Wall Street Craps – 2012 Global Ebook Finance Award-Winner

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.

**********

“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.

**********

“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.

**********

“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.

**********

“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.

**********

“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.

**********

“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

ALWAYS PLAY THE GAME CORRECTLY: Trade the stock market without any traces of ego or emotional attachments. Your primary objective over the long term is to build real wealth by becoming a savvy investor who manages their money wisely and consistently plays the game correctly.

The reality of playing the stock market is that you won’t win every time you enter into a trade. In fact, the manner in which you handle your losses will determine your degree of success, as much as what you do when you win. As in any sport or serious endeavor, the path to mastery is not about making one great move. Instead, a savvy investor learns to master his or her ability to trade the stock market by taking consistent disciplined action based on accurate thinking and sound investment fundamentals.

Comment: Remember the master strategy for success at playing Wall Street Craps: Always play the game correctly by making only smart bets, at the optimal time, and in the appropriate amount. Do this consistently as well as manage your money wisely and “Know Thy Self” so that you can adjust your play according to your unique individual temperament.

**********

“Yes, risk-taking is inherently failure-prone. Otherwise, it would be called sure-thing-taking.”

Tim McMahon ~ Featured in Money Talks by Rosalie Maggio (1998)

KNOW THE PROPER TIME FOR ENTERTAINMENT: Don’t trade the stock market for the sake of fulfilling your entertainment needs. Your goal in trading is to make fast money and then get out. The time to entertain yourself with the stock market is when you’re on the sidelines anticipating your next big move.

If it’s the thrill of “action” that you crave, then you would be better off taking a gambling trip to Las Vegas or Atlantic City. At least you can get free drinks for playing recklessly with wild betting schemes, when you’re at these places of entertainment. It’s much more appropriate to think of the stock market as a place for making serious money with disciplined thinking, rather than a place for receiving instant gratification with just plain luck.

Comment: Trading the stock market is very much akin to playing chess. Over the long haul of a person’s investing life, the outcome will ultimately be determined by consistent smart moves in terms of market tactics and money management. All of a person’s side issues regarding such things as the need to be right, the need for action, the need to feel special, etc. will only serve to undermine your trading and investing success. When it comes to playing the market for serious money, know that when you are holding trading positions, it’s all business and not necessarily for pleasure.

**********

“A successful trader is rational, analytical, able to control emotions, practical, and profit oriented.”

Monroe Trout ~ Trader and hedge fund manager

“TO SELL OR NOT TO SELL? THAT IS THE QUESTION!”: When you follow the price of stocks that you own, it is tempting to calculate how much money you have gained or lost up to that point. But this calculation is only relative to the stock price at which you bought your stocks.

Since buying and selling are essentially independent decisions to make, the captured buying price of a stock should not be a factor at all in determining when to sell it. By keeping the purchase price of a stock fixed in your mind, it will only serve to cloud your thinking and result in making an unwise trading decision to sell or not to sell.

This means that you will likely do two things when you regularly calculate your paper profits:

1. sell too early in an upward moving market and thereby miss out on potential profits, or
2. sell too late in a downward trending market and end up taking unnecessary large losses.

In both of these cases, the unwise decision to sell or not to sell is based on the investor’s fear. And that fear is the amateur’s avoidance of any emotional pain associated to taking a financial loss and, more importantly, admitting that he or she was wrong.

If you are not willing to take a loss and admit that you can be wrong, then you have no business trading or investing in today’s volatile stock market.

Comment: This doesn’t mean that you can’t play the stock market. It just means that trading the market over the shorter-term based on extremes in the underlying indicators is not suited for your temperament. What you can do is play the longer term in your “growth funds” and “security assets” portions of your portfolio in more value and income-oriented buy candidates.

**********

“If you can’t take a small loss, sooner or later you will take the mother of all losses.”

Jack D. Schwager ~ Author of The New Market Wizards (1992)

DON’T COUNT YOUR CHIPS WHILE YOU’RE PLAYING: Don’t count your gains and losses while you have positions in the stock market. This natural tendency will most likely cause you to trade based on the prices of your stocks instead of the underlying market indicators.

In order to reap large gains in the stock market, you must be able to hold a portion of your winning position longer than you’re emotionally inclined. And conversely, in order to avoid large losses in the stock market, you must be able to sell out of losing positions quicker than you normally would like. In both cases, it’s usually the practice of watching the price of the stocks they own that causes investors to sell at the less desirable time.

Comment: Always remember the masses exclusively follow price while the savvy players pay more attention to volume and breadth when it comes to the technicals. And in terms of sentiment, the masses love plenty of company to reassure them of what to do while the savvy players do the opposite of what the masses do at key turning points or extremes in the market.

**********

“Avoid ‘jogging in place’ with your portfolio. Failure to decide is, in effect, a decision. If you would not care to buy each holding in your portfolio each day, you should sell it (barring tax considerations).”

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