[Day traders have been abandoning the game in droves because it supposedly has become too rigged to beat. In fact, the markets have always been rigged, and it’s never been an easy way to make a living. Yes, thinking machines programmed mostly by nerds who know little about the psychology of trading have added a new layer of complexity. But the nerds are hardly unbeatable. Below is the advice we gave traders in a column that originally appeared in the Sunday San Francisco Examiner. It has been modified to suit the times, but the advice still applies. RA]
The late John Scarne, legendary card manipulator and gaming wizard, used to tell a story about how he and his pal, heavyweight boxer Jim Braddock, walked into a crooked card game and won a pile of money. Knowing that they were being cheated put Scarne on his guard, and he lost no time taking countermeasures to ensure his and Braddock’s great success that evening. Whenever it was Scarne’s turn to deal he went to work, peeling useful cards from the bottom and even the middle of the deck. At one point, in full view of all, he surreptitiously stacked the cards while shuffling them, allowing him to deal Braddock a hand that beat a tableful of exceptionally good hands.
Scarne surely would have feasted if he’d lived long enough to play the stock market today, since the game has come to be increasingly dominated by thimble-riggers and keister bandits who would not think twice about bankrupting some widow or stealing from an orphan’s college fund. With stocks pushed ever higher by a tide of virtual money from the central bank, Wall Street’s wolves have set upon an unwary flock of short-term traders with unusual voraciousness, jacking shares up and down with the skill of a carny man working the roly-poly board.
It is in times like these that cynicism and street smarts can help the day trader and active investor eke out gains in markets that have alternated between tedium and hysteria. On balance, stock have trended higher, and this alone creates opportunity for traders patient enough to be at their monitors when the inevitable spasms occur. Here are some tips to avoid getting fleeced. They come from long experience in the trading pits and from close observation of certain patterns that have repeated themselves throughout history, to wit:
* Visualize the competition. If you would not sit down at a poker table with a bunch of guys who wear $2,000 lizard-skin boots, then pick another game.
* Forget everything you may have heard on the business channels about what causes stocks to move up and down, because it’s not “fundamentals” that drive them. In fact, most of the time shares fluctuate at the behest of institutional heavies whose skill at manipulating the herd would make Machiavelli weep for the little guys.
* Many traders follow the adage that “the trend is your friend.” However, we’ve found that trend reversals are more easily tradable and that swing highs and lows that are easily exploitable can be predicted within pennies. If you’re skeptical, click here for a free trial subscription to Rick’s Picks that will give you access to a chat room where it happens routinely every day.
* Use the leverage in put and call options whenever possible by purchasing options that are far enough out-of-the money to be selling for $1.00 or less. Stick with the near-term expiration at all times, since longer-term plays are a sucker’s bet.
* Never trade options without using “contingency” orders, such as, “Buy four December 60 calls for 2.30 or less as long as the stock is trading 53.50 or higher.” If you do not understand and employ such strategies routinely, you are no more likely to make money with options than the blackjack player who always splits fives and doubles down on sixteen.
* For options traders in particular, high-flying “lunatic stocks” like Priceline, Netflix and Google offer a particularly juicy bet, since the $20-or-greater intraday prices swings such stocks frequently trace out can cause a $1.00 option to quadruple-or-more in within hours.
* When a stock that has been strong gets socked for a sudden $10 loss, keep in mind that the illusion of weakness has been deftly engineered by the shakedown artists. Typically, they have just unloaded shares into a steep rally and wish to accumulate more stock at lower prices before repeating the cycle. The bunco artists who jerk the high-flyers hither and thither are among the true masters of the game, and you can learn a great deal just from watching their swoon-and-recover antics.
* Don’t be afraid to trade in the opening hour, before the dust has settled. Price action may seem crazy, but if you look at it on a one-minute bar chart, you’ll see that it is not only predictable but opportune. It is only when the trend has been established that a stock becomes increasingly difficult to trade. That’s because the stock will take increasingly devious evasive maneuvers to prevent “everyone’ from making money on what is obvious.
* Don’t swing for the fences, and be sure to take at least a small partial profit on any trade that goes your way. That’s the best way I know of to put your mind in a relaxed state that will help you make better trading decisions.
These rules work for me, but you can probably come up with equally effective ones by paper-trading for a while. Trust your own observations, since they are capable over time of identifying profitable patterns and quirks that the algo nerds don’t necessarily see.
