Spring training has arrived for baseball players and that led me
to consider some of the analogies of trading to baseball. Over the
years, I have observed quite a number of traders who perceive
themselves as sluggers who are always looking for the home run in
their trading. Rarely, I have found, do they succeed over the long
haul. In their zest for knocking one over the fence, they fail to
heed the most basic of trading principles -- cut your losses and let
your profits run. These folks, it seems to me, are often (though
definitely not always) the gamblers of trading. They may let losses
run too long in the hope that things will turn around and their
position will take off in the direction they initially hoped. Only
after large losses have mounted do they realize that they actually
have struck out.
I sometimes receive emails from subscribers who "half in fun,
but all in earnest" suggest I hurry up and make a trade. In my
estimation, that is akin to swinging at a high fastball; the odds of
scoring aren't too great. In baseball, the really good hitters look
for a specific pitch to hit. They don't try to hit any ball that is
pitched. The principle, I believe, is applicable to trading as well.
If the markets are rising, that is probably a better time to enter a
bullish position than when they are falling. Markets rise when most
stocks are rising and are falling when most stocks are falling so why
not try to play the percentages in your favor. If we choose bullish
positions in a bullish market, aren't we giving ourself a better
chance to have a winning trade if we await the bullish market to make
that bullish trade? If we persist in trading bullish positions in a
bearish market, isn't that a little like swinging at a high outside
pitch simply because we may hope we'll make contact?
Ted Williams, perhaps the greatest hitter of all time, had a lot
of natural power, but he doesn't hold the home run record. He picked
his pitches and knew that some pitch locations simply weren't
conducive to the long ball, but could be hit successfully to the
opposite field for singles or doubles. In trading, I have found that
there is nothing wrong with singles and doubles and if I am persistent
and work to pick the right "pitches to hit" the home runs come at
times as well.
In my book, "Trade Your Way to Wealth," I discuss different
strategies for up, down, and sideways markets. Since those directions
are the only ones available to traders, if we take the trouble to
learn what strategy is more likely to be successful to a given market,
then we are setting ourselves up for greater successes. Once we
determine what the markets are doing we are much better able to decide
which strategy or strategies to put to work. While none of us is
going to be right all the time, we can help give ourselves an edge
with that kind of approach.
By looking at reward to risk ratios and utilizing careful money
management principles as set out in my book and in earlier articles,
we can work to create an edge. We don't need to bat 1000. In trading,
a .500 hitter is pretty good and with proper reward to risk and money
management can do very, very well.
Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
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