My dislike of TV is due to the medium being constrained by its revenue model. It must be aimed at a broad audience due to its high cost structure. Unlike the Internet, which is an inherently cheap medium, TV cannot afford to pass up potential revenues.
The wide focus means an emphasis on short, easily digested sound bytes and simple explanations for everything, not just financial news. However, in the stock market, as in life, a lot of what happens cannot be explained simply and we don't know the explanations for many things. So, those sound bytes are never the whole truth; they are often not the truth at all.
Regardless, day-traders, who form the bulk of market-programme audiences, want simple explanations. An honest answer like "I don't know why stock X has moved 1.5 per cent today" is unacceptable. Nor can one offer a trading strategy with a full complement of stop losses and caveats. There is simply no time. Yet, no trading strategy is complete without stop losses and a few other factors that are simply never brought into programming. Hence, I avoid being on market-related TV shows if I can help it.
Misplaced priorities
Most traders concentrate on entry points and target prices. In reality, entry points are much less important than they seem and setting price targets is a flawed way to trade. There are many different methods of calculating a potential entry point and they can all generate money. I set price targets when offering short-term potential trades only because the broad audience requests it.
I don't set price targets when trading my own account or working with a serious client. I always set stop losses and I spend a lot of time working out the ideal position size. Those two factors are actually far more critical to making money in the long run.
Entry points could consist of simple breakouts above or below the high or low respectively of a given period. They could consist of movements above or below a moving average of a given period. They may consist of oversold or overbought indicators reaching certain levels. The time periods depend on the individual trader's preferences. A day trader may look at breakouts of three-day duration; a position trader might look at 35 days. Similarly you could set a moving average of anywhere from three days to 200 days, depending on the timeframe you want to trade.
All these methods work some of the time; they fail some of the time. Since they do fail roughly as often as they succeed (for reasons we don't understand or cannot predict), it is vital to set stop losses. It is equally vital to calculate acceptable position size.
This is not difficult. You could be prepared to lose 1 per cent of your capital on a given trade or you could be prepared to lose 5 per cent. Calculating backwards from there, you can assess the volatility of a given counter and its lot-size etc., and set a stop-loss and position size.
Again, targets are actually set automatically for a day-trader. Most stocks and all commodities have daily limits. Stocks available in the derivatives segment don't. But they do have patterns of average fluctuation. Therefore, the limits are set by the timeframe. If you trade over longer timeframes, why set a target and cut down on potential profits? Just move the stop loss up if you're in the black and hope that the position continues to generate more profits instead.
None of the above is rocket-science. The data required to do the calculations is easily available. So are programmes that will actually do the calculation at a mouse click if you lack the expertise to set up the calculations yourself. Nor does any of this cost very much - the data is available for free.
Taking the easy path
But most traders seem to consider it too much of a bother to make these simple calculations. It is much easier to simply watch a set of recommendations onscreen and trade those. It is even easier to follow the khabar as told by a total stranger, who has in turn heard it from another stranger.
Very few traders set stop-losses, even fewer work on sizing exposures properly. As a result, most lose money. They would do much better if they switched off the TV set, picked a few liquid stocks at random, and worked out stops and position sizes. It took around 750 words to explain this. You will rarely get the chance to speak more than 50 at one go when the camera is rolling.
This article was originally published on August 27, 2010.
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