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Robert Weinstein
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  • Commitment and Just Letting Go

    Yesterday I was in a trade that I took a loss in.

    The trade may serve as a good example of when its time to walk away and how we process information.

    A common (probably the most common mistake) that new traders make is commitment to a trade. A trader will give different levels of thought to entering a trade. Usually I find that the reasons to enter are way to small in relation to the risk at hand but that’s another topic. Whats important is that the trader has A REASON to be in the trade and commits capital and/or risks capital to be in a trade. That’s all fine and dandy but here is the problem that often comes up. The price action and/or the reason for being in the trade change but the trader puts on mental blinders and ignores the negatives to being in the trade and focuses on the positive reasons. Worse yet often a new trader will have ALL the reasons for being in a trade go away and then go into ‘HOPE’ mode. Even worse still is when we start changing our trading plan and ‘double up’ or as brokers like to say to the unknowing public ‘dollar cost average’. Yes this technique works and works often but that doesn’t mean you have gained an edge. In fact if your edge on average for those trades is a net negative all you have done by adding to the position is create a larger loss in the long run.

    It is part of our natural makeup to want to avoid losses. This is what ‘feels right’ and this is why most traders lose. The market punishes most of the people most of the time for doing what feels right in the long run. Its actually easy to understand why so few can make so much and so many lose. The ones that are making the money understand that they need to become removed from the emotional attachment or ‘commitment’ and let the market tell them what to do. This is also one of the best parts about a market for those that understand AND can follow the rules. They get to make huge amounts of money while others struggle trying to figure out why the market appears out to ‘get them’. The market is obviously not out to get anyone and its a mental game we play with ourselves. Since most new traders don’t know the mental games and why our emotions can trick us into making the wrong decisions while in a trade they tend to lose on a very consistent basis. Learning about how our brain processes information to make decisions as well as dealing with emotion is much more important than learning the ‘ultimate setup’. No setup or trading rule in the world will allow us to make money if our emotions get in the way and we change our trading plan in the middle of a trade.

    Going back to yesterday I traded a stock called HLTH. A big mistake was made with this stock (well maybe two). My first mistake was entering into the short at the point I did. HLTH had not fully qualified as a setup. As it was a very cheap stock I ‘gave it a couple of pennies’ and went ahead and shorted it. This was arguably the most important and deadly mistake. Had I used strict rules of entry I would not had shorted it. These rules where just recently modified and I knew under my old rules of a week ago I could be short at the price I actually entered into the short. (Of course whats the point of having updated rules to avoid losers if your not going to follow them ). The other mistake was once I entered in I added size very quickly. Much more quickly than usual due to it being a low price stock. This I consider a minor mistake as I do believe in raising size as profits grow and my account at the time of entry was at an all time high so that did cause my loss to be bigger I accept that as part of the price of my other trading gains being bigger as well. While the price did move against me, I was thinking that abiding by entry rules seemed to be rather easy in my other trades and why not this one?? In fact I had two other trades that day and in both cases I risked losing the trade as I would not budge in my required entry price.

    So I am in this HLTH short trade and while I am not feeling that great about it I am also not worried and in fact was thinking that all the size I had on it would be a nice payday when the price did break and retraced back down. I was also not sized up to the point where I was needing to worry about how much leverage I was using.

    What did happen was in the chat room I was told that there was news out on HLTH. This normally means nothing to me. I fade large moves up in stocks as the main component to my trading much like a market maker will do. So not only am I used to news being a driving force in the price of a stock but I expect that there is news. no big deal normally. This time ‘it was different’. HLTH was being bought out by a division of HLTH called WBMD for a price of .4444 of WBMD of stock. With the price of WBMD at its current price it put HLTH price at about 20-30 cents higher in value than it currently was trading for and could be expected to close the gap as time moves on. (a stock will not trade at full buyout price due to risk of deal evaporation as well as the time premium to the buyout date). I put up a spreadsheet on a monitor and entered in some WBMD prices in the cells and had it calculate the correct HLTH price and I quickly found out that I should no longer be short HLTH but rather I may want to consider being long. Even better might be to be long HLTH and short WBMD as a par trade arbitrage. Shorting WBMD was not an option on itself as it had too small of volume and in the next days I could see the volume of both stocks drying up pretty quickly.

