Don't Ignore the Role of Luck

 | Dec 23, 2011 | 10:55 AM EST  | Comments
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Stock quotes in this article:

wwww

,

vhc

,

invn

,

ftk

We have some low-volume volatility to start the day. After some early flipping, the bulls are pushing once again. There actually are some signs of speculative action in small-caps which is something that has been missing from this market for ages.

I have positions in a few things I've mentioned lately, like Web.com (WWWW), VirnetX (VHC), InvenSense (INVN) and Flotek (FTK), but I have some medical appointments this afternoon so I'm not doing any aggressive adding. I just want to stay very short term and try to book some profits when I have them. I'm not thinking long term at all right now.

This morning I was contemplating an advertisement for an online broker I see on television quite often. A trader says, "Luck? I don't trade on luck." as a way to promote the software tools that the broker offers. I always end up thinking, "What a great idea. Just give me a tool that helps me avoid that bad luck that seems to occur so often."

It would probably be better if they used the word "hope rather than "luck" in this advertisement, but it is more dramatic this way. Traders should always have a rational basis for the trades they make rather than just rely on blind hope, but they'd better be aware that there is no way they will ever be able to determine what Lady Luck might do.

I take luck so seriously that I often think of trading as "luck management." It is inevitable that we are going to be surprised by news. Every trade we make is a gamble to some degree, since we can't predict the future. But what makes us astute speculators rather than wild gamblers is that we develop ways to manage the risks that we are taking. Speculators don't just dump it all on red, cross their fingers and spin the wheel. They make sure that bad luck doesn't kill them, and they try to take advantage of good luck when it strikes.

Don't deny the role of luck in trading. We have to deal with it constantly; the key to success is to manage it effectively.

I have to head back to the hospital today to deal with some minor setbacks on my hearing surgery. I should be back by the close, but if I'm not, I want to wish you a Merry Christmas and happy holidays.

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