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The Top Secrets of Pro Traders

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Trading Tips of the Pros

Do Wall Street pros know something the rest of us don’t? Why are billionaire investors ahead of the curve while most individual investors are behind it?According to trader Joe Terranova, it’s because money pros regularly employ strategies that regular folk don’t even know exist.

Do Wall Street pros know something the rest of us don’t? Why are billionaire investors ahead of the curve, while most individual investors are behind it?

According to trader Joe Terranova, it’s because money pros regularly employ strategies that regular folk don’t even know exist.

In his book “Buy High and Sell Higher,” Terranova reveals some of those “trade” secrets; edicts that he and his colleagues live by.

Click ahead to learn about some of these powerful strategies. Also find out how the Fast Money traders leveraged these concepts in real-world circumstances.

By Lee Brodie
Posted 26 January 2012

Watch Your Weight

Trader: Dennis Gartman, strategic investor and author The Gartman LetterJoe Terranova, chief market strategist, Virtus Investment Partners
Photo: Peter Dazeley | Getty Images

Though Terranova’s no stranger to exercise, in this case “watch your weight” strictly involves watching the allocation of capital in your portfolio. Pros carefully spread around their capital and are unafraid to cash out.

“I make sure that no more than one-third of the value of my total portfolio is devoted to any one sector, such as energy or technology,” he said. “The maximum amount that I allocate to any one ‘player’ in any one year is 12 percent of the total investment.”

Bond With Bonds

Trader: Steve Cortes, founder of Veracruz LLCMany retail investors tune out the bond market, and Terranova doesn’t understand why. If it’s a matter of learning the basics, as Nike would say, “just do it.” “Historically Treasurys lead the stock market; they’re a reliable barometer for anticipating where the equity market is going to be three months from now,” Terranova says. “If you begin to see Treasury yields decline, that means there is something out there that is concerning. Big investors are
Photo: Astrid & Hanns-Frieder Michler | Getty Images

Many retail investors tune out the bond market, and Terranova doesn’t understand why. If it’s a matter of learning the basics, as Nike would say, “just do it.”

“Historically, Treasurys lead the stock market; they’re a reliable barometer for anticipating where the equity market is going to be three months from now,” Terranova said. "If you begin to see Treasury yields decline, that means there is something out there that is concerning. Big investors are moving money into Treasurys to seek out safety."

Start Dating

Trader: Doug Kass, founder and president, Seabreeze Partners ManagementNo, he’s not talking hanky panky. When Terranova says to start dating, he simply means to keep a calendar, something he says too few retail traders know to do. Yet a string of economic data such as the monthly employment report, ISM, existing home sales and more are released on a regular basis, and they typically move markets. “This data should be all over your monthly calendar and used to time your trades.”Strategic investor
Photo: Digital Vision | Getty Images

No, he’s not talking the singles scene.

When Terranova advises investors to start dating, he simply means to keep a calendar, something he says too few retail traders know to do. A string of economic readings, such as the monthly employment report, manufacturing and home sales data, and more are released on a regular basis, and they typically move markets.

“This data should be all over your monthly calendar and used to time your trades,” he said.

Never Trade Without a Net

Trader: Guy Adami, managing director, Drakon Capital; Tim Seymour, founder of EmergingMoney.comYou wouldn’t walk a high wire without a net; there’s no reason to trade without one either. Professionals always set up a net for themselves in the form of a stop loss order, says Terranova. That is, at the time you enter a trade, request to sell a certain number of shares if a security falls to a specified price. That way if the stock starts falling, you can limit the damage.Stops are something Guy Ad
Photo: Grant Faint | Riser | Getty Images

You wouldn’t walk a high wire without a net; there’s no reason to trade without one either.

Professionals always set up a net for themselves in the form of a stop-loss order, said Terranova. That is, at the time you enter a trade, request to sell a certain number of shares if a security falls to a specified price. That way if the stock starts falling, you can limit the damage.

Don’t Skip Homework

Trader: Karen Finerman, president, Metropolitan Capital
Photo: Les and Dave Jacobs | Cultura | Getty Images

This trade tenet is so fundamental it may hardly seem like a secret strategy, but Terranova says it separates the best from the rest.

“Making money involves reading company reports, crunching numbers, and parsing through a lot boring research,” he said. “I mean no disrespect by this, but I think most investors are lazy. Ninety percent of the trade involves research.”

