us stock market, trend trading stock

In the opening paragraph of last weekend's Newsletter, I wrote: "This article looks at the specific subject of money which may be the root of all evil, but..." I received a miniature firestorm of emails that corrected my statement to say it isn't money that is the root of all evil, rather it is the love of money that is the root of all evil. First, let me hasten to point out that I was not quoting when I made the statement and next let me say that without money there could be no love of money.

The fact is that trading does show us how love of money can lead to some pretty bad results. I sincerely believe the market and stock movement in the shorter run is much more related to the psychological than the logical. Just look at the run leading to the crash from 2000 to 2002. Then Fed Chairman Greenspan labelled it "irrational exuberance." How about the tulip craze in Holland. In hindsight and with logic, these phenomena made no sense. Why would anyone get excited about a stock that had a P/E of 2000 or pay a $100 a share for a company that had no earnings. The fact is that love of money was the culprit.

Greed can and does move markets and as long as greed is pushing, the markets or the stocks keep climbing. It seems like a market or a stock can move slowly and then begin to roll like a snowball gathering momentum as players see more and more movement. The price goes up and up and up, well past the price of reason and sensibility. Why? Greed; the quest for more and more money. Finally, it reaches a point where there are simply no buyers left so someone decides to sell at a lower price. The next guy is afraid he will lose his profits so he sells and now others notice the market is falling so everyone rushes for the exit at the same time. Fear about the precious money takes hold and panic rules. The stock or the market crashes.

We have seen the scenario repeat several times. The crashes of 1929, 1987, 2000 are just major examples of the effects of love of money on the markets. As long as people are trading and "love" their money, it is destined to happen again. Greed and fear in trading are very hard to control. They even affect professional money managers. Look what happened to the mutual funds in 2000. The really successful traders are those who discipline their trading to remove the greed and fear engendered by love of money. They use a system. No specific system or plan is perfect, but adherence to the system is an exercise in self-discipline that can yield much higher rates of success than trading on emotion.

The next time you get ready to buy a stock or an option, ask yourself why. If the only reason is because you want to make money, you may be on the wrong track. If the reason is that the company appears to be relatively sound and the entry you are making is good because there is a nearby disciplined exit in case you are wrong on the direction, then you may be on your way to successful trading. All of us know the old adage: "Cut your losses and let your profits run." How do you assure that you will cut your losses? What steps do you take to avoid cutting profits short? I urge you to think about those two questions in your own trading. If you do not have answers, you might want to establish a method for yourself, a method that is not based on pure emotion. I was once told that it is more important to have a plan than what the plan actually contains. Of course, as you develop your own discipline, test it by paper trading before permitting the love of money to influence your trading actions.

Good Trading!
Bill Kraft

Mr. Kraft's past articles are posted on our website for your review.

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