Wall Street Craps – 2012 Global Ebook Finance Award-Winner

DON’T PARTY WHEN YOU PLAY: The market doesn’t care if you’re on vacation or goofing off somewhere. You must either get out of your positions before you leave or else monitor stock market action after the close of every day while you’re away at play. And if the latter is the case, you must also have the presence of mind to take clear decisive action when necessary.

Not everyone has the experience or discipline to play the market correctly while their mind is somewhere else. Therefore, cashing out or lightning up your positions before you take a real or mental vacation might be the smart way to handle this situation. Otherwise, your play time may end up costing you more than you ever imagined beforehand.

Comment: I know this first-hand from the days before the Internet and when I used to take cruise vacations every October. Back then I couldn’t make trading decisions while I was away on a cruiseship. And the stock market had a not-so-funny habit of always crashing with me aboard every October.

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“If a speculator is correct half of the time, he is hitting a good average. Even being right three or four times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong.”

Bernard Baruch ~ Legendary investor (1870-1965)

FOCUS WHILE YOU ARE PLAYING: When you hold positions in the stock market, refrain from as many distractions as you possibly can. Make it a daily practice while you’re in the market to know how the major indexes and underlying indicators performed at the end of each trading day. You never know when the stock market will give you an unexpected gift in the form of a spectacular one-day gain.

That’s why it is so important to pay attention to the market every single day when you’re holding stock positions. It could turn out that your window of opportunity to sell at a great price will be quite small when unexpected news-driven market events occur. As seasoned market players can attest, it’s not uncommon for a big up day caused by investor euphoria to be followed immediately by a sobering big down day. (Note: Never forget a Wall Street adage that reads: “Take windfall profits when you have them.” Sometimes the smartest move you can make is to simply “take the money and run.”

Comment: Always remember that the stock market doesn’t know when you bought your stocks. That means that you should be ready to sell at any time. Pay attention to the stock market whenever you hold positions in your “play money” trading account. Otherwise, you may find yourself selling on the market’s term instead of yours.

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“If there is a well-defined movement on at the close, it is more than an even bet that the next day’s market is to be a speedy one, for the closing movement usually carries on in greater strength and for a longer duration than the movements which develop and pass out again during the course of the usual day’s trading.”

Richard W. Schabacker ~ Author of Stock Market Profits (1934)

CATCH A HOT STREAK & RIDE IT: A stock market rally is more about longevity than it is about price. When it comes time to sell, accept whatever price the market gives you. Discipline yourself to sell out before the rally runs out of time.

Most amateur players only concern themselves with the price of the stocks they own. But when you buy investment vehicles like broad-based Exchange-Traded Funds, you’ll know that when the market is up, your stock value will be up and, conversely, when the market is down, your stock value will be down.

If the market gets on a hot roll, be content to take your profits on the way up no matter what the actual quoted price is. An obsession with meeting predetermined price objectives for individual stocks is what keeps many amateur players from selling when the time is right. A major key to trading success is the ability to maintain the mental discipline to buy and sell according to time rather than price.

Comment: When time becomes your determining factor in buying and selling, it is normal to occasionally be a day early and/or a day late. But you will be more likely to participate in a major move rather than be left behind by trying to wait for the perfect price to come in for you.

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“If you are in the right thing at the wrong time, you may be right but have a long wait; at least you are better off than coming late to the party. You don’t want to be on the dance floor when the music stops.”

Adam Smith ~ Author of The Money Game (1967)

FINE-TUNE YOUR BETTING STRATEGY: After you have gained valuable experience in trading, you can adjust your betting strategy to suit your own individual preferences.

For example: In my own trading account, I find it easier to buy three times over a three to five day period. This means that I don’t necessarily buy every day during the period of time that I identify as a bottom area. I will also make my first bet only one unit. I do this in order to eliminate the tendency to miss moves by wanting to time the market perfectly. Then I’ll make my second and third bets equal to two units, bringing my total for any one position to five betting units.

This strategy works for me because I’ve found that the hardest bet to make is always the first one. This 1-2-2 betting strategy also makes it easier to sell effectively if I choose to leave this particular market position in the same gradual progression. (Note: The 1-2-2 progression appeals to our basic antsy, fear-based behavior when it comes to trading the stock market. On the buying side, we are often afraid of missing out on an opportunity but scared of being too early. On the selling side, we can be fearful of losing a profit and having it turn into a loss. But at the same time, we are afraid of selling too early and losing out on the potential for further profits.)

Comment: If all of this seems a little confusing, then simply make of your bets small ones. I call these the “$5 Bets.” This is the smallest denomination of a betting unit and is one that any player with a $100 bankroll can feel comfortable about playing. Remember that the key to playing freely lies in not being afraid to lose – hence the $5 bet.

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“To obtain better than average investment results over a long pull requires a policy of selection or operation possessing a twofold merit: (1) It must meet objective or rational tests of underlying soundness; and (2) it must be different from the policy followed by most investors or speculators.”

Benjamin Graham ~ Economist & Professional Investor (1894-1976)

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