THE ALCHEMIST                         by AL THOMAS
                 BEING WRONG IS OK
     Being wrong is OK, but let’s not carry it to
extremes. That applies to everything, but let’s
limit our discussion here to the stock market.
 I have been trading for several decades and was
an exchange member and floor trader for 17
years. You learn fast there or you go broke in a
hurry. As you can see I managed to hold my own
for a few years until I found the secret and
started to become a successful trader. Every
professional trader I know knows the one great
secret and that is to keep your losses small.
     We all learned that when we took a position –
either long or short – that we better be able to
jump out if the trade was not going our way.
Many of my friends were scalpers. That means
they were trading for just a few ticks and every
night went home flat. Flat is no positions at
all.
     Others, myself included, took a longer look and
planned to hold a position for a period of time.
That could be several days or weeks. If you were
right the longer you held on the more money you
would make.
     The general public seems think that exchange
members know everything and always made money.
Tain’t so. Many traders were wrong more than 50%
of the time. Huh? Yes, fifty percent. My account
had losses 40% of the time and 20% were scratch
trades (neither winners nor losers).
     You ask, “If you are out of the money 60% of
your trades how can you make money?” This is
what every professional knows: Keep your losses
small and let your profits run. How many times
have you heard that one? BUT how many times have
you ignored that rule?
     At the end of the year when you analyze your
trades you find that you made $3.00 for each
$1.00 you lost you will show a nice big profit.
     I don’t care what business you are in you don’t
put your whole wad on a single outcome and stick
with it until it either works or go broke. That
is what brokers and mutual fund managers want
you to do. They want you to buy, but never sell.
 It is a tragedy for the small investor today
that mutual fund families are putting in selling
restrictions to discourage investors from
dumping funds that are headed down. Many require
long holding periods and if you sell prior to
that time they charge an extra fee of 2%. They
give lame excuses that I know are not true for
doing this. Never buy any fund or trade with any
brokerage company that has that kind of rule.
     It is cheaper to pay the 2% or whatever fee
there is and get out than hang around and lose
20% to 40% of your equity. Look back at 2000 to
2003. This can happen again despite what your
broker tells you.
     Be wrong and run home with most of your money.
You still have enough to invest in a better
opportunity. If you are disciplined to get out
of any bad situation early you will end up a
rich person.

 

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Copyright 2004 Albert W. Thomas All rights
reserved.Former 17-year exchange member,

floor trader and brokerage company owner.