Wednesday, September 09, 2009

The Kirk Report � Blog Archive � 7 Questions

The Kirk Report � Blog Archive � 7 Questions

Q: On four different trades over the last month, I was in ahead of the crowd and in great position, only to lose confidence, get out at a loss, and then watch the things go up. I am scared now to trade and I need to take steps to boost my confidence. Will you consider this and make suggestions? Thank you so much.

A: You need to first take a detailed look at your stop loss strategy. When I hear these things, typically (but not always) it is because stops are set to tight and/or you’re trading extremely volatile positions. I would take the last 50 trades you made and were stopped out at loss in order to determine whether the stop strategy you are using (like one based on average true range) was effective. In addition, if you’re not using a consistent stop strategy in this regard (i.e. you are getting stopping out when you “feel like it or when it “looks good”) you need to start incorporating one right now. Being consistent here is important and will help improve your consistency overall.

As for your level of confidence, remember there’s no room for perfection in trading. Mistakes will be made and you will get stopped and chopped on good positions routinely if you’re doing a good job of managing your risk. After evaluating your stop loss strategy, I’d also look closely into how you position size and whether you are using any “scale-in” techniques. Both are integral parts of the process here.

Finally, the best way to restore confidence is moving onto the next trade once you taken time to fully analyze what has happened with your stop outs and you have established confidence in the exit strategy you use even with the whipsaws that are likely to continue to occur. If your methods are sound, four bad trades shouldn’t rattle your confidence unless they’re the only four trades you’ve made and the exit strategy is faulty by design.

Gary's Greatest Hits on Trading | Page 3 of 3 | Gary B. Smith | Financial Articles & Investing News | TheStreet.com

Gary's Greatest Hits on Trading | Page 3 of 3 | Gary B. Smith | Financial Articles & Investing News | TheStreet.com: "There is a golden equation of trading. This is it: (The win rate multiplied by profit percentage per win) -- (the loss rate multiplied by loss percentage per loss) = expectancy. Learn this equation. Learn that there is an infinite set of numbers that could yield a positive result. And an infinite set of numbers that could yield a negative result."

Gary's Greatest Hits on Trading | Page 2 of 3 | Gary B. Smith | Financial Articles & Investing News | TheStreet.com

Gary's Greatest Hits on Trading | Page 2 of 3 | Gary B. Smith | Financial Articles & Investing News | TheStreet.com: "I asked another student how many times he thought you had to be 'right' as a chart reader in order to make money. I'll bet his answer was the same as yours: 51%. But, of course, that's wrong. The correct answer is that there is no correct answer. You could be right 1% of the time and be filthy rich. How? Let's say I did 100 trades last year, and won once. However, that winner netted me a 200% gain. The 99 losers? I cashed out each for a 1% loss. See the interplay between win rate and gain per trade?"

Gary's Greatest Hits on Trading | Gary B. Smith | Financial Articles & Investing News | TheStreet.com

Gary's Greatest Hits on Trading | Gary B. Smith | Financial Articles & Investing News | TheStreet.com: "The most efficient way to turn a small amount of money into a large amount is through constant compounding. Even small percentage gains per day add up to big gains over time. I asked one of the students if he started with $5,000 and every trading day increased it only 0.5%, how much he'd have after five years. He guessed about $50,000. The answer is $3 million."

Sunday, September 06, 2009

John Fund Interviews David Walker: The Deficits Are Coming! - WSJ.com

John Fund Interviews David Walker: The Deficits Are Coming! - WSJ.com: "'Our $56 trillion in unfunded obligations amount to $483,000 per household. That's 10 times the median household income—so it's as if everyone had a second or third mortgage on a house equal to 10 times their income but no house they can lay claim to.' As for this year's likely deficit of $1.8 trillion, Mr. Walker suggests its size be conveyed thusly: 'A deficit that large is $3.4 million a minute, $200 million an hour, $5 billion a day,' he says. That does indeed put things into perspective."