, worth even more money, that can be won.
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:

Luck (n): A combination of circumstances, events, etc, operating by chance to bring good or ill to a person's life.

In order to make better sense of the above definition, although it already is quite simple to understand, I would like to key in specifically on the idea of chance. To me, the word chance suggests things beyond a person's control because we often use this term when referring to situations in which we either cannot predict an outcome or doubt the outcome that we had in mind. For example: "So, what do you think the chances are that the Mets finally make it to World Series this year?" or "If, by chance, you happen to speak to Steven today, can you please remind him that he has yet to return the tools I lent him last summer?"

In making any trade, a trader leaves plenty up to chance. If you buy stock, you are taking your chances that the market will go up. Likewise, when you sell, you are taking your chances the market will go down. In some ways, it is very much like the contestant on Deal, Or No Deal who in selecting a briefcase is taking a chance that it holds $1,000,000. The difference between the trader and the Deal contestant is that the trader has the opportunity to actually be good at what he or she does, whereas the contestant relies on nothing but pure luck.

What you need to consider next is what the difference is between being lucky and being good. In relying on chance and circumstance, as described in our definition, luck really refers to those factors that you cannot control. That being the case, luck plays a role in everything you do, yet its effect very much depends on your own proficiency in whatever it is you are doing.

Take for example, a simple physical task that most any able-bodied adult can do quite effortlessly: Crossing the street.

We know very well when going from point A to point B how we ought to get there. We can expect to encounter and overcome certain obstacles and have the faculties to compensate for most of that which we cannot anticipate. Therefore, most people are relatively good at crossing the street. So, we can very easily navigate our way across the street based on our perfection of an acquired motor skill (that would be walking) and our acclimation to a variety of external factors such as other pedestrians, auto traffic, potholes, diuretic pigeons, etc. If luck is comprised of the factors and circumstances which we cannot control we must acknowledge the fact that in every single situation we involve ourselves in, there are more factors that we cannot control than there are factors that we can control. However, through experience and practice, we basically become equipped to negate, or at the very least minimize the impact of those factors that we cannot control; because, alas, we can control our own actions and reactions in any given situation. Over time our actions and reactions are predicated on how much experience we have with that type of situation. It is, indeed, a Pavlovian phenomenon. Just as sure as a dog might eventually begin to salivate after repeatedly hearing a dinner bell ring, or a trader will start calling out bids and offers once the trading bell rings, we learn how specifically to behave in various situations. However, our success in minimizing the impact of that which we cannot control is not only based on experience. Success also depends, in part, on whether or not the factors beyond our control fit within a reasonable realm of possibility.
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.

If you are competent at a basic task, such as crossing the street you can easily deter most any factor beyond your control from becoming a real obstacle should those factors fall within reason. Accidentally bumping into a fellow pedestrian falls well within reason. The prospect of being robbed at knife-point while crossing the street is a possibility, but it does not generally fall within reason that such would occur. Of course there is a greater possibility of getting robbed while crossing the street in certain neighborhoods or at certain times of the night. But, generally speaking robbery is not something that we need to concern ourselves with when we cross the street. Because, if it were likely that we got robbed while crossing the street, we might never leave the house.
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.

The toddler is ill-equipped to make it from here to there without incident and on the first time he were to rise from all fours and take his first wobbly steps across a room, he would be lucky to walk more than a couple of feet without fail. The youngster in this instance has not become proficient at walking and as adults we hold our breath and walk close behind the small child because we know that he has practically no ability whatsoever to compensate for factors beyond his control, therefore we must try and compensate for him. Eventually, after countless tumbles on his fanny and falls on his face, the toddler will become an expert walker, will soon add skipping, running, and jumping to his repertoire, and in time will have enough confidence to cross the street without harm, doing so without luck having to be on his side.

You Are NOT Born a Good Trader

The neophyte trader is a lot like the toddler who is learning to walk and as the saying goes "You must crawl before you can walk". So becoming a good trader means you will have to endure plenty of obstacles and bumps in the road, all of those factors beyond your control, which will eventually barely have any impact on your ability to trade profitably. Traders are subject to countless factors beyond their control, meaning that as in any situation, luck is always in play. However, the idea is for trading to become more like crossing the street as an adult rather than crossing the living room as a toddler: You will be able to competently complete your general task, taking into account those factors beyond your control that you can reasonably anticipate, but will also be able to minimize any damage brought on by those that you could not reasonably anticipate. The ability to better overcome any and all factors beyond your control, thus reducing luck's impact, ultimately depends on how good you are at what you are doing.
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."

Q: "How did it feel to finally beat your rival school's football team at homecoming after losing to them every time you played them the last five years?"

A: "It felt good."

A: "What did you and your husband think of the ballet the other night?"

Q: "We thought 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.

You earn adjectives beyond good based on how you trade. For example, a good trader is patient. A patient trader waits for a stock to get into a desired area before making a trade and will not take a significant position, or any position at all, if the right trade has not come along. The patient trader does not trade if confused by the markets. Sometimes, the best traders are the ones who know NOT to trade at a particular time, and wait for the market to make more sense. Therefore, patience, both before and after getting involved in the market is one example of the qualities of a good trader and is, in my mind, one of the most important. To that end, the patient trader has studied charts and is prepared with knowledge as to where a more optimal trade might occur, taking into account the over all market condition.

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.

Maybe you bought 500 shares of some stock and believing the market to be strong, you expect to get at least a dollar out of it. That would be $500 on one trade. You could live with that, right? And, so begins the 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.

Black Diamond Trading

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

Had I decided to rocket down the Black Diamond run, without any regard for my own personal safety or my own personal limitations, I might have gotten really badly hurt. The fact that I took my time to employ a careful plan left me with the opportunity to make the necessary adjustments to make it down the run free from harm, giving me the confidence to know that I could, in fact, ski trails of that sort, making me more willing to make further attempts and to develop my ability. Had I fallen hard repeatedly or injured myself during the run, I am sure I would have relegated myself back to more practice on the Blue Squares, knowing that the Black Diamonds were, at that time, still too difficult for me. Just as I had left myself with options as far as how I would negotiate the Black Diamond, one must also consider one's options when involved in a difficult trade. It is impossible to tell what the proper course of action would be when dealing in hypotheticals. One thing I can tell you, however, is that even the very best traders are sometimes perplexed by the market. My father is as experienced as a trader can be. He has more than 40 years of experience. There will be times when he tells me that he just does not know what to do at a particular point in time. I might ask him his opinion, searching for guidance, or he might just mention, in passing, that he is not certain what to do. As a fairly competent trader, I must decide whether to agree or disagree with those around me. If another trader who you trust has a different opinion on the market than you, then there is nothing wrong with either doing nothing, or taking on a small position with a defined risk. You should always value the opinions of those with more experience than you have. But, at the end of the day the only opinion that really matters should be your own and you should only react to the market as you see it, not as somebody else sees it. There have been times when my father warned against a position I had taken on and the position promptly backfired. There were times as well when I had opinion about the market, my father's differed, as a result I did not make a trade that I might have wanted to, and it turned out that I would have been right. Remember: Little harm can come to you if you can admit that the terrain is too challenging and you decide to try some that is more suited to your abilities and disposition. Sometimes, though, the best way to become better with the more challenging terrain is to have a go at it, whether you meant to or not. You may find that you did in fact possess the resources all along to successfully manage a difficult trade, opening the floodgates for further success down the road.

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.