The Kirk Report

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. :)

Trading Rules: Strategies For Success

Earlier this month a member sent me a copy of Trading Rules: Strategies For Success by William F. Eng. And, I have to say, I found myself enjoying the book quite a lot and I highly recommend it. Mr. Eng covers 50 rules and most of them are real gems:

1. Divide your trading capital into ten equal risk segments

2. Use a two-step order process

3. Don't overtrade

4. Never let a profit turn into a loss

5. Trade with the trend

6. If you don't know what's going on, don't do anything

7. Tips don't make you any money

8. Use the right order to get into the markets

9. Don't be whimsical about closing out your trades

10. Withdraw a portion of your profits

11. Don't buy a stock only to obtain a dividend

12. Don't average your losses

13. Take big profits and small losses

14. Go for the long pull as an outside speculator

15. Sell shorts as often as you go long

16. Don't buy something because it is low priced

17. Pyramid correctly, if at all

18. Decrease your trading after a series of successes

19. Don't formulate new opinions during market hours

20. Don't follow the crowd - they are usually wrong

21. Don't watch or trade too many markets at once

22. Buy the rumor, sell the fact

23. Take windfall profits when you get them

24. Keep charts current

25. Preserve your capital

26. Nothing new ever occurs in the markets

27. Money cannot be made every day from the markets

28. Back your opinions with cash when they are confirmed by market action

29. Markets are never wrong, opinions often are

30. A good trade is profitable right from the start

31. As long as a market is acting right, don't rush to take profits

32. Never permit speculative ventures to turn into investments

33. Don't try to predetermine your profits

34. Never buy a stock because it has a big decline from its previous high, nor sell a stock because it is high priced

35. Become a buyer as soon as a stock makes new highs after a normal reaction

36. The human side of every person is the greatest enemy to successful trading

37. Ban wishful thinking in the markets

38. Big movements take time to develop

39. Don't be too curious about the reasons behind the moves

40. Look for reasonable profits

41. If you can't make money trading the leading issues, you aren't going to make it trading the overall markets

42. Leaders of today may not be the leaders of tomorrow

43. Trade the active stocks and futures

44. Avoid discretionary accounts and partnership trading accounts

45. Bear markets have no supports and bull markets have no resistance

46. The smarter you are, the longer it takes

47. It is harder to get out of a trade than to get into one

48. Don't talk about what you're doing in the markets

49. When time is up, markets must reverse

50. Control what you can, manage what you cannot

While this may provide a sense to what is covered, you really must read the book to fully understand, appreciate, and apply these trading rules. Fortunately, even if you don't like reading trading books or don't have a lot of free time to spare, each rule is about five pages in length and takes around 10 minutes to read on average. Reading one rule per day (perhaps at the start of each trading day) will be a worthwhile addition to your daily routine.

Trading To Win

One of the biggest challenges that I face within my own trading now versus in years past is that I have a great deal more to lose. It has taken me some time and quite a lot of hard work to accumulate the assets and raw firepower that I have at my disposal and I don't want to lose that advantage. Admittedly, it has become quite easy for me to let my cash sit, accrue interest on the sidelines, while I cherry pick opportunities I see from time to time.

Yet, as any experienced trader will tell you, fear of failure can be a trader's worst enemy and something we all deal with at different levels. Experience and skill in this game doesn't eliminate this issue. Doug Hirschhorn recently wrote an excellent article at TraderDaily that certainly makes this point quite clear:

"Not long ago, I went to the Seminole Hard Rock Casino in Florida to watch Michael Moorer, two-time heavyweight champion, possessor of a devastating left hook and a former client of mine, launch a comeback. His opponent: a monster journeyman named Cliff Couser. Moorer, nearly 40, looked out of shape and vulnerable; Couser looked like a taller version of Mike Tyson in his prime.

