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The Secret to Winning: Not LosingBy Jeff ClarkThursday, April 12, 2007 Hot streaks always come to an end.
That's why I don't worry too much about global warming, and that's why I always focus on the risk side of any trading equation.
Longevity in the world of options trading isn't measured by how much you make when you're hot. It's defined by how little you lose when you're cold.
Think about Brian Hunter, the young natural gas trader that blew up Amaranth Advisors. For the first half of 2006, he was unstoppable. He was on the right side of every move in the natural gas market and generated $4 billion in profits for his fund in six months.
But just one trade later, he lost all $4 billion of profits... and another $2 billion of investors' capital.
That's what I mean by a blowup trade.
I've seen it happen dozens of times. Traders get on a roll. They make five, six, seven winning trades in a row. Then, just as they are convinced of their genius, they plunk down their entire account on the next trade.
And you know what happens next... KABOOM!
The stock market gods are a fickle bunch. They'll let you play along with them for a while. But as soon as you start thinking you're omnipotent, the gods re-instill a good sense of humility.
You can protect yourself by paying attention to position limits. Resist the temptation to anger the gods and put it all on one trade. That's the advice I recently gave readers of the S&A Short Report...
We've had a great run in the past few months, profiting on eight out of the last nine trades we've closed. We made good money on our little songbird, Merrill Lynch, bagging 20% in two days on calls. We managed a six-day double in dirt-cheap semiconductor stock OmniVision...
We closed out March with a trade on natural gas. As I've been writing in these pages for the past few months, there are plenty of oil and gas stocks trading for low valuations right now. More importantly from a trader's perspective, there are plenty of attractive charts to trade from the long side.
Just a few weeks ago, we jumped into independent oil and gas producer Pioneer Natural Resources (PXD). The stock had a great looking chart and was trading for less than seven times earnings. Even better, the whole natural gas sector was getting ready to break out to the upside. We closed that trade out four days later with an 80% gain.
That's all well and good, you might say, but what's ahead? Currently, we've still got a long position in oil services and a very short-term speculation on a weakening overall market.
I think both these trades will produce 50%-plus gains for us, of course. But don't forget, hot streaks always come to an end.
Best regards and good trading,
Jeff Clark
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McDonald's at new 52-week high... up 32% in the past year.
Raw materials still pacing the market... Anglo American, Potash Saskatchewan, Southern Copper, and Silver Standard Resources at new highs.
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