Wall Street Craps – 2012 Global Ebook Finance Award-Winner

SEVEN OUT — LINE AWAY!: There is a natural lag time between the internal peak in momentum and the external top in price. Sell into the momentum strength rather than get caught in the gut-wrenching drop that follows the top in prices.

Realize that all rallies ultimately come to a sobering halt. Many of the smartest investors in Wall Street history have subscribed to the notion of selling early while the stock market is still rising. This is because guessing the exact top is nearly impossible to do on a consistent basis.

In addition, getting caught in a steep post-rally stock market decline is a painful and costly experience that you want to avoid. Don’t let the emotion of greed take control of your trading decisions when the majority of market barometers are signaling that it’s time to move aside.

Comment: For those who are not familiar with the game of craps, the term “seven out — line away” comes from a common phrase that is spoken by those in charge of running the casino’s dice table. This phrase is announced to the players at the craps table immediately after the dice are thrown and they turn face up with a total that calculates to a sum of seven. This signifies that the standard bet in the crap game called the “Pass Line” is lost and the money that is put on that “line” is taken “away.” This equates to saying to the crap players that they have now lost their bet and that the streak of good luck is over for the time being.

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“Repeatedly I have sold a stock while it still was rising — and that has been one reason why I have held onto my fortune. Many a time, I might have made a good deal more by holding a stock, but I would also have been caught in the fall when the price of the stock collapsed.”

Bernard Baruch ~ Legendary investor (1870–1965)

SENSE THE END OF THE ROLL: The end of a rally is near when the people who missed the boat cannot stand sitting on the sidelines any longer. You must pick up your chips and leave a noisy crowded table filled with emotionally driven latecomers.

Recognize that when investor sentiment is extremely bullish, it is time to be out of all stock positions. However, this doesn’t mean that the market cannot continue upwards. It only means that the potential downside risk far exceeds that of the upside.

Therefore, based on the classic barometer of risk vs. reward, it is wiser to be on the sidelines sitting in cash than it is to remain in an overextended market whose time in the rally phase is about to expire soon.

Comment: When the market starts getting too crazy on the upside, it’s wise to take your profits and run. The temptation is always there to stay to the end of the rally but that often comes without warning and has an uncanny way of trapping greedy traders at the top. So it’s best to gauge the sentiment accurately, sell your stocks, and get away from the market.

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“One must simply get out while the getting is good. The secret is to hop off the elevator on one of the floors on the way up. In the stock market one good profit in hand is worth two on paper.”

William J. O’Neil ~ Author and founder of Investor’s Business Daily

LET IT RIDE BABY!: You may choose to hold a small portion of your bets out longer for higher share prices. Sell as soon as your indicators suggest that the market has become overbought. Don’t get greedy by trying to guess the exact top.

The fact is that you never really know when a rally might catch fire and go further than anyone expects. The strategy of “letting it ride” helps you capture some extra profits on the occasional “hot roll.” The portion of money that you let ride is largely determined by the amount of “house money” you have accumulated through your cumulative trading activities. When you have a lot of extra chips stacked up in your investment pile, it’s a lot easier to let your profits ride without the fear of loss holding you back.

It is this uncanny sense of knowing when it’s time to “let it ride” and the guts to carry it through that often separates the big winners from the average players in both casino gambling and stock market trading.

Comment: You have to remember to take some early profits in order to protect your capital. And then you must also reserve some of your chips in order to go for bigger gains. That’s why it is usually smart to sell in gradual even amounts. The exception would be an unusually spectacular one day gain.

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“The stock market seems to move according to the rules of gravity; you can fall 1,000 feet very quickly, but climbing 1,000 feet takes quite a bit more stamina.”

Richard Saul Wurman ~ Author of The Wall Street Journal Guide to Understanding Money and Markets (1992)

TAKE DOWN YOUR BETS: Smart selling may require you to reduce your exposure quickly when things do not work out as planned in the rally’s projected time frame. Accept occasional small losses as part of playing the game correctly.

Remember that risk-taking in the stock market is inherently failure-prone. Therefore, making a losing trade in the market should not in any way come as a surprise. Be willing to take an occasional small loss so that you can avoid the kind of stubborn thinking that eventually leads to excessive losses of capital.

View the act of taking small losses, based on your evaluations of underlying indicators, as a sign of disciplined trading. Always remind yourself in the heat of trading that the single most important reason that people lose money in the financial markets is that they don’t have the presence of mind to cut their losses short.

Comment: A poker player is well acquainted with the idea of folding their hand before the last card is shown. This is a smart but somewhat counter-intuitive move based on pure odds. When the mathematical odds say that your hand is weak, it is better to get out immediately than it is to hope for a miracle long-shot event to bail you out. Always remember that “hope” is the strategy of last resort for amateurs.

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“Perhaps my number one rule is: Don’t try to make a profit on a bad trade, just try to find the best place to get out.”

Linda Bradford Raschke ~ Professional trader

SELL ON OBVIOUS GOOD NEWS: The big announcement of favorable economic news has an uncanny way of causing the public to rush in with a surge of new investment money. If this good news occurs before the opening of trading, it will usually propel the stock market upwards for at least the first hour.

Savvy traders will often anticipate this market reaction by placing their orders to sell about a half hour into this early strength. They do this before the market rally has a chance to fade and reverse course to the downside.

It is a prudent strategy to sell at least some, but not necessarily all, of your short-term trading position (play money) on any piece of obvious good economic news. This type of selling serves two important purposes: (1) it takes advantage of an often temporary swing in over-enthusiastic public buying, and (2) it relieves the natural uncomfortable urge to sell in order to prevent a gain from turning into a loss.

When it comes to both buying and selling stocks, heed the words of legendary stock market technician, Joseph E. Granville, who so profoundly coined the phrase, “The obvious is obviously wrong.”

