Wall Street Craps – 2012 Global Ebook Finance Award-Winner

MANAGE YOUR CHIPS WISELY: Spread your money evenly over a targeted three to five day buying period. Always keep plenty of your money in reserve so you can maintain peace of mind and clear thinking. Only losers bet their last dollar.

Remember that the market has the ability to do anything at any given moment. The proper way to invest in the stock market is to respect its power and play the percentages wisely. By spreading your money gradually over a specific period of time, you are taking calculated risks. At the same time, you’re respecting the possibility that market conditions could change. Making even-sized bets will also help you sell less emotionally; you won’t be favoring your big bets over your small bets.

As a helpful reminder, your objective is not to be “perfect” in your decisions. Your objective is to play a smart game in terms of prudent risk/reward trading opportunities and wise money management. (Note: Sometimes rapid overnight developments in a news-driven stock market environment like the European debt crisis of 2011 will reduce your normal three to five day window of opportunity down to only two or three trading days.)

Comment: Resist the urge to go “all in” like in a game of poker. The gradual accumulation method will keep yourself in check just in case your market analysis proves to be wrong. My experience also shows that it’s okay to be a day early from a long-term perspective. A day early only is a problem when that bet is too large.

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“In order to make a success trading in the stock market, the trader must have definite rules and follow them – Divide your capital into 10 equal parts and never risk more than one-tenth of your capital on any one trade.”

William D. Gann ~ Author of Truth of the Stock Tape (1923)

CHECK FOR SWEATY PALMS: The best entry points in the stock market are often the times when it feels the scariest. This is because the media has an uncanny way of causing negative investor sentiment with a barrage of relentless bad news at stock market bottoms. Recognize that key turning points in the market are usually counterintuitive.

The hardest, yet best time to buy is often when everyone else is selling and no one else is buying. Conversely, the most comfortable, yet worst, time to buy is usually when no one is selling and everyone else is buying. If your palms aren’t sweaty and you’re not afraid to buy, you’re probably not at a good stock-market bottom. Always remember that having sweaty palms caused by media-induced fear is one of the key prerequisites to buying into the stock market at an optimal time.

Comment: Find several ways to monitor fear, worry, and apathy in the stock market. Notice the outspoken people who are notoriously wrong at key turning points in the market. While I like to notice whether I have sweaty palms or not, I also notice when the clamor of worry or the confidence of short-sellers becomes excessively loud in volume or number.

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“Nobody rings a bell at the market bottom.”

Wall Street Adage

DON’T GET ANTSY & JUMP IN: Don’t let low rates of return on cash equivalents be your sole reason for buying. The market will reward your patience and discipline with solid double-digit returns.

Many investors assume that their money must be “at work” all of the time. But there may be times when the best values for your liquid assets are not to be found in the equity or fixed income markets. Instead, the best use of your money at these unique moments may be in paying off debt, buying items of value for personal use, increasing your insurance needs, or simply protecting it from risk.

There’s something good to remind yourself about when low returns on cash equivalents cause you to start feeling antsy to trade: it’s much better to earn a positive risk-free rate of 1%, than it is to suffer through a negative 25% return in a downward trending stock market.

Comment: It’s perfectly okay to sit in a cash position for extended periods of time even when it is yielding less than 1%. Don’t let salespeople talk you into going after higher yields when it comes to your short-term and intermediate-term money. The extra yield over a year or two is less significant than keeping your powder dry for a market that is setting up for an eventual big move in either stocks or bonds.

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“Bet big when the odds are in your favor, bet small when you’re less convinced, and don’t bet at all if you’re not sure.”

Jim Cramer ~ Host of CNBC’s Mad Money

MARKET BUY SIGNALS FOR JANUARY 8, 2012: The master strategy for winning at Wall Street Craps is to always play the game correctly by making only smart percentage bets at the optimal time period in the appropriate amounts relative to risk. Do these key tasks consistently as well as manage your overall bankroll wisely and “Know Thy Self” so that you can adjust your play according to your unique individual temperament.

• Sentiment Signals = moderately optimistic both long and short term

• Breadth Signals = breadth indicators are moderately overbought

• High Yield Bond Signals = topping out and headed for a potential stock market bottom

Comment: The stock market is at the top of its trading range. This past week’s action can be described as an “overshoot rally” (enthusiastic momentum) which can be a real fooler to investors. A tradable bottom looks to be more than a few weeks away in order to get the right amount of sentiment shift. But with the overall moderately overbought sentiment and technical readings, the stock market can still go in any direction. This looks like another week to sit on the sidelines letting the market set up for its next big move to participate in.

