The Kirk Report

Goals For 2010

Since the start of the year, I have shared several reports that focus primarily on looking back for perspective and for help as we start the new year. But from now on, we will shift our focus where it really needs to be - the future and what it is really going to take for us to reach the goals we've set for ourselves.

In the membership survey I asked the following: "What are three of your most important goals for 2010?" I received hundreds of ideas many of them were truly inspiring. But, unfortunately not all. In fact, some of the goals I think required a bit more thought. Some examples include:

• Eliminate emotion: Markets are emotional and so are you when you have your money on the line. The good news is that you can train yourself to use your emotions as an asset. Skilled traders and investors learn to recognize when and how their decisions are dominated by fear and greed and adjust accordingly. You will never get rid of emotion and your goal should not be to remove it. Instead, learn to recognize when you're making emotional-based decisions AND then take steps to control and modify the behavior.

• Not lose money: Losing money is not the issue. When taking risk, you are going to lose sometimes. In fact, you may even lose frequently. The key, however, is to win more than you lose and to lose less when you're wrong. At the same time you must learn how to make more money when you're right. Money management skills such as proper position sizing, only trading low/risk high/reward setups per your strategy, and utilizing preset stops based on ATR to prevent large-scale losses will help you achieve more success.

• Work harder: For some of you, this is a big issue. You spend your time looking for hot tips and easy answers without putting any concentrated effort into your trading and investing. But, for many who read The Kirk Report, this is not always the problem. Instead, it is being focused enough to develop a strategy that suits your personality which takes full advantage of your skills is not to be underestimated. If you're going to work harder, that's where you need to devote your time and energy in 2010.

• Be patient: Your personality simply may prevent this no matter how you may want to change it. Some people are more patient than others by design. The important thing is to structure your strategy according and adopt a method that take this into account. Some trading and investing methods require more patience than others. That said, if you desire more patience, a goal to perhaps set for yourself is to design a set of rules and checklists that will help you approach your strategy in a more consistent manner. People become more impatient when they don't have rules to follow and are simply trading and investing with no plan. In addition, I've personally found that incorporating daily meditation and intense physical exercise in the daily routine helps me be much more patient than others as unhelpful uncontrolled energy is spent in a more productive manner that helps me focus and think more clearly.

• Consistent positive returns: The market is inconsistent and your returns will be inconsistent. Unless you are Goldman Sachs or have an edge no one else on Earth has been able to discover yet, your returns will be correlated to market conditions and that means there will be some level of inconsistency. Expect that, prepare for it, and trade accordingly. Our goals should never be tied to seeking "the holy grail" but simply producing above average market performance as consistently as possible within the risks that we find acceptable and within the time frame that is appropriate for us.

• Make 5% a day irrespective to market conditions: Good luck! We are all subject to market conditions and the best traders will understand that you will often make 90% of your money in 10% of the time you spend. The market will go through periods of not offering many good setups and you've got to be patient when that happens. At the same time, preparation and being ready for opportunity is equally important. In my experience, the trader that will be wiped out the fastest is one that will set daily goals so high that requires such risk and leverage that they blow themselves up in the process. Setting a goal to make 5% of a day is a good way to go down that well-traveled road to failure. Resist the urge to structure your goal system to performance goals that require super human behavior because you're not super human.

Remember, your goals need to be as specific as possible with a detailed plan of action to achieve them shared with someone who will hold you accountable. Do that, and you'll provide yourself a good chance of reaching whatever it is you wish to accomplish this year.

Also, in addition to creating flow charts as I have talked about before, you may find these free goals tracker worksheets quite helpful in 2010. I use these same worksheets in my mentorship program and you'll may find it helpful as well to manage and track your progress this year. We also use a nifty service called Toodledo.

Good luck to everyone and their goals whatever they may be in 2010!

Listen To That Inner Voice

All of us have that inner voice telling us what we should be doing, even if we later decide to ignore it or do something different.

