us stock market, understanding the stock market

As an advocate of discipline in trading, I am a firm believer in having a precise exit strategy in place before I ever enter a trade. I try to do that in my own trading and believe it is important to actually exit according to that plan rather than relying on that little voice in my head that tells me: "Don't worry, hang in there, it'll come back." One of my random thoughts this weekend is whether everyone has that little voice. In talking with traders and students over the years, I suspect almost everyone has heard that voice and maybe even heard the same advice. It can be awfully easy to listen to that voice and stay in a play just a little longer than originally planned. Maybe the voice is right. Maybe it will come back. I'm sure many would argue that you should stay in because the market goes up and the market goes down and, after all, it is best to buy and hold. On the other hand, could it be that it won't come back? If it is coming back, when? Since I have absolutely no ability to predict the future with certainty (and neither does anyone else as far as I know), what effect does my believing that "it'll come back" have on the price movement of the stock? Obviously saying "it'll come back" does not make it so. Trading, quite simply, is done in the present. That, I guess, is one of the main reasons why I set up my exit strategy before I enter a play and exit when it is hit -- almost always, at least.

Another of my random thoughts this weekend is why don't people make the effort to take over the management of their own money? Why, for example, was there such a furor over the idea that as at least a partial replacement for social security, people be in charge of investing their own retirement money? Really, now, how has the government done investing the social security trust monies? If we are going to have retirements, who is going to provide the money? Social Security? Corporate pensions -- how many people coming to retirement thought they would have a pension and now don't? My thought, and you certainly may disagree, is that everyone should be in charge of their own investments. That means that they may need to invest some time first in educating themselves and it could take time away from watching the "Bachelorette" or some other reality TV show. Is it worth the effort? It was for me. I had no savings, no pension, no appreciable 401k, but took the time to learn about risk and money management and strategies and it has done me very well. If I didn't do it, who was going to do it for me? So I did it. The apprehension about learning trading and investing is, quite frankly, much worse than the learning itself. We have been led to believe investing, trading, stock and 'oh my gosh,' options are too complex and well beyond our abilities. Frankly, I believe that is nonsense or an excuse not to learn. I wrote "Trade Your Way to Wealth" in an effort to show readers many different strategies that could make them money. None of the strategies is particularly complex and money can be made with any or all of them. I tried to use clear simple language and teach basic strategies using stock, stock and options, and options in order to try to make understanding easy. Building on sound basic foundations, almost anyone can take a book like "Trade Your Way to Wealth" and gain an understanding of how risk can be managed, limited, reduced, or in some cases even eliminated while employing strategies potentially leading to high profits. Almost any of us can learn ways to trade or invest successfully providing we are willing to commit to learning. Why do so many of us simply refuse to do it and expect it to come from somewhere else?

The next random thought for the weekend is why do so many people always go after the home run in trading? I've seen so many over the years who are in a highly profitable position only to see the profits fade and ultimately turn into a loss all the while waiting for the big hit. Though 'ten baggers' do occasionally occur, why not generate profits in smaller increments as well. I've heard it said that no one can get rich selling covered calls, for example. I disagree. As a purely hypothetical example, suppose we could make 2% a month selling covered calls, the compounding effect can lead to some pretty hefty sums over time. Let's say you could net 1.5% per month selling those unexciting covered calls. That would be an 18% gain in a year. Using the rule of 72 and compounding at 18%, it would take about 4 years to double your money. $10,000 could grow to $160,000 in 12 years or $100,000 to $1.6 million in 16 years. As one instructor told me, one of the great ways to make money in the markets is the same way you eat an elephant -- one bite at a time.

My final, though not so random, thought for this weekend is that you have a wonderful one and a great Memorial Day.

You can comment on this article on my blog!

Good Trading!

Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader

"Trade Your Way to Wealth" by Bill Kraft is an Amazon.com best seller!

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

We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.

Chart by StockCharts.com

Details Here.