Damons Prefered Trading Strategies

I am often asked what I trade. "Are options better, or are stocks?" You can answer that question for your self. If you want to know how a pro does it, I will break it down and give you a sense of what makes the Smart Bomb tick...



I normally have between 5 and 10 active trades in a single account at any given time. The break down looks a little something like this.

• 5 long stock positions
• 3 synthetic long stock positions – 6 to12 months away from expiration
• 2 short term option plays. Usually single leg (directional) straddle, strangle, ratio spread or spread that I have legged in to.

I have found that this fits my style the best. The belief that one strategy is superior to another is simply not true. I used to think that I had to trade nothing but options to crank out superior returns. I tend to shift my thinking a little from time to time, but what you see here is a reflection of my style. I personally have associates that produce stellar returns using options only. I also have seen others replicate those returns by simply buying and selling stock.

This may come as a shock to some, but I have never seen one shred of evidence that would substantiate a claim that “option traders make more money than stock traders”

The best traders find a good mix that matches their own “Inner Holy Grail” and go with that. My holy grail is to trade stocks primarily- with options as a supplement.

BAM! There you have it.

The recent trade on ABM and the topic of 2 previous posts was a plain and simple long stock position (I bought shares) and I will buy more when it pops again. Here in the big time we call that a "scale in." That's a different subject all together.

The Super Bowl Indicator

OK- I realize that I am a bit of a Jonny come lately with my commentary on the outcome of the super bowl. For those who don’t know what I am talking about, please go buy a copy of Barron’s Dictionary of Financial Terms and look up the Super Bowl Indicator. Sorry, I don’t have time to explain it.

I have seen all kinds of chatter this year from people who know the legend and those who don’t. Anyhow, here is the bottom line: It doesn’t matter!!! Are all the talking heads listening? IT DOESN’T MATTER!!! The funniest thing is that if you know the indicator and all the lore that surrounds it, you also know that according to the legend, the Super Bowl didn’t determine the posture for the coming year. When the semifinals were over, the fate of the market was sealed. Both teams that played in the big game last Sunday are teams that, if victorious, will cause the market to rise in 2007. So again, it doesn’t matter. Oh, and even if it did matter, it still doesn’t matter. Indicators are right until they are wrong.

Nothing takes the place of price trend in the major indices! I will not apologize for it. Watch the market move and trade accordingly. I am so very tired of listening to people pontificate on market internals. Moreover, it means nothing - or did I say that already?

Listen! Dwellers of the Trade-o-sphere! When all of my bullish trades get stopped out, I will rethink my posture. For now, let us just relax and ignore the noise.

ABM Breakout Continued...

As it turns out, ABM did confirm the "nearly perfect breakout" from Monday. Any time a stock hits a new 52 week high on good volume I give it one additional day to confirm. I actually purchased this stock on Tuesday morning. I like to keep it simple and give my self plenty of room to retrace. I bought in at $25.38 and I placed my sell stop at $23.75

What is the next step? In most cases I am looking to own the stock for as long as the trend holds up. I am not using a trailing stop loss. I always adjust my stop loss orders after market close. I don’t anticipate an adjustment of my stop in this case for a few days or even weeks. When the stock bounces off of a new level of support I will raise my stop loss. Until then I will keep my initial stop in place.

Smart Trader, Smart Rules and Smart Results

As my first official entry on the topic of trading I wanted to do a little explaining. I have no intention of being exhaustive in this entry, but I want readers to understand a little more about me and my style. I think the first thing that needs to be explained is the name of this blog. A "Smart Bomb" is a very destructive weapon in the world of firepower, but I live in the world of trading. So I guess you could say that a "Trading Smart Bomb" is a metaphor for a trader who is strategic, accurate, effective and most importantly can hit the target. The amazing thing is not what happens when the bomb hits its target... It is the amount of planning, cooperation and discipline that it takes to get in a position to drop the bomb in the first place. I could go on for hours but lets just say that I consider trading a lot like combat. So then, a smart trader has smart rules, smart habits and smart routines. Do all this and you get "smart" results.

If you have not guessed by now I was born in 1973 hence the "73"

As far as rules go lets keep it simple for now. I certainly didn't create the guidelines I am about to present, but any trader who has been around the block a few times can tell you that being a great trader is not about reinventing the wheel. The governing principles of my trading are time tested and proven to be vital to staying in the game not to mention making money. Here are 5 rules you can't break for long (and still make money) any more than you can disprove the law of gravity without breaking your neck.

1. Trade with the TREND- Trade what you see on the graph not what you wish you saw.
2. Size your position appropriately
3. NEVER add to a looser. NEVER! NEVER! NEVER!
4. Take 100% responsibility for your trades, and trust your own judgment. Don't expect to trade like me. Only I can do that, and only you can trade like you.
5. Don't argue with the market. If you are shown a loss- take it and be glad it wasn't bigger. The winning trades are out there but you cant get in them if you are too stubborn to change your posture. The market is never wrong.

If this list is confusing you are in denial and probably need to stop trading for a while. I will elaborate in much greater detail as time goes on, but for now let those 5 rules be a foundation.

* * * NEXT WEEK * * *

I am in a holding pattern for Monday. I don't have any reservation about taking new trades but I don't see myself entering anything until later in the week when I can see what kind of confirmation I get on this bullish long term trend we have enjoyed since things turned up last summer. Now if things do pop to the upside... Here are some stocks that I think are ready to bounce off support or break resistance.

IFF-EV-COH-AMG-MLHR DAVE-URBN-ADSK-ATHR FTEK-ABM-PVH-VTIV-COL

If the market stays flat going into Monday and Tuesday I don’t expect a lot of buy signals from these picks. Either way I think they are all fit for adding to a watch list. Good Trading