Comment: When it comes to buying stocks, the human emotion that does most of the public in is greed. It is the fear of missing out that causes poor players to rush into the market at the wrong time. You can capitalize on this occurrence by selling some of your shares to those who are too eager to buy and too impatient to wait.

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“Nobody ever went broke taking profits.”

Wall Street Adage

SELL NEAR THE CLOSE: Another good time to sell is during the last half hour of trading. This is particularly true before a weekend or three-day holiday when unexpected bad news could trap you in the wrong position.

Today’s stock market can also be subjected to manipulation by large hedge funds, resulting in strong moves during the last hour of trading. Since hedge funds usually base their trading decisions on computerized statistical models, these last-minute advances may not be based on any tangible information that will carry over into the next trading session.

A savvy investor can take advantage of these strong erratic moves during the last half hour by simply selling into the market’s temporary strength. This strategy is particularly useful when the character of recent market behavior shows a tendency to operate without any memory of the previous day.

Comment: Sometimes you just have to take the money and run. And when you get a strong close in the last half hour, it makes a lot of sense to sell into that market strength. You never know when that type of move is merely done to set up shorts in a thin market.

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“The most liquid period is the opening. Liquidity starts falling off pretty quickly after the opening. The second most liquid time of the day is the close. Trading volume typically forms a U-shaped curve throughout the day. There’s a lot of liquidity right at the opening, it then falls off, reaching a nadir at midday, and then it starts to climb back up, reaching a secondary peak on the close. Generally speaking, this pattern holds in almost every market. It’s actually pretty amazing.”

Monroe Trout ~ Professional trader

SELL AT THE OPENING: The best time to sell is often at the opening after a strong close the previous day. Your sell order can be placed during the quiet hours when the stock market is closed and your mind is clear.

For many investors, this is the easiest way to sell at a good price. And while bad news could crop up overnight, there is more often than not some sort of carryover from the previous day’s activities in the market the following morning. Placing your order to sell before the opening of trading is the least stressful way to get out of profitable positions and, in many cases, at the best price of the day. This is particularly true when the previous day’s strength is based on valid fundamental news rather than on pure speculation or anticipation of favorable data.

Comment: This is one of my favorite times to sell. And while I may not sell all of my positions at the opening, I will certainly lighten up a significant number of shares if the previous day had a spectacular upside move with strong close. It’s a way of getting out before the market has time to reconsider and change directions. It also catches a lot of public money trying to pile in at the opening so that they don’t miss out on an obvious rally fueled by good news.

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“Morning markets are the most active and the most liquid. They are largely public. Midday markets are thin and quiet. Most markets get more active and liquid in the afternoon prior to the close, but the activity is largely institutional.”

Dean Lundell ~ Author and professional trader

capital preservation:

1. a conservative investment objective of avoiding asset value loss.
2. an investment goal in which protecting the investor’s principle from loss is the primary concern.
3. a wise and prudent reason for selling underperforming stock market positions when the disempowering emotions of hope and greed are more likely to cause amateur investors to procrastinate and do nothing.

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“Perhaps my number one rule is: Don’t try to make a profit on a bad trade, just try to find the best place to get out.”

Linda Bradford Raschke ~ professional stock trader

CASH OUT QUICKLY: Sell early into strength by gladly accepting any immediate or unexpected stock market gifts. The market doesn’t care when you bought in. Be happy and grateful to take the money and run.

Occasionally, the stock market will explode with a 200-300 point move in the Dow Jones Industrial Average, based on investor response to optimistic news. While this may indicate the start of a new “bull move,” it could also turn out to be just a “one-day wonder.” Since one could make an argument for either of these scenarios, it makes perfect sense to simply take your profits while they’re available. Don’t let the amount of time that you hold a stock to be a factor in your decision-making process. If you buy one day and then get presented with a spectacular gain the following day, simply go ahead, sell your stocks, and gratefully accept the money. Recent statistical studies have shown that selling out quickly into spectacular short-term market moves is the best strategy on average.

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Comment: Remember that it doesn’t take much for the stock market to change its mind. The year 2011 is one in which the market showed little memory of the previous day’s activities. Therefore, “one-day wonders” became commonplace. Taking profits and, conversely, taking losses should not be hampered by the idea of how long you’ve held your position. When it’s time to buy, buy. And when it’s time to sell, sell. It’s just that simple if you want to maintain a successful disciplined trading approach.

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“Take windfall profits when you have them.”

Anonymous Wall Street Adage

A Savvy Investing Take: The act of trying to sell your stock positions at the perfect time and at the highest possible price is nearly impossible to do. As a result, you will automatically be inclined to second-guess your decisions to sell. A word to the wise: do the best that you can, learn from your mistakes, and move forward to your next opportunity.

Granted that selling early and thereby missing out on a big run to the upside is not enjoyable to watch. But remember that it’s a far greater and costlier mistake to allow your losses to grow in size and then to sell out in an emotional state of fear and panic.

Even though every investor knows that you have to cut your losses short, very few have the stomach to do this under the pressure of trading. This is one of the key disciplines that separate the amateurs from the professionals in area of stock market trading.

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For most investors, it is more emotionally challenging to sell than it is to buy. Perhaps that is why the “Buy & Hold Strategy” is so appealing to amateur stock players. With this long-term approach to the stock market, an investor never has to face the tough decision to sell when the final outcome is still in doubt. But this is also why so many amateur stock players end up taking large losses, instead of having the decisiveness to cut their losses short. The key point to remember here is that you must learn to sell when the market indicates that the “time” is right and not when the “price” is where you want it to be.

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“ Losing potential profits hurts the ego; losing money really hurts.”

Gerald Appel ~ President of Signalert Investment Management Firm