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Your Last Best Hope For Sunnier Markets

06/28/12 02:32:57 PM
by Billy Williams

There is plenty to be anxious about in today's markets, but while others hope for sunnier days, you can become your last best hope right now by understanding these key principles.

Security:   CF, KO
Position:   N/A

If you've been trading or investing in the last few years, then you don't need me to point out that it has been a tough stream to navigate through. Solid returns has slowed to a crawl if they are able to move forward at all. Worse, the news being put out there by the media and the financial talking heads don't exactly communicate a positive outlook for the future and, in fact, are probably having more negative impact than good by scaring the wits out of potential investors.

But a decade from now, the decisions that you make today will have a direct impact on your financial well-being as a consequence of what you do today, as well as what you don't do today.

Remember, boxers are remembered as much for the fights that they don't take as the fights that they do. So don't slink away in fear of taking on the responsibility for your own financial livelihood.

However, it's not as scary as it might first appear (Figures 1 and 2).

FIGURE 1: KO. Coca-Cola has been a solid performer for decades in the stock market with impressing earnings and dividend yield. As a value play, the stock displays a strong balance sheet coupled with a low price/book ratio of 5.16. However, you can also use options by selling naked puts to collect the premium and if the stock is put to you, then you have bought a reliable value stock for an even lower price.
Graphic provided by:
Every great trader or investor has stood where you are standing today. And rather than let market anxiety get the best of you, start redefining what you want to get out of the market versus being inundated with the negativity that comes from the financial media.

Simply, know your desired outcome and make plans to get from where you are now to where you want to be. Keep in mind that desiring a 50% annual return is a lofty goal, but you can't force those returns from the market; instead, you need to work at refining your skill.

This brings us to the next phase, which is "honoring the process" by having tightly followed rituals to pan out the slivers of gold in the market. Like a gold prospector, you want to develop a daily routine of scanning the market, doing research, analyzing risk/reward, and preparing for the moment to pull the trigger and enter a position like a finely tuned machine that manages a trade from start to finish with the precision and accuracy of a Swiss timepiece.

FIGURE 2: CF. CF is an up-and-coming stock that has surged lately and traded through its 0.382 and 0.618 Fibonacci zones. Now, after having traded more than 80% of its previous down move, the stock is poised to challenge its old price highs, making it a prime target for a smart trader looking to ride the momentum of the bullish trend.
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Next, start becoming more selective of the type of trades you take. Warren Buffett uses the principle of the 20 pitches where he states that if you had just 20 investment decisions that you would make in your lifetime and no more, then you would become much more selective of the types of investments that you would make. This mentality brings home the point that you have to be strategic about what you say yes or no to in order to enjoy long-term success with the market.

Taking volatile trades that have little risk to reward can chip away at your account. That could leave you standing on the sidelines at some point in the future and powerless to take any action when the home run trade appears with all the promise of a windfall profit because you squandered your opportunities.

Only trade what you view as "quality" -- the trades that are so overwhelmingly in your favor that it is almost impossible for you to fail and trade only those high-probability, low-risk setups.

In our world, the realm of the intelligent speculator, you strive to achieve a level of freedom, of independence through the judicious use and application of capital for higher returns. Unlike the herd of traders and passive investors who hope and pray from the sidelines, you use the greatest tool -- your finely tuned mind -- to become your own last best hope by gaining the skill to apply capital at the right time and the right place to achieve a level of freedom and independence from the market by being selective, honoring the process of trading/investing by being patient, and only trading or investing in quality.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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