Trading Tips

If it’s icy out there you have to take small steps

In case you haven’t heard, the Northeastern U.S. was hit by a bit of snow over the weekend. It started midday on Friday and ran just about all the way through Sunday. The biggest accumulation was early on, but the add-ons definitely forced a lot of folks to re-shovel their driveways and walks a couple of times. Welcome to winter in New England!

As I made the walk from my home to the local subway stop Monday morning, I couldn’t help but relate what I was doing to trading. See, I live on a dead-end street which never gets properly plowed, or even sanded in most cases. What happens after these types of storms is that the sun and car traffic serve to melt the top area of the snow during the day, but it gets compressed and freezes overnight. So basically my street is nothing but several inches of uneven ice. Getting to the main street, where I can finally get on bare pavement, is all kinds of fun.

Stay with me here. The metaphor is coming. 🙂

So there I was on Monday morning trying to get down my street without falling and breaking a hip or cracking my skull open, and it occured to me that it wasn’t too different from trading. If you’ve ever had the pleasure of trying to walk on ice you know you have to take small steps to keep your feet under you. If you try to stride out at all your foot is bound to slip out from under you and BAM!, down you go.

Taking risk in trading is very much the same way. There may be times when you can get a bit more aggressive (dry pavement) because you are unlikely to get burned (though sometimes you still trip over a crack in the sidewalk). There are other times when the volatility in the market (icy pavement) is such that if you don’t take care with what you’re doing you could find yourself flat on your back, figuratively speaking. Part of becoming a good trader is learning how to identify when the conditions are treacherous and absolute safety is required and when they are more stable. Unfortunately, it isn’t always as easy as seeing whether there’s snow and ice on the street, but experience goes a long way.

Deep Posts Trading Tips

Very, very, very bad trading!

The following posting was pointed to me. I think it originally came from Craig’s List. The poster’s moniker was CaReFulInVEstOR.

$130,000 saved up and I have follwed Robert Kiyosaki (Rich Dad) and he said Silver was going to run and the market wasn’t a safe place, so In Feb of this year, I put it all into silver at $21 an ounce. It dropped to $16.50 an ounce in March. I lost $30,000 in that move so I sold it out since I couldn’t take the losses. Then everything started getting crazy and I read more artacles that said there was a silver shortage and put my $100,000 in to silver at around $19 an ounce in July. It is now around $11 and I only have $58,000 left and I don’t know what to do. I lost over half my money just this year in silver. It was my life savings. I owe $160,000 on my house and that money was everything I saved up so now I have nothing.

I won’t make any judgements on Kiyosaki’s call because I didn’t see it or read it. That is completely beside the point, in any case. This person acted incredibly foolishly - as greed will often make people do. Check out the screen name. Careful Investor? Not so much.

Risk Management!  Risk Management!  Risk Management!

Trading Tips

Lehman and company, like bad carry trades

In the forex market there are tons of strategies which basically boil down to being carry trades. By that I mean the primary thrust is holding positions which produce income from the net positive carry produced by being long the higher interest rate currency and short the lower interest rate one. Carry trades can be very lucrative – so long as a depreciation in the value of the position doesn’t trigger a margin call. When that happens the trader generally gives back all the net interest earned and quite a bit more.

Lehman was basically the same type of thing. They were in positions which were producing nice income for them, but which continued to lose value steadily. Eventually, they lost too much on the capital side and it all came crashing down. It was the same with Bear and apparently Merrill was heading the same way. It looks like AIG is going that direction too, and probably some others.

These are clear examples of poor risk management. Take them to heart. They demonstrate just how bad things can get if you don’t respect what the market can do.

Learn the lesson.

Trader Resources

Trader Wish List – Tenth Installment

Here is the 10th installment of my list of my trader’s gift recommendations.

I want to feature a couple of books today which focus primarily on the risk side of things. There aren’t a ton of books that do so exclusively, as many incorporate it in to the mix with other things.

Trade Your Way to Financial Freedom was written by Van K. Tharp, who was featured in the first Market Wizards book. Tharp was among the first to bring in to play the idea of modeling successful traders. That isn’t what this book is about, though. I actually think the title is somewhat deceptive as it wouldn’t seem to suggest a text focusing mostly on risk management.

Trade Your Way to Financial Freedom presents an excellent systematic way of approaching the application of risk and money management in trading. If you read it with the right mindset (not the one implied by the title), you can get a huge amount of value out of it. The concept of “expectancy” is more than worth the price of the book all by itself. There is a healthy does of trading psychology along the way also – all of which is quite useful as well.

Trading Risk by Kenneth Grant is a book I’ve only just started getting in to myself. I can’t provide a lot of direct feedback just yet (I’ll post a full review when I’m done), but I can say I like the author’s writing style. He makes a topic which can be a challenge to get excited about interesting by using a little humor mixed in with loads of information. The reviews I’ve read so far have been quite positive, so it’s definitely worth at least a look.

The Psychology of Risk was written by Ari Kiev, who is author of several other well thought of books on trading, including Trading in the Zone, and Trading to Win. This book, as its name implies, focuses on the mental side of risk and how you apply it in your trading. It is less “practical” than the other two books in terms of providing an applicable formula and whatnot, but certainly does have some very good stuff to offer the reader.