Case in point, last Sunday at Costco we were shopping for food supplies and my wife asked me if we needed any batteries because they had them on sale. I told her no at first because I was trying my best to stick to our weekly budget and knew that batteries especially in the quantities Costco offers are pricey. However, I then changed my mind because my inner voice reminded me that I hadn't changed the batteries on the smoke detectors throughout our home since we moved in last December.

That was the last time I thought about that until at 2:AM this morning when a loud beeping sound on not only one, but three smoke detectors throughout our home, woke us from our peaceful sleep. Surprise, the batteries had run low and needed replacing!

How in the world my subconscious knew that was going to happen amazes me and I paid the dear price for not replacing the batteries I had purchased over the weekend when we returned home.

For me, it served as yet another good reminder of how important it is to listen and follow our inner voice. As traders and investors, this is especially important. All of us know when we choose to violate our own rules, ignore our inner voice and let emotions rather than facts cloud our judgment and our decisions. But we do it anyway because as humans we are fallible by nature. After all, that's what makes us human. If everyone in the world did exactly what we are suppose to do, it would be a boring place and there would be no opportunity in the market because it would be efficient at all times.

So, I share this story this morning in order to remind you that 1) if you haven't changed the batteries in your smoke detectors for awhile, do so now before they wake you up when you really need your sleep, and 2) to be cognizant of your inner voice so that you can be alerted to problems that you may not have consciously considered. That inner voice can often help you spot problems long before you have time to deal with them. When we ignore our own inner voice, we do so at our own peril.

10 Rules

I'm always looking for ways to improve my trading and, in recent years, I've been reading more on applied sports psychology. The reason? The principles offered by many of those who study sports psychology can be applied directly to trading.

Dr. Bob Rotella is a famous sport psychologist for professional golfers (including Padraig Harrington). Recently he wrote an interesting article in Golf Digest offering 10 Rules to help golfers achieve better performance. The concepts outlined there are as helpful to a golfer looking to win as it is a trader looking to achieve peak performance in the market. To see what I mean - let's review each of Bob's 10 rules and my own interpretation of Bob's comments as they relate directly to trading:

Rule 1: Believe you can win. If other traders can do well in the market, so can you. However, if you don't have enough courage and confidence in yourself, you will never achieve success. The events over the past year have tested many people in this regard and some now think the game is rigged against them. Nothing could be farther from the truth as opportunities remain. Those who will win in the markets first start by believing they can do it. Then they back up that strong belief with serious hard-work and determination to find their trading edge. However, it starts with you first having faith in yourself.

Rule 2: Don't be seduced by results. You must stay in the present and focused on executing each trade to the best of your ability. Don't let yourself think about how much you're going to win (or lose) in the market or how great of a trader you are or not, but instead focus on what matters most - each and every trade you make. Do that and the results will take care of themselves.

Rule 3: Sulking won't get you anything. The worst thing you can do for your prospects of winning is to get down when things don't go well. If you start feeling sorry for yourself or thinking the trading gods are conspiring against you, you're not focused on the next trade. Good traders readily accept their mistakes and move on to the next trade. They don't let one bad trade carry onto the next one.

Rule 4: Beat them with patience. Every time you have the urge to make an aggressive trade, go with the more conservative one. You'll always be OK. The moment you get impatient, bad things happen. In tough markets, stay patient and let others beat themselves.

Rule 5: Ignore unsolicited advice. You'll have lots of well-meaning friends and experts who want to give you advice. Don't accept it. In fact, stop them before they can say a word. Their comments will creep into your mind when you are trading and conflict with your own strategy. If you've worked on your game, commit to the plan and stay confident with it.

Rule 6: Embrace your personality. The key is to find what works best for you. There are many approaches out there, but there is only one trading approach that will utilize your best skills and talent to create and sustain an edge. The worst mistake you can make is to simply embrace a strategy of someone else that doesn't match your own personality and strengths.

Rule 7: Have a routine to lean on. Every trader should follow a mental routine on every trade. It keeps you focused on what you have to do, and when the pressure is on, it helps you manage your nerves. You may not have control over the market, but you have control on how you trade the market. Having a routine will inject consistency that will keep you calm under pressure.

