The Secret of my success Part 4. Be Reactive, Not Proactive.

When I first started investing in the stock market, back in the early 90’s we did not have the internet. I opened a trading account at National Discount Brokers, later to become Ameritrade, now TD-Ameritrade, and they kindly sent me earnings reports and charts via fax, for $1 each (if I remember correctly). There were no sophisticated search capabilities, and I was certainly not willing to pay thousands of dollars for trading software. So I would do the Peter Lynch method: Pick one company from my daily life that I thought as having a good product or service, and then look at its financials. I did my research, I was PROACTIVE.

Later, as internet became available, and Yahoo! Financial began to offer daily quotes, I bought myself a cheap charting software that could take the imported data from Yahoo, and I downloaded data more or less daily for a collection of 30 stocks that I kept watch over. By then, I had learned about the Elliott wave, and began to trade by buying and selling one or more of those 30 stock, based on my wave count based on channeling, and using Stochastics, Candle sticks and moving averages as entering/exit signals. I watched stocks daily and searched for the opportunities, I was PROACTIVE.

By the late 90’s, I had streamlined my trading by using real time quote charts from IQ-charts, for which I paid a monthly fee (about $35, if I remember correctly). With this approach, I could enter my trades “intraday”, at precisely the time when the daily and intraday charts signals coincided. I still kept that list of 30 stocks, mostly tech stocks, and using options I was able to produce profits I never thought possible. Nevetheless, I continued to be PROACTIVE, always on the lookout for those opportunities within my watch list to which I often added and subtracted components. Ironically, the really great, momentum stocks were for the most part ignored, as I viewed them as too overpriced to buy them as long-term stocks, and too volatility to buy calls on. I refused to be reactive. I insisted on being PROACTIVE.

These days, computers have evolved to such an extent that the TradersExpo is full of companies selling you “a unique system” that can pick the winners with great accuracy (usually 60% or so), long before they are winners. Then they show you how you could have picked AAPL when it was at $11/share (presplit) and how by now you’d have a 1800% return on you money. Or perhaps they would show you a brand new indicator that secures your position with a unique entry signal. How about those that claim that can pick the bottom of an Elliott wave 4, 80% of the time? Search capabilities for Telechart and IQ charts and a host of web-based applications are phenomenal. Now more than ever, we are PROACTIVE. Always looking for the pot of gold at the end of the rainbow, when it is right in front of you.

I looked for the PCCRC for years, and when I finally thought I had it, it took me months to implement it, but I quickly learned that with it, I could ignore all the signals, and all the beautiful patterns and "sure-thing" entry signals and focus on stocks that were brought to my attention by their own strong single day performance. All I had to do was to verify that the reason for that one day performance was sound fundamentally. What a concept! I could REACT to the news, rather than anticipate it. Ironically, I learned of this approach, months after I started trading the PCCRC, serendipitously, when DNA jumped after news in April 2005 from $58 to $68 overnight, that was about 13% increase. Mind you, just weeks before in March 2005, DNA had jumped from $43 to $55. Throwing caution to the wind (knowing of DNA’s huge rally just the year before, which by the way would have also been a huge opportunity for a PCCRC), I entered a PCCRC, even though the volatility had spiked on that day. At first, I had a loser, as IV promptly declined in the next few days, but as Delta picked up, my profits began to mount, in spite of the Vega decline. I learned! I found out that if I had waited just one day, I would have also put Vega to work for me. I also learned to pay attention to those intraday >10% jumps, and verify that the story justified the price jump, and probably a continued rally, later on. I am not always right, of course, and buying calls would probably be one more of those “yes-no-maybe-so” propositions. But I also learned that with the PCCRC I could limit my risk, and even profit if the effect of the news was somehow reversed. I learned to be REACTIVE, rather than PROACTIVE.

Later on, I realized that the best news for a company usually come after earnings when they report “better-than-expected” results, and may add a phrase I love: “raised guidance for the next….”. Now I have the fundamentals and the momentum on my side. But rather than shy away from these one-day-wonders, I embraced them, because more often than not, they have now a built up potential energy, which is becoming kinetic energy. A momentum stock that should perform well, even when after a few days (weeks) of rest follow the earnings report. The PCCRC would take advantage of the move, whatever it ends up being (up, down or sideways). If you are an engineer or a physicist, you may think of Vega as the potential energy and Delta as the kinetic energy. Often, if the stock is not moving up, Vega may be increasing, particularly as we approach earnings. So I discovered that I could enter a PCCRC right after earnings, expecting a rally, but often end up profiting from Vega as the next earnings approach. Regardless, I am being REACTIVE. Not proactive.

Finally, there is one more way in which I am being REACTIVE, rather than proactive, when trading the PCCRC. I can sell portions of my long position as the stock moves and my Delta profits mount. This is actually quite liberating. No longer do I need to put my time and effort into reading the tea leafs of the charts trying to figure out the tops or bottoms. Trust me, this is peace for an emotional trader like me. I don’t need to pump up my ego trying to assure myself that I am going to be profitable because I am a good chart reader. Ultimately, success comes from knowing how to control risk, and the PCCRC is the best tool I have run across to do that. Why? Because as I sell my long calls, as the stock moves up, I am simultaneously readying my position to take profits, should the stock collapse. My number 2 and 3 best performers this year, GOOG and WYNN, performed precisely that way. I took my profits from the long calls on the way up, and profited from the short calls and long puts on the way down. Once again, I was REACTIVE.

Please help!
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