Tools or the Trade?

 | May 15, 2014 | 2:30 PM EDT  | Comments
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Stock quotes in this article:

csco

,

ntes

,

acxm

,

vips

So what do you look to get out of your "research"?

Whether you spend the day reading the incredible wealth of information spread among different offerings from TheStreet.com or you watch your chosen financial television channel, or maybe even spend the day on Twitter or some other subscription service, you have to ask yourself why. Are you looking for a trade or to develop tools? These are two very different things and while they are not mutually exclusive, the distinction is important.

A trade is just that: a trade. It won't come with much of a thesis, if any, and it won't come with much in the way of a follow-up. If anything, it is likely to be some short-lived boasting about how the trader is a genius. Occasionally, there may even be a quick follow-up if the trade goes wrong, but don't hold your breath waiting for it. If this is your path, then you are making yourself a trading slave and holding your portfolio hostage even if you are making money. 

In a kinder light, think of it as buying a house sight unseen as opposed to building a house. Of course, after you buy a house, you are free to change it around to suit your needs. Often, this will come at an additional cost. When you are building a house, you can tailor it to suit your needs in the beginning, so there isn't the additional stress or costs of making the changes after a purchase has already been made. Without a trade thesis, blindly following someone into a trade is like buying that house sight unseen. Of course, you can make changes once you are in. Heck, you can even turn around and sell it right away, possibly making a profit, possibly not.

I try to make certain that I have a thesis with each trade. Still, there is a difference between trades and tools. For instance, I talked about Cisco Systems (CSCO) Wednesday being an attractive straddle trade based on the charts and the past moves in the stock, a position I've closed already. Additionally, I mentioned NetEase.com (NTES) as a name where selling straddles in front of earnings has been the most attractive play. Those were trades. Yes, they had a thesis, but they were trades I tossed out. At the open this morning, both played out very well, with NTES being the bigger winner of the two, but, in fact, either trade could have been closed for a profit.

On the flip side, I talked about trades to look at after the open. I mentioned buying CSCO at the open or if it dropped 0.5% from the open. Acxiom (ACXM) was potentially a stock to follow the direction of the open. The stock opened down, so following the trade thesis, it would have been a short looking for a 4% to 6% continuation lower. Finally, Vipshop Holding (VIPS) was one where I expected volatility and wide ranges after the open with post-earnings straddles as a possible play.

CSCO worked great as buying the open or buying 0.5% down from the open -- which ended up being only $0.03 off the day's low -- and turned out to be a profitable trade. ACXM continued down another 4% to 6%. In fact, it was down about 22.5% at midday from the lower open and there was no reason that thesis should not have delivered at least double-digit returns. VIPS held its bargain with a wide intraday range, but buying the straddles at the open hasn't been a winner at all.

But these were not trades -- at least not in the sense folks have grown accustomed to. The outlines on these stocks were tools. It was up to the individual to follow up upon these, review the thesis, develop an understanding on how -- or even if -- they worked, and to execute it on their own. This is one type of tool development. Clearly, there are many ways to develop the tools of trading, but recognition of whether you want the tools or just want the trades is the first step. Build or buy is up to you, but most folks I know are happier living with things they built than what they bought.

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