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“Winning big bets is the real key to investing success. The amateur typically dabbles in an assortment of small high risk long-shots in the effort to receive a big payout. On the other hand, the pro only makes a few big moves when there is low risk and good returns. Therefore, the secret for any savvy player is to wait for the market to set up for a major buy opportunity. That way, an investor can place an intelligent big bet on a well-diversified, deeply undervalued, dividend paying Blue Chip equity position with complete confidence.”

Steve Nakamoto ~ Author of Wall Street Craps

CONSIDER PLACING SOME BETS EARLY: Pay special attention to quiet “selling exhaustion bottoms” because this type of market turn goes straight up, does not pause to correct, and leaves overly cautious investors behind at the starting gate.

An example of this would be a string of seven or more negative trading days in the widely followed Dow Jones 30 Industrial Average, where the volume becomes increasingly lighter with each passing day. This would ideally occur after a long drop in the general market, where investor sentiment has turned from fear and panic to hopelessness and apathy. At this point, it might be worth risking some well-placed chips in anticipation of a turnaround in the market. Remember that your job is not to be “perfect” in timing the market — it’s to consistently play a high-percentage winning strategy over time.

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Comment: Timing stock market purchases is about finding the right range in time to make your move. If your indicators point to a potential bottom and you want to make gradual purchases, it will require some of your buys to be early. These will often feel a bit wrong at the time but you must resist the temptation to be perfect in this aspect. If you save all of your ammo for the perfect absolute bottom, you are more likely to be left behind when an overnight news event from someplace like Europe causes the market to open up by 300 points.

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“Some of the best trades come when everyone gets very panicky. The crowd can often act very stupidly in the markets. You can picture price fluctuations around an equilibrium level as a rubber band being stretched — if it gets pulled too far, eventually it will snap back. As a short-term trader, I try to wait until the rubber band is stretched to its extreme point.”

Linda Bradford Raschke ~ Professional trader

TIME YOUR BETS WITH INCREASED PRECISION: Buy when the market is ready to go up. Don’t buy just because it’s done going down. There’s a natural lag time between internal changes in momentum and external changes in prices.

Like dropping a rubber ball, most stock market bottoms bounce a few times before the downward energy has been fully exhausted. Therefore, it’s entirely possible that the lowest price of a stock candidate may not be the ideal point in which to buy it from a timing standpoint. That’s because the market can end up sitting near the lows for several weeks, while tying up your capital and testing your nerves.

Again, the ideal time to buy a stock for trading purposes is when it’s ready to go up in price. This is often a misunderstood concept to amateur stock market players, who try to follow a simple “buy low and sell high” strategy.

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Comment: The actual way that a market finds its way to an eventual bottom has an uncanny way of always appearing slightly different. So don’t get locked in to any set pattern of the way a bottom should look. However, it’s important to know that the internal bottom always precedes the external bottom. The external bottom is the point in which the momentum has waned and the direction is about to turn up.

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“It’s important to distinguish between respect for the market and fear of the market. Whiles it’s essential to respect the market to assure preservation of capital, you can’t win if you’re fearful of losing. Fear will keep you from making correct decisions.”

Howard Seidler ~ Professional trader

LOOK FOR THE OBVIOUS COVER STORY: Every major stock market bottom has a media story attached to it, which causes the public to panic out of fear or lose all hope. Often this story will appear on the cover of a widely read national publication, such as Time Magazine or Newsweek.

An example of the associated headline might be: “The Recession Is Official!” Since fear and greed are the primary motivating emotions in the stock market, the appearance of such a cover story coincidentally marks the maximum point of investor’s fear and negativity. At this juncture in the market cycle, the selling of stocks has almost entirely been exhausted. Yet a sustainable turnaround to the upside is about to begin.

Remember these classic words credited to Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family: “The time to buy is when there’s blood in the streets.”

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Comment: The news is always negative near the bottom in prices. But at some point, the market will no longer respond to the downside and instead defy the obvious and start moving up. This happens when the last unsophisticated investor or trader has decided to panic out of fear and finally sell.

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“When good news about the stock market hits the front page of the New York Times, sell.”

