The Trader’s U E-Letter
Wednesday, June 22, 2005

A Sneaky Way Get a $1,200 Edge Every Year
by D.R. Barton, Jr., Chairman, Trader’s U

I was standing with my 10-year-old son on the pitcher’s mound of our local Little League field when his pitching coach stepped up and handed him a bright red baseball.

“Wow, that’s heavy!” exclaimed Josh. It was a specially weighted baseball. The coach explained that throwing this ball about 10 times before pitching gives two advantages - it strengthens your arm, little by little over time, and throwing this weighted ball over-emphasizes any flaws in the pitcher’s throwing motion so they can be corrected.

After a few missed tosses and subsequent corrections, Josh had one of his best practices ever.

All because of a silly little red baseball… and one small correction after another…

As traders and investors, we are often guilty of looking for the “really big fix” to help out our bottom line. Any help that can give us incremental benefits is often overlooked or ignored completely.

But let’s look today at how a series of little improvements can add up to a big edge in your trading and investing.

One Shrimp Never Stuffed Anyone - But a Plateful Can Be a Meal

When you want to increase the profits in your trading or investing account, it’s quite natural to set your sights high. We are filled with platitudes in other walks of life that encourage us to stretch ourselves and think big thoughts: “If you can dream it you can do it” and “Fish for whales not minnows” are two examples that come to mind.

Given this training, we tend to search for that really big idea - the monster stock tip or the new “can’t miss” trading system.

And while searching for these “huge fixes,” we overlook the minor improvements that can add up to big profits. We ignore the silly red baseball when someone hands it to us.

Now let’s look at one improvement that will make only a small difference on your next trade - but has the potential to make a big difference to your bottom line this year.

How Good Are Your Entry Prices? Little Improvements Add Up

Here’s a great exercise: Go back through your last 25 to 50 trades and check where your entry price was, versus the best entry price that you could have reasonably gotten after the trade or investment signal was given.

How good were your entries? Was there a way to get an extra 10 to 25 cents - or was there even an extra dollar to be gained in some trades?

Most well designed mechanical trading systems are built to give good entries - on average. Others are not.

But almost all stock picks are just looking to get the “big picture” right and pay little to no attention to fine tuning entries. This is a great opportunity for you to develop an edge!

How to Maximize Your Gains From All Stock Picks

Let’s say that you can improve your newsletter’s recommended entry price by just 10 cents per trade. (For many newsletters that just give “buy at the market” recommendations, this is not an unreasonable assumption.) If you make just two trades per month and buy 500 shares per trade, the advantage really adds up:

(2 trades per month)
x (500 shares)
x (12 months)
x ($0.10 per trade)
= $1,200 per year!

How would you like to put an extra $1,200 dollars in your pocket each year? (If you trade more or less often, or if you trade more or fewer shares, you can adjust the calculation for your situation.)

Next week, we’ll look at some ways, simple and sophisticated, to improve your entries and gain that 10-cent-per-trade advantage. Until then…

Today’s TU Tips & Tricks

• How do you make the entries better for your newsletter or system? The key is to understand the beliefs upon which the system or newsletter are based. Dig into why this trading or investing strategy works. If you understand this, you have a great chance of making better entries, especially with the techniques that we’ll show you next week.

The Chart of the Week

Last week in Trader’s U E-Letter #139, we looked at the daily chart of Research In Motion (Nasdaq: RIMM). Now, with a week of market data behind us, let’s look at what drew my eye to this chart in the first place. Pointer “1″ on the chart shows RIMM in a steep decline from recent highs. Pointer “2″ shows a four-day consolidation period - a time when the stock was trading in a narrow range after a strong directional move.

I like to find these consolidation periods. The probabilities are in our favor that when a stock breaks out of these short-term pauses (either up or down), it will continue strongly in the direction of the breakout.

In the case of RIMM, the price never traded below the consolidation period lows, and then broke out through the top of the consolidation range. From there it has made a strong move up and could be on its way to test the recent highs of $85. ~ D.R.

Great trading,

D.R.