Rule 8: Find peace in the market. The market has to be your sanctuary, the thing you love, and you can't be afraid of making mistakes. Yes, you'll experience both good and bad times, but you must enjoy and revel in the challenge.

Rule 9: Test yourself. Don't look for easy trades and setups at all times. Test yourself by working hard trades and difficult markets in order to test and improve your skills. For example, if you're uncomfortable with trading options, spend a month just trading options. If you're uncomfortable with shorting stocks, spend a month shorting stocks. We only get better if we constantly test what we think is most difficult.

Rule 10: Find someone who believes in you. Having confidence in yourself is important, but it helps to have someone who believes in you, too, whether it's a spouse, a friend, a teacher, or a mentor. No man's success can be entirely attributed to his own actions. You must surround yourself with people who believe in you at all times.

This is a powerful set of trading rules that will serve you well.

Learn How To Breathe

Recently one of my mentees asked me a simple question - "How do you remain so calm during the trading day especially when there is so much money on the line?"

My first instinct to reply was to tell her that I never trade beyond my limits (mental or financial), but there is much more to it than that. For me, trading requires a sense of both calm and confidence that takes time and serious effort to acquire and maintain.

I discovered some time ago that one of the most simplest ways to remain calm and in control is to practice basic breathing exercises throughout the trading day. Years ago when I was back in law school and extremely stressed out over the final exams, a dear friend taught me several techniques that I still use every day. Others, like Dr. Weil, have said they've seen simple breathing exercises significantly improve people's lives and I have seen the same for everyone I've recommended this to as well.

To help get you started, Dr. Weil has provided instructions on three breathing exercises that I highly recommend you try out for a period of time. In fact, at least three times every day I engage in the following exercise which Dr. Weil provides these instructions:

The 4-7-8 Exercise

This exercise is utterly simple, takes almost no time, requires no equipment and can be done anywhere. Although you can do the exercise in any position, sit with your back straight while learning the exercise. Place the tip of your tongue against the ridge of tissue just behind your upper front teeth, and keep it there through the entire exercise. You will be exhaling through your mouth around your tongue; try pursing your lips slightly if this seems awkward.

• Exhale completely through your mouth, making a whoosh sound.

• Close your mouth and inhale quietly through your nose to a mental count of four.

• Hold your breath for a count of seven.

• Exhale completely through your mouth, making a whoosh sound to a count of eight.

• This is one breath. Now inhale again and repeat the cycle three more times for a total of four breaths.

Note that you always inhale quietly through your nose and exhale audibly through your mouth. The tip of your tongue stays in position the whole time. Exhalation takes twice as long as inhalation. The absolute time you spend on each phase is not important; the ratio of 4:7:8 is important. If you have trouble holding your breath, speed the exercise up but keep to the ratio of 4:7:8 for the three phases. With practice you can slow it all down and get used to inhaling and exhaling more and more deeply.

This exercise is a natural tranquilizer for the nervous system. Unlike tranquilizing drugs, which are often effective when you first take them but then lose their power over time, this exercise is subtle when you first try it but gains in power with repetition and practice. Do it at least twice a day. You cannot do it too frequently. Do not do more than four breaths at one time for the first month of practice. Later, if you wish, you can extend it to eight breaths. If you feel a little lightheaded when you first breathe this way, do not be concerned; it will pass.

Once you develop this technique by practicing it every day, it will be a very useful tool that you will always have with you. Use it whenever anything upsetting happens - before you react. Use it whenever you are aware of internal tension. Use it to help you fall asleep. This exercise cannot be recommended too highly. Everyone can benefit from it. - Dr. Weil

Do yourself a favor and do this three times every day for the next three months. (I do it 5 minutes before the opening bell, again around lunchtime, and after the closing bell). To achieve the most benefit, it takes several months of practice and, if you do this, you'll see big improvements in your overall levels of stress, your blood pressure will go down, and ultimately your trading and investing decisions will see significant improvement. In fact, this very well may be the most important piece of advice I share with you this year!

