Price Gaps and learning about discipline  

I copied the following youtube links from Jeff White (Stockbandit.net).

They are good trading videos which highlight why we dont chase for price gapups, but instead wait for it to retrace for a while and make a good retest (and better entry point) to trade in the direction we want. :)

Trading Videos:
1.) Trading Price Gaps - http://www.youtube.com/watch?v=QDEMW-bpIE8
2.) Making Money from Mediocre Trades- http://www.youtube.com/watch?v=k6pJjZ7ljVk

Great advice from Jeff White when it comes to price gaps:

---> The market has expended quite a bit of energy getting to where it will open this morning and chasing prices doesn't seem to make sense. Keep an eye on the 0ne-minute chart for entry levels or just stand aside.It is better being on the sidelines and wishing you were in than it is to be in and wishing you were on the sidelines.

My personal experience/opinion:
I agree with Jeff White's quote that its better being on the sidelines and wishing you were in than it is to be in and wishing you were on the sidelines. In short, its better to lose the opportunity than to lose your capital.

I recently am reading Marty Zweig's 1990 book "Winning on Wall Street" and what struck me with his introduction is his story on how he profited from the great crash of October 1987. What I admire about his story is that the reason he made money was in being realistic and being defensive.

Below is an excerpt of his story:

I figured that if a break of the magnitude of 1946 or 1962 evolved, the puts would have climbed sufficiently to protect the 40% or so long positions we held (whose risk was also limited by stops) and would have even provided a moderate profit. If I were wrong, the puts would have produced a mere 1% loss for the portfolio, which might have been offset by gains on the stocks if the market had risen. Remember, I was not positive. I was only dealing in probabilities.

The upshot is that the market walked right into the buzz saw of 1929. From the August 1987 high of 2722, the Dow collapsed to a closing climax low of 1738 on Oct 19, a plunge of 36.1%. That nearly equalled the 39.6% wipeout in 1929 down to the Oct 29 climbax low. As a result, the puts, which were bought at 2.375 in late September, soared in price. I began selling them in pieces as the market crashed. Beginning on October 15, we sold in 5 bunches over the next several days at prices of 9.25, 19.25, 54, 86.50 and finally on October 20, we sold the last at 130. The weighted average profit on the puts was 2075%, which added about 20.8% of value to our overall portfolio, and more than offset the losses of about 7% on our remaining stocks which were stopped out. (By the close of October 16, the portfolio was down to just 8% invested in stocks.) As a result, our portfolio gained 9% on Black Monday.

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If you had been reading the above story, his puts gained an astounding 2075%! He however realized only a gain of 20.75% because he only put in 1% position in the stock portfolio. Most people would think he was nuts for not having added more puts considering that he had a "feeling" or he was being lead by "market indicators" that market seemed to be weakening.

He writes the following statement:
"If I were a genius, I would have sold everything before the break and made zillions. But that is not reality. Reality is cutting risk to the bone when the indicators weaken, hoping that you can make a few bucks when conditions are good, and praying that you'll survive crashes, plagues, and earthquakes long enough so that someday you'll see the pleasant light of another bull market and have some money left to play it."

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NOW THAT IS WHAT I CALL SUCCESSFUL DEFENSIVE MONEY MANAGEMENT.

Hope we all learn from the great Marty Zweig's experience:)
We should never try to hit for homeruns in the market. We don't bet big if we don't know how we control our risks. We try to inch our ways in little bits and pieces. I'm happy with my 11.11% gain in my first HK trade but its effect in my account was only 1.7% (due to my 15% position.) This is totally fine because had my trade gone adverse, I would have lost only a maximum of 2%. This is what money management feels like, and this is what trading is all about.

Im happy that Im finally learning.

Good trading to all!

-Nix