Model Management | SCST Bloggers Confederations

Eco NEW YORK (TheStreet) ? Apple(AAPL) is one of the most exciting stocks to watch. With or without a current position, I enjoy simply watching the movements. The price action is a combination of powerful fund money positioning and allocating to a set schedule as well as the standard garden variety of fear and greed working their magic. Thankfully, it's a lot more difficult for someone to decide one day they are going to be a pilot and start flying the same afternoon. At my local airport where I have taken flying lessons, they will not let you rent an airplane without checking your credentials first. But even as a new student pilot flying solo, the probability of crashing is extremely small. With day trading, though, the barrier of entry is much lower. If you want to try day trading/investing, there is an endless supply of brokers willing to let you take "the controls" without training and testing to make sure you know what you're doing and understand the risks. Don't get me wrong, I am not opposed to letting people become "dead money" by choice. After all, it's their money to do with as they please with. I am not suggesting "tests" or other requirements, and in fact, I believe we already have too many needless rules and regulations. Risk has more to do with skill than luck in flying and investing. People come into my chat room all the time brand-new and knowing little more than which buttons to push to execute a trade. They ask questions such as "What is in play?" or "What are you trading?" and "How can I learn how to trade?" My standard answer is to suggest a couple of books that will bring home how much financial peril they are in by attempting to outsmart Wall Street. Most new traders are not interested in spending the needed time and work required. Thoughts of losing money are cast aside to make room for a mind filled with dreams of riches and success. Simply put, it's challenging to discern a difference between many new "traders" and my 8-year-old son arriving at an amusement park freshly armed with a fistful of credits. Day trading is a decidedly different beast from investing and requires a different skill set for many things, but one area where the skills are particularly complementary is the level of discipline needed for success. The first key is to have the discipline to know when a trading idea is not working. My son is likely to walk away from the amusement park with little more than a plastic spider ring in his pocket; an undisciplined day trader will experience much the same fate given enough time. The discipline needs to be found ahead of time. Studies have shown clearly that people generally make the best decisions when emotion is not influencing choices. Knowing when a trading idea is bad is not "being wrong" or "losing," and it's crucial to understand all investments are winners regardless of the results if the reason for entering the position is solid. If you're not sure if the idea is solid and or questioning why you're in something, it's time to rewrite your entry and exit rules. You do have rules of entry and exit, correct? If not, it's the first thing you want to do. Consider this: You're about model management to board an aircraft with a new air carrier and you ask the captain, "What's your plan to get us to Vegas?" If she replied, "I don't actually have a plan. I'm hoping to figure it out as I go along," would you still want to fly?. Those who held on with Research In Motion(RIMM) when I called it a short July of last year have learned a real big lesson in risk management. RIM has dropped in value by about half since then. The good news (it's not really good) is if you're holding RIM right now and hedging with options, you're likely fine. It may be true the market is efficient, but that is only comparing the market with the government. It's pretty clear how efficient the government is. I believe RIMM is worth at least $12.50 per share, and even a few bad reviews of OS10 don't change my numbers. Currently, I favor the August $12 put options trading for about $1.63, and allowing a modest amount of time for sentiment to change or begin to change. Another company with a recent drop, albeit a slight one, is Apple. What makes Apple different than RIM, other than market size, is that Apple touched upon support today. Apple has proved to be a great technical stock to trade or invest in. For the past three years, every dip has brought a buying opportunity. I believe the current dip is the next buying opportunity, if properly hedged. If entering an outright long Apple position doesn't make sense for your portfolio (a $60,000 single position can easily imbalance a portfolio under the size of a $1 million), options can offer a perfect way to dial in the level of risk as well as provide exposure and time decay. With Apple trading at $567, a bull credit spread option position (selling a higher strike price put option while also buying a lower strike price put option) with a sale of July $565 strike puts for $30.80 with a purchase of July $530 puts as a hedge for 16.75 translates into a credit of $14.05. As long as Apple closes on option expiration day for the July options above $565, the full gain is realized. Apple doesn't have to move higher from its price today to max out the gain. Also, unlike the neighbor who may have bought Apple, the maximum exposure to loss is about $20.95, and that will happen only if Apple moves lower to close at $530 on options expiration day. My next rule of day trading that is often very helpful in investing is based on news. I learned this one from Tom DeMark, a legendary market timer. Stocks don't make tops on bad news; they make tops on good news. What this means is if a stock gets great news and can't move higher, you just saw the top. I pointed this out with an article I wrote about Sirius XM(SIRI) and you can read about Sirius here. On May 1, Sirius opened and traded higher after earnings came in about as good as can be expected. Shares ended the day lower, indicating to day traders the top was in. Investors who know what it meant exited quickly as the volume almost doubled the day after the earnings report. Until something else comes along to shift sentiment with Sirius, expect the stock to mostly move sideways to lower. The company is good, and many love the service; the problem is the difference between price and value. What you pay is the price and what you get is the value. So many love and are willing to pay up to hold Sirius even when the upside is gone. In day trading we know that the worst thing to do is to join the mob after the mob is fully established, and Sirius demonstrates this better than most. Day trading isn't for most, just like piloting isn't for most. Even so, learning some rules of the trade can be very helpful in your investing goals. If you ensure you have a written plan, exercise discipline, wait for pullbacks when trend following and let the news work in your favor, you will be miles ahead. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication. This blog is for intellectual and educational purposes only.

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