Remember, all things must be in harmony for you to achieve the level of success you desire. Taking care of your body is a component of this that few traders fully understand and appreciate and these simple breathing exercises will be of tremendous help.

Sector Tracking

I'm often asked how I keep track of sector movements and, in the past, I've offered many examples. But, one free way is to simply visit Google Finance which offers a convenient sector summary which appears at the bottom of the page:

What I like most about this offering is that if you click through the sectors, you'll be taken to separate pages specific to that industry. For example, if you click on "Basic Materials," you'll see not only a nice chart for that industry in comparison with the S&P 500, but you'll have convenient links to news in the sector as well as the top gainers, losers, most actives, etc. You can also dive down into subcategories. Check it out!

Don't Lose Your Humor

Times are tough for many and all of us have different ways to deal with stress.

As I've commented upon before, my favorite ways are to exercise more, get more sleep, and make sure that I stick to my normal work routine. In fact, I also make every effort to resist the urge to work longer hours and watch business-related TV, though I know most do the exact opposite during these times.

Beyond that, I also think it is important to keep good humor. We all take the market, ourselves, and money in general far too seriously. Yes, I know, there is real money on the line and it hurts when we lose money, but if you can't roll with the punches and maintain a good perspective through thick and thin, then you have no business trading or investing one dime in this or any other market. This is a tough game and only those who are able to maintain perspective thrive over the long haul.

As for today, to assist you in making sure you at least smile on yet another stressful day, be sure to visit one of my favorite websites in times of despair. I'm sure it will put at least one smile on your face today.

Your Comfort Zone

High achievers (in life and in the market) frequently step outside their comfort zone. That's the way they learn and make progress. At the same time, they also expect to fail (more often than not), but do not see failure or mistakes they make as problems, but as educational experiences.

The natural instinct of all of us is to seek safety and shelter, unfortunately at the exact same time when we should be aggressive and risk tolerant. Those who do well in the market understand this natural human tendency and they consistently work against it when others are doing the exact opposite.

The key for today is to first understand what your comfort zone is and then take a step outside of it. Remember, the market doesn't reward comfort and decisions that "feel" good to make. That's the law of nature and it is true of this market like any other.

Trading Lessons From Nicolas Darvas

Nicolas Darvas has inspired traders for many generations. His book, "How I Made 2,000,000 in the Stock Market" is one that you'll find on many recommended reading lists including my own. While some have argued that much of Darvas' success had to do with lucky timing, his books are still widely read and for good reason.

A lot of traders can identify easily with Darvas because he went through the process of learning how to trade much like most people do today. Darvas began by first looking for the "secret" to the market. And, just like all of us have found, after finding no success from trading on the stock tips of others including brokers and expensive newsletters, Darvas figured out that he ultimately had to develop a trading system on his own. He accomplished that feat by committing himself to years of study of the market and from learning from his own mistakes. His determination, perseverance, and constant self-evaluation offers an excellent model for all traders to follow.

In continuing a series of posts where I share my notes I've taken (and refer to from time to time) after reading the books and methods of others, here are some things you may find of interest about Nicolas Darvas and his approach:

Trading Lessons From Nicolas Darvas:

• There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace


• "You can never go broke taking a profit" is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times


• There is a "follow-the-leader" style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader


• The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle


• It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. "You have to find out what the public wants and go along with it. You can't fight the tape, or the public."


• One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!


• Losses are tuition on Wall Street. Learn from them.


• You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. "I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?"


• Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful


• The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time


• The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it


• Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price


• It is difficult to be profitable on the short side of the market versus the long side - trading in rising or bull markets will give you the best chance for success


• Most, if not all stocks, will follow the general trend of the market


• To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes


• Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time


• Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is "no other reason worth considering."


• Darvas used his "box theory" to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box). For more info on using Darvas boxes, visit these two websites: GerryCo & Sethi


• For new trades, Darvas used "pilot buys" which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position


• He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. "I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality."


• Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. "I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride."