Sitting ringside, I struck up a conversation with the guy behind me, who, as it turned out, was Couser's manager. Though our chat was brief, it became clear to me that Couser’s camp was more concerned about surviving the fight — simply not losing — rather than winning it. Mental advantage, Moorer. And I doubt he even knew it.

One minute and twenty-six seconds into the first round, Couser was lying flat on the mat. I couldn't help but wonder: Did he lose because he lacked talent? Or was it because he was more afraid of losing than he was focused on winning?

When athletes are consumed by not losing rather than by winning, the game is over, often before it has even started. The same precept applies to trading. As crazy as it sounds, most traders aren't making the money they could be — and the reason, I'd argue, is the fear of losing it. Traders are far too worried about giving money back. This paralyzing phobia can transform talented, elite professionals into disappointing underperformers.

How many times have you been up in a trade and started to think about the money? Your head tells you to bank it quickly and then play it safe. After all, you made your mark for the day, or even the week, so your job is complete. That's not the mark of a trader; that's the mark of an accountant.

Trading is an occupation based on fleeting moments of opportunity. They're here one second, gone the next and entirely out of anyone's control. The best traders love this, and even crave it. When the action is on, they're prepared and trained to strike hard, as they have no idea when the next great trade will appear.

It's akin to fishing: You can be out on the water all day and not get a bite, but when you hit a school of tuna, you better have your rods ready and baited to maximize the opportunity. All that matters, ultimately, is how many pounds of fish you caught, not how long it took to reel them in.

"Sean" is a client of mine, a trader who generally does the right thing on the job. He sets goals, takes losses and makes only high-quality trades — but he fails to get big when he really needs to. After years of sitting idly and watching less-talented traders make vastly more money than he did, he finally concluded that he wanted more — not because of greed but because he knew he was capable of taking his game up a notch.

After working with Sean to isolate both the issue (his fear of losing money) and his core motivation for seeking a change, I was able to implement a structured behavior-modification program for him. The key was forcing him to step outside his comfort zones. We developed guidelines that would require him to increase his position size. We also agreed, should he fail to follow the rules, to impose severe consequences. The purpose was to make him more leery of fecklessly staying in his comfort zone than of giving money back.

It took a few months, but Sean was able to achieve a 250% profitability increase. The goal of our work together was not to change his personality or eliminate his fear. After all, we are who we are, and Sean is Sean. He will always be conservative, seeking comfort and favoring stability. But now he trades to win rather than not to lose."

Learning How To Trade

I read the The Worden Report every morning which is bundled automatically with TeleChart. The following is a snippet of one report from last week where Don Worden shares an email from one of his subscribers:

"Back in 1982, while I was within the process of training to become a stock broker, I was on the floor of the AMEX where I met an options specialist. I had been trading options since 1974. So, to meet an option's specialist to me was like meeting a rock star. Needless to say, I was full of questions and as one question lead to the next, the exchange closed trading for the day at which point I was invited to join my new mentor for a beer.

There are two very distinctive things I remember from that encounter. The 1st was the reply he gave me when I asked how he made his money. With beer in hand, he said "I never make big bets." I lean a little one way, as he tilted to the left, or I lean a little the other way as he tilted to the right. He repeated this swaying until his beer was gone.

After ordering another round, he turned toward me and said, "I'm going to give you the best piece of advice anybody will ever give you. I want you to take a $100,000 paper option account and try to lose all of the money." I started to laugh. He did not. He then said, looking me straight in the eyes, "You will not be able to do it." He said being a good trader is not about making money. Making money is about being a good trader. And being a good trader is about having the right rules to make a decision and then following those rules. So when you try to lose money, you are just as likely to fail as you are when you try to make money. The difference being in this exercise is to separate the two motivations.

Then he started to laugh and concluded his thought trend by saying, "When you finally have figured out how to lose consistently, and your paper portfolio is gone, you are now ready to trade. Simply flip the rules around and you'll have your money making trading system. And always remember one thing - that there are two sides to every trade. You just have to learn on which side to lean." - Paul