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The Cost of Doing Business

December 15, 2006
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Hello again. Since I talked about it last night in our meeting, I thought I’d use yesterday’s trade to briefly discuss something which is….losing money. The cold hard truth of participating in the stock market is that in order to make money, you must be willing to lose money. You will not receive any gains without the first step of being willing to take on risk. Whether it is an aggressive options strategy or a conservative approach, we must take on AND MANAGE risk. That’s where cutting losses short and proper position sizing come in.
The first step is deciding how much you are willing to lose in any given trade. Until you do that, you can’t do much other than talk and if you do choose to make trades, you will act with fear rather than the understanding that you are in control of your risk.
Most people recommend risking 1-2% of your whole portfolio in any given trade. From there you make your position size depending on where you see support and where you will set a stop loss order.I won’t go through that again, as it’s in the last post.

Now for today’s action. Though I’d have liked it to take off like a rocket today, it didn’t. Such is the nature of a breakout. It is different than a bounce off of support. We should anticipate and expect that it will come back to test support. With a breakout we have two choices. We can either buy on the breakout and take the risk that it will come back down to test support and possibly not hold there, resulting in a “fake out.” Or we could pass on buying the breakout and wait to buy on a successful test of new support. The risk there is that it just might continue to rocket higher without you in it(see LVS on 11/08/06). Today saw a bit of profit taking, though it was on considerably lighter volume than yesterday on the breakout. There was some buying off the lows of the day too, so that makes some argument for new support. However, depending on the broader market conditions, next week may show investors deciding that this is not the right time for this stock to go higher and will bail out. If that happens and the stock goes back below the resistance level, then so be it. I’ve positioned with this possibility in mind and I’ll exit with the acceptable loss(perhaps less since I positioned for the Stop loss level and not the support level). It will still be a “good” trade as long as we adhere to the plan and read what the chart is telling us. If not now, then maybe the moment for this stock to make its move is still just around the corner, in which case so might be a re-entry.

Have a great weekend!

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