This Week’s Battle Plan

This past week we did very little trading. Except for a few positions, the war
with Iraq had us mostly on the sidelines. And certainly, most of our focus — and
the country’s focus — was on the fighting men and women of this country, who
are the true heroes of our time. And, in spite of the few idiots who are burning
the American flag and throwing rocks and bottles at the police, (and who are
committing an act which in my opinion is one step short of treason), the men and
women fighting in Iraq deserve full support. There are well over 200,000
Americans who are risking their lives for us in order to protect our country
(how quickly 9/11 has been forgotten by a few) and I’ve found myself transfixed
on the news channels each night getting updates on their progress. I, along with
nearly everyone in the country wishes these courageous people a short and
successful stay in the Middle East, followed by a permanent return home to their
families.

Trading…This Past Week

As I mentioned, we did very little trading this past week. The risk/reward
situation didn’t justify it. This scenario plays itself out about once every
12-18 months, so it’s worth us looking at it.

Let’s go back to Monday night when President Bush announced Saddam Hussein had
48 hours to leave Iraq. At that point, any positions taken, including intra-day
positions, were subject to two very distinct possibilities. The first was that
Iraq did a pre-emptive strike including a terrorist strike. Had this happened,
and you were short, you would have made a lot of money. If you were long, you
would have lost a lot of money.

Now, lets look at the second scenario. Hussein, waves the white flag, gives
himself up, and is hired to be a teacher at my oldest daughter’s school (a
distinct possibility based upon the recent teachings done in her American
History class). If you were long the market in this scenario you would profit
(I’d profit too, because I’d have one less tuition bill to pay next year) and if
you were short, the market would have moved sharply against you, leaving you
deep in the hole.

So, what does all this add up to? That last week was more conducive to gambling
than it was to professional trading. And that’s a game you play betting the NCAA
tournament and betting your office pools, not one you play in the financial
markets with real money. Those who bet “up” last week hit the
lottery. Those who bet “down” got slaughtered. Great if you
win, bad if you lose. Perfect for Vegas, but not perfect for serious money. And
that’s why we mostly stood aside.

More Trading..Move To This Week

This week we’ll likely start entering positions, especially as the risk begins
to lessen. Our position size will be less than normal to reflect the remaining
uncertainties of the war, but we’ll be back in. And if the uncertainties
increase, we’ll lighten up again. If these uncertainties dissipate, we’ll get
ourselves back to normal size. We’ll make these decisions on a day by day basis
until things settle down. I like being as structured as possible in the markets
and risk control is usually the only aspect that some discretion comes into
play. Why? Because I’ve been told a very true saying more than once in my career
by some very sharp professional traders. And I encourage you to tape this saying
up on your wall as it will likely make you a lot of money in years to come. The
saying is “learning how not to lose money in the markets is more
important than learning how to make money in the markets.” Over the
past few weeks our primary focus was not to lose money. There was too much
uncertainty and our plan worked. Now, if everything continues to go well, our
trading will soon be back to normal by combining the goal of minimizing daily
risk in order to capture gains.

Wrap Up

I had a lot more to cover this week, but I’m going to save it for the next few
weeks. This week’s lesson may be short in words, but it’s long in importance.
The ability to properly access risk by playing out scenarios, such as above, is
not something you will learn in a book. You can only live it. Sometimes you can
access risk. This past week it was fairly easy. Sometimes you cannot imagine the
risk because the unthinkable occurs (9/11, or the crash of 1987, or the meltdown
caused by Long Term Capital). Looking to see what you can make from daily
positions always needs to be properly balanced with what you can possibly lose.
Most times this can be accurately predicted. But this past week, there was no
way of knowing the outcome of the market’s direction ahead of time. And that is
why, in weeks like this, lessening your exposure is better than trying to bet on
an outcome. Better to do your betting in the NCAA basketball office pool than in
the markets, especially with serious money. It seems like common sense, but
there was a lot of money lost this week…by people betting “down.”

If you need help on this please email
me.

Coming Up

My online seminar beginning in early April sold out in under a week and a second
one has been added. It will begin in late April (it looks like this one will
sell out quickly also). In the fourth week of the course, we will be covering in
depth, a lot of today’s lesson including formulas for you to use to assess
intraday risk, overnight risk and portfolio risk. If you would like to attend,
you can call 1-888-484-8220 ext. 242 or you can find details here.

TradingMarkets Trading Contest Update

Next week we’ll update you on the TM Trading Contest we began on January 1. So
far, the market (S&P) is up 1.8% and the average mutual fund is near 0% (due
to cash positions).  A healthy percentage of the contestants in the TM
contest are up over 10% for the first quarter. And, in case you have forgotten,
the only way you could get into this contest was if you were under 5 years old.
First quarter results (plus bios of the leaders!) will be revealed next week.