Bernard Baruch ~ American stock market speculator (1870-1965)

KNOW WHEN CASH IS KING: In a downward trending stock market, the buying power or relative value of your cash assets automatically goes up.

In other words, your money goes a lot further when the items in the store go “on sale.” That is exactly what’s going on when stocks drop in price. Always remember that being in a 100% cash position or out of any stock market positions allows you the emotional freedom to quickly enter into new trades when market extremes in prices and investor sentiment create timely buying opportunities. Realize that it’s a good thing for stock prices to plummet when you don’t own anything. Instead, declining prices offer cash-rich investors and traders an opportunity to buy stocks while they are “on sale.”

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Comment: Sitting safely in a 100% cash position allows you to enjoy a market that is in decline. Not only are you not losing money like everyone who has long positions, but you are also “keeping your powder dry” for the next buying opportunity — at lower prices! So don’t get caught up in simple asset allocation plans that only allow 5% to 10% in cash because there are plenty of times when your cash position approaches 100%.

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“Be comfortable holding cash. Nothing in nature is as powerful as a void and that’s why ‘cash’ is so difficult to hold.”

Bennett W. Goodspeed ~ Author of The Tao Jones Averages (1983)

RECOGNIZE THAT THE “DON’T PASS” BET SEEMS SMARTER: The bearish argument always sounds more intelligent than the bullish one. But for success in trading the stock market, always remember that there is a big difference between appearing smart and being right.

When you’re analyzing the stock market for trading purposes, it’s wise to remain mentally and emotionally neutral. Don’t fall prey for either the optimistic or the pessimistic point-of-view on the stock market. Choose instead to monitor the market in an unbiased way, so that your decisions are based on facts instead of opinions. That way, you won’t be seduced into unwarranted actions by the subtle unconscious influence of authoritative contrarian media figures in the investment world. (Note: The “Don’t Pass Bet” in the game of craps is the wager that is designed to pay off when the normal “Pass Line Bet” loses. In other words, betting on failure seems like an intelligent bet because it goes against the wishes of an unsophisticated, over-exuberant crowd.)

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Comment: In the 1980s, I found myself reading a lot of bearish material from the likes of economist Elliot Janeway, market technician Joseph Granville, Elliot Wave expert Robert Prechter, Dow Theory Letter’s Richard Russell, and gold expert James Dines. And while it made for interesting reading, I discovered that I had developed a bearish bias towards the stock market. And while these advisors made intelligent evaluations about the stock market, I found them to be largely wrong about the eventual outcome. In hindsight, I would have done a lot better by simply buying the recommendations of my full-service stockbroker at E.F. Hutton. The lesson was to avoid being persuaded to the negative just because it sounds more intelligent and less hyped.

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“As a very successful investor once said, ‘The bearish argument always sounds more intelligent.’”

Peter Lynch ~ Author of One Up On Wall Street

DON’T BET AGAINST A STREAK: Respect the power of a strong bearish or bullish trend in the stock market. Don’t bet against a market that moves relentlessly in one direction. Sometimes market moves will defy the odds for longer than your money or stomach can hold out.

It’s worth noting that a great deal of money has been lost by investors who don’t properly gauge the strength of a stock market move. It is far wiser to let the power of a stock trend wind itself down before trying to guess when a change in direction will occur.

If you do make such an untimely bet, be sure that you have the discipline and courage to cut your losses short in order to live to trade for another day. Losing lots of money in a short period of time does more than hurt your bank account —it also destroys the vital self-confidence to take action on your future opportunities. (Note: Many investors have misunderstood the popular advice of “buy when everyone else is selling.” If the selling is panicky in nature, buying is analogous to “trying to catch a falling knife.” What you really want to do is buy when everyone else is done selling. It’s when the selling has been exhausted that low risk opportunities become available. Otherwise, what you’re actually doing is trying to make fast money with more risk instead of with less. Buying during a market panic is just plain risky!)

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Comment: There is a natural tendency to bet against a trend that has persisted without you being onboard for the enjoyable ride up. But when market momentum is strong, it tends to go longer than anyone expects. The market also has an uncanny way of producing one last “overshoot rally” which causes the last doubters to finally throw in the towel. And that’s when the trend is about to change.

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“I believe that only short-term price swings can be predicted with any precision. The accuracy of a prediction drops off dramatically, the more distant the forecast time. I’m a strong believer in chaos theory.”

Linda Bradford Raschke ~ Professional trader