    This leads us back to the commitment and seeing a different landscape. Once I could see that the reasons for the price appreciation was not unjustified greed by an anxious crowd and actually a rational price increase I knew the reason for being in the trade was gone. While I can not say that I liked it I knew all I needed to do in this trade was to get out and get out as fast as possible while limiting my losses in the process. To do ANYTHING other would be the same as throwing darts at a board and buying/shorting whatever the dart landed on. You can NEVER grow committed to a stock and you must treat them with a total lack of emotion.

    When you exit a trade with a stop loss (in this case maybe we could call it a stop reason) you may be thinking that at that moment now more than ever before the trade makes sense and that price should now go your way. But not actually getting out may feel right as it will allow you to avoid the current loss but will in the end destroy your trading capital. Its what happens in the end that matters. Our income is based on ALL the choices we make in the year as a WHOLE and if you let ANY ONE trade take you out of the game you will not get a chance to gain from the rest of the good trades that you would have otherwise been able to make.

    So yesterday I took my first loss in over a month and while it was not enjoyable it was good to know that I made the right choice in getting out of the trade even if I didn’t fully make the right choice getting into the trade. The next time your looking at entering into a trade be sure that you know under what reasons you will exit at a loss, like with a stop loss or or stop reason. Having it all planned out in advance will keep you in the game and will keep your emotions in check and most importantly will keep your capital intact.

    Disc:  no posistions

    Jun 20 12:21 AM | Link | Comment!
  • Oil Moves above and stays above $72 a barrel

    Is there anyone in DC awake at the wheel?

    Hello Congress and the Feds !!!!!

    Did you guys forget to read your history books?

    OIL is not moving higher because we are using more of it. Its moving up due to the devaluing of the USD and ASIA is going to pass us up while we are sitting around trying to figure out what the ‘fair’ amount of money to urinate away on government programs is.

    We are going to see gas prices at the pump over $3 in the next few weeks and that may seem like cheap gas by the end of the year. What happens when China along with the rest of Asia keeps growing and we sit around taxing the hell out of anything making money back here in the states??

    I am soooooo mad that my sons future is being totally mortgaged away so that a few in DC can feel good and not have to make tough choices. Note to congress……. If you extend unemployment benefits you will have HIGHER unemployment AND higher deficits. I guess they still have not figured that simple econ 101 rule out yet.

    I am tired of spending time trying to figure out how to protect the few US dollars I have and this ponzi scheme will blow up at some point. The boys and girls in DC know this but are only looking after whats in their best interest and how they can maintain as much power and control as they can. The rest of us get to pay for it.

    Ok, I will get off the soapbox now and yes I know that DC isn’t listening but it doesn’t mean its not worth saying


    Disclosure:  No positions

    Jun 12 12:00 AM | Link | Comment!
  • Global Warming Petition Signed by 31,478 Scientists

    Its not what you think

    I know I know. In todays environment its heresy to talk about global warming or climate change not being total fact. After all who hasn’t seen the power point presentation by Gore and that really should end the discussion. We all know that a politician would never lie to us. Especially one with a huge financial interest in moving an agenda forward.

    I also know that I am not making any friends and that I am in the minority in my view that global warming by CO2 emissions as presented is at best a theory and most likely a myth. With so many different competing interests with a lot of money on the line its hard to know what is fact and what is guesswork or outright lies. That’s the issue as I see it. There is way too much money at stake from those that are saying its a problem for me to give them any credibility. Back about 30 years ago they talked very seriously about a coming ice age. Now when polar ice caps melt they say its from global warming. When polar ice caps INCREASE they also say thats from humans.

    I also know we like to think of ourselves as very important and we can and do control everything but lets face it, we just don’t have that much control over the weather even if we wanted to and set out to do so.