• Trade only when the environment is in your favor. Darvas' strategy kept him out of poor and bear markets because he wouldn't trade stocks that didn't fit his requirements which were only found in raging bull markets


• Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock


• While his trading approach was very technical, after studying the market's winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important


• Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb's books & approach served as key inspiration


• No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away

Searching For Answers

Many stocks have gone down recently and whenever that happens I receive numerous emails along the lines of "My stock is down - do you know why?"

In general, there are three reasons why stocks fall: 1) a company-specific news item (like earnings, rumors, analyst revisions, etc.), 2) a sector-specific news (like a company in the same sector reporting significant good or bad news), and 3) market-specific situation (many stocks fall in a correction whether deserved or not). When trying to figure out if a stock has been damaged due to some news-related event, there are five main sources I rely on:

• Briefing.com: Their ticker search is fast and helpful. That will pull up any news-related event for most stocks (upgrades, downgrades, earnings, etc.). However, if the stock is not widely followed, it may not show up.

• MarketWatch: This service is free, but if you want to know the latest buzz, their search engine can prove useful. I just usually enter the ticker symbol and look over the links presented.

• The Fly On The Wall: Works the same way as Briefing.com, but there are times that one will pick up a news-related item that the other has not. There is a bit of an overlap, but one of the main reasons I use the Fly is its tight integration with Quotetracker. Essentially, any news-related item on any stock I'm watching tags an automatic alert which I can access through a simple click.

• PR Newswire: In some stocks, especially ones that don't receive a lot of attention from Wall Street or analysts, you'll have run a search at the press release websites. This is the most time-consuming option, but if a stock is really acting up, you may want to do some searching there.

• EDGAR Database: It takes time and a bit of knowledge about what to look for, but the EDGAR database is also a helpful resource. Over the past few years, their search functions have really improved making this a useful resource.

Seven Deadly Sins of Trading

One of the distinct privileges I have from doing this website is that I receive a lot of free books from publishers and authors who hope that I'll mention it in one of my posts. On average, I receive about two books per week, so you can imagine there's no lack of reading material on trading and investing in the Kirk household.

At a minimum, I do try to skim over most of the books I receive and it is always interesting to read others perspectives. For example, in one book I received recently, Boris Schlossberg wrote a chapter called "The Seven Deadly Sins of Trading." I'm a sucker for these kind of chapters, so I had to take a look to see what the author had to say. According to Boris, the seven deadly sins were:

1) No good reason to trade
2) Chasing price
3) Not letting profits run
4) Seeking high-probability trades
5) Assuming the trend is linear
6) No averaging down
7) Overtrading

I agree with most of these, especially number two (chasing price), number six (no averaging down) and number seven (overtrading). However, I did have a problem with one of his deadly sins - seeking high-probability trades.

Essentially, Boris thinks that since master hedge fund pro Steve Cohen (who runs one of the most successful hedge funds in history) makes the most money on only 5% of his trades, you should trade more like Steve and find "seek trades with greater payout potential but less accuracy." I'm not sure I agree with that.

While there is something to be said for spreading your bets and that every shot not taken is a missed opportunity, on the other hand everything I've learned is that picking your spots carefully makes a huge difference in the long run. Granted, I agree with his view that you should avoid "low-payout/high-probability situations." But, at the same time I do not think that seeking high-probability trades should qualify as a deadly sin.

It is always a tough balance between being too selective and not selective enough. In fact, I'd readily admit that I've been too selective in recent years and have missed opportunities to make money. But, I also put myself in the position where I don't lose money very often which is a higher priority for me at this point. We all have to trade in a way that matches our goals and risk tolerance so what is right for me, may not be right for you. Which is also why everyone's deadly sins will be unique and will prey on their own individual weaknesses.

After reading the chapter, I must also tell you about a funny discovery. Since I'm not familiar with Boris to any great extent (and I'm sure he is very good at what he does), I had to look him up to see if I could find other stuff Boris had written that I would find of interest. Very shortly within my research, I discovered that Boris is selling a book titled "High Probability Trading Setups." I had to smile when I saw that title in a book by a trader who also thinks that seeking high-probability trades is also a deadly sin. :)