The Trader's U E-Letter: Issue #165
Wednesday, December 7, 2005 The Curse of the Low-Quality Trade: Lots of Activity, Little to No Profit.
by D.R. Barton, Jr.
Chairman, Trader's U
Thanksgiving Day at the Barton house was a celebration of gratitude - for good food, great family… and fun football. The Barton family game was spectacular, as always - amazing catches, death-defying runs, and a liberal bending of the rules to suit the needs of the situation. But it wasn't the only exciting game that day… The Dallas Cowboys and Denver Broncos produced a thriller as well. Two well-matched teams battled back and forth for four quarters. The contest was so even that the outcome could not be decided in regulation play - overtime was needed. We all love a battle of closely matched opponents - except when we're trading. When we enter a trade or investment position, we want the odds grossly in our favor. A battle where the market's bulls and bears are evenly matched is of no interest to the seasoned trader or investor. Yet, people still take trades where they have little to no edge, every day. We take these marginal trades for various reasons - none of which are useful for trading and investing. Low-Quality Trades: Lots of Activity, Little to No Profit Have you ever taken a trade or gotten into an investment that you knew was not that great as soon as you entered? I'm sure that you recognize it - one of those trades or investments that didn't quite meet all of your set-up and entry requirements, but you took it anyway. I call these "low-quality trades." These are the positions that even the most experienced professional finds on his trade blotter every once in a while. They are the "fodder" of the trading industry. I really like that word - fodder. Webster defines it this way: fodder (n): inferior or readily available material used to supply a heavy demand And that's just what "low-quality trades" are. They are inferior to the high-quality trades that we all long to make each time we open a position. And they certainly are readily available - you can take a low-quality, coin-toss type of trade any time you like. But the key for traders and investors who find themselves taking low-quality trades is found in the last part of Webster's definition - "used to supply heavy demand." When you take a trade of dubious quality, what demand in your life is it supplying? Why are you taking a trade that doesn't measure up? - Are you bored?
- Do you need the action of trading, even at times when a high quality trade doesn't exist?
- Do you believe that success only comes from hard work or furious activity?
- Are you frustrated by your last trade or trades, and trying to "take it out on the market?"
- Are you trying to make up for losses that you took earlier in the day, month or quarter?
- Does your broker need some new equipment for the family yacht?
Finding the underlying reasons that explain why you're taking marginal trades is the beginning of the cure! Next week, we'll talk about the real costs of taking low-quality trades, and then we'll follow up with some tools that you can use to help you "just say no" when you're confronted with the urge to take a low-quality trade.
Today's TU Tips & Tricks
- I made a sarcastic remark about brokers' big boats in the article today. But if you want a scathing look at the inner business of Wall Street, then you must read Where Are the Customers' Yachts? by Fred Schwed, Jr. It is very well written, witty and a truly enjoyable read. You can find it here.
- On Saturday, I spoke on the airwaves with Adrienne Mitchell, an anchor for the WTOP Radio Network in the Washington, D.C. area. She tossed a few general knowledge softballs up about savings and holiday spending. Listen to the interview here (mp3 file).
The Chart of the Week 
The S&P 500 is still acting weakly for the near term. Remember that last week, I didn't like the bad reaction to moderately good retail news after Thanksgiving. Yesterday, the market made a new multiyear high, but the bulls failed to support it and the markets fell and finished very weakly. Add a divergent MACD to the mix and we have a market that doesn't look like it wants to go up any time soon. Great trading, D.R. Related Articles: Trader's U Archive | 