    Normally I wouldn’t bother talking about an issue that I have an opinion on especially when I am in the minority. After all its not a great way to make friends. The truth is I do not have the luxury to stay silent and let Cap and Trade or any other government control and tax over every aspect of our lives take hold without speaking up. I now have two sons and I am about to greet my third son into this world this fall. That requires that I try to make the best world possible for them. I feel that if we let the government have that much control and increase taxes by as much as being suggested that my sons along with the rest of Americans sons and daughters will on average have a much lower standard of living. As I am fully convinced that its not only bad science but simply a power grab that will hurt all Americans I am speaking up in this forum.

    Some may say “hey Robert, your a trader and the cap and trade program will trade carbon credits on an exchange and you can make money trading the CO2 credits”. You would be correct. I do stand to make money trading carbon credits but that doesn’t make it a good thing overall or right for the country or the world for that matter.

    I also believe that for the most part and in this case the eco system is self correcting in ways that dorff what humans can do. For example there are strong theories that the oil we pump out of the ground (from sea and land) comes from algae and not dinosaurs as so many believe. What algae as well as other plant live ‘eats’ is CO2. While I am not a super fan of Ronald Regan he was blasted in the media for once saying that trees use up oxygen as it was widely “known” that tress use CO2 and give off oxygen. the thing is he was correct. Trees for the most part are CO2 neutral and actually end up being net negative oxygen. Of course the media didn’t let simple things like facts get in the way of a good story.

    Most people including those that are in Congress have no idea how much this will effect every person in America. They know its going to be ugly and they know its going to hurt so they suggest things like giving away for free much of the CO2 credits and tax breaks for those that they consider lower income. That all sounds fine and dandy but they totally miss the point that a lower tide lowers ALL boats and that the total income for Americans will go down. It will not go down by a small amount it will go down by a large amount and the number of government workers managing this mess will further drain those that are productive. China, India, and most of Asia will NOT be adapting in practice any such measures and this will accelerate the transfer of wealth from America to Asia. This is why I care. We are never going to get rid of government bureaucrats that want to control our lives and money but this will really send us on our way to surfdom and be subjects of the government to do as they wish.

    Factories that would otherwise be built here will be moved and/or started in other places as well as the worker knowledge that goes along with it. While many think wrongly that we don’t make anything in America they couldn’t be further from the truth if they tried. America is actually by dollar value the largest manufacturer in the world. Let me repeat that, Americans make more goods by value then anywhere else including China. When you add Americas service industry we are the largest market in the world. While thats great and many people who shop at wal-mart seeing made in China everyday would not have guessed that we are indeed still making things here we must not rest on our laurels. For China is growing very quickly and while our economy shrinks the economy of China and India still is growing. They are still growing in this world downturn because they are embracing the free market and gaining the wealth and inproved standard of living that it produces.

    Meanwhile back on the ranch America is looking straight down the barrel of the shotgun called cap and trade. This program will increase the cost of doing business in many ways. For starters its easy to see how electric bills will go up. For those businesses that have to pay for the increased costs they will start to look at ways to get out of it. One sure way that many will look at is changing the location of the factores. Another expense will be paying for all those that get tax breaks from the government (no free lunch after all) Employee costs will go up, transportation costs will go up, cost of raw goods will go up and sales, well they go down as anyone who passed econ 101 will tell you what happens to sales when the price of an items goes higher.

    Do I not care about the environment and what kind of world my sons will live in? Of course I care. I as much as any parent wants whats best for my children. I care enough that I would write publicly and take a side in a subject that I know I am the minority because I feel that its the right thing to do. Maybe for some that can only feel comfortable if they have others in agreement will look at all the scientists and feel like they can have an open mind and also see that there are real damages and real unintended consequences and not allow the government to take away our economic freedoms and strength.

    I am currently long GE which stands to gain from a cap and trade program.  Regardless I am as stated very much against this new proposed government regulation.

    Disclosure: long GE

    Jun 11 11:57 PM | Link | Comment!
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