Try Half & Half

Trader: Steve Grasso, director of institutional sales trading, Stuart FrankelThe concept of half and half goes well beyond your morning cup of coffee. When a stock achieves your upside price target, even if your heart tells you the stock will continue higher, let reason be your guide and sell half. “By selling 50 percent of your position you lock in profits on a sizable portion of the investment. And by holding half you still participate in gains if the stock continues higher,” says Terranova.Se
Photo: Farhad J Parsa | Photolibrary | Getty Images

The concept of half and half goes well beyond your morning cup of coffee. When a stock achieves your upside price target, even if your heart tells you the stock will continue higher, let reason be your guide and sell half.

“By selling 50 percent of your position you lock in profits on a sizable portion of the investment,” Terranova said. “And by holding half you still participate in gains if the stock continues higher.”

To Everything There Is a Season

Trader: Jeffrey Hirsch, editor-in-chief, Stock Trader's Almanac“Institutional investors know seasonality like the back of their hand, but retail investors rarely understand it,” says Terranova. “Certain times of year are more favorable for certain sectors.” For example, historically technology tends to perform best from about Labor Day to the beginning of December. Energy also trends to trade well during the third and fourth quarters.In October, Jeff Hirsch of Stock Trader’s Almanac suggested i
Photo: Walter Schmid | Stone | Getty Images

“Institutional investors know seasonality like the back of their hand, but retail investors rarely understand it,” said Terranova. “Certain times of year are more favorable for certain sectors.”

For example, historically technology tends to perform best from about Labor Day to the beginning of December. Energy also tends to trade well during the third and fourth quarters.

Monday, Monday, Can’t Trust That Day

Trader: Pete Najarian, co-founder, optionMONSTER.comLike the Mamas and the Papas, Terranova never knows what to make of Monday, Monday. “Whatever the reason, there is always a flood of emotion coursing through the market on Monday, and that makes Monday a volatile day of trade,” he says. But unlike the song, Terranova does not agree that every other day (every other day) of the week is fine. “I generally like to execute trades on Wednesday and Thursdays. By then the markets have settled down fro
Photo: Steve McAlister | The Image Bank | Getty Images

Like the band The Mamas and the Papas, Terranova never knows what to make of Monday, Monday.

“Whatever the reason, there is always a flood of emotion coursing through the market on Monday, and that makes Monday a volatile day of trade,” he said.

Unlike the song, however, Terranova does not agree that every other day (every other day) of the week is fine. “I generally like to execute trades on Wednesday and Thursdays,” he said. “By then the markets have settled down from the emotions of the weekend, and you’re in front of whatever potential rebalancing could occur on Friday."

Give Up the Ghost

Trader: Guy Adami, managing director, Drakon CapitalDespite homework and sound analysis, a stock can still defy logic and decline. When that happens, and it will, pros typically are proactive while retail investors are reactive. “Retail investors will rationalize the trade as a long-term investment and stay with it, while pros recognize the trade for what it is – a bad investment. Give up the ghost and get out,” says Terranova.TV personality to this very problem in May. He held onto his position
Photo: Abby Marshall | Flickr Open | Getty Images

Despite homework and sound analysis, a stock can still defy logic and decline. When that happens, and it will, pros typically are proactive, while retail investors are reactive.

“Retail investors will rationalize the trade as a long-term investment and stay with it, while pros recognize the trade for what it is — a bad investment,” he said. “Give up the ghost and get out.”

Buy High and Sell Higher

Stephen Weiss, partner, Short Hills CapitalIt may sound counter-intuitive, but Terranova swears by the ‘buy high and sell higher’ strategy. In fact, he named his book after it. “When you buy high, you’re buying confidence. You’re buying a stock in which there is conviction in price. Also confidence has a way of feeding on itself, which in turn propels a stock even higher. It’s what pros mean when they say ‘stick with what’s working.’”In the last quarter of 2011, trader partner at Short Hills Ca
Photo: Stephen Weiss, partner, Short Hills Capital

It may sound counterintuitive, but Terranova swears by the “buy high and sell higher” strategy. In fact, he named his book after it.

“When you buy high, you’re buying confidence. You’re buying a stock in which there is conviction in price,” he said. “Also confidence has a way of feeding on itself, which in turn propels a stock even higher. It’s what pros mean when they say ‘stick with what’s working.’”

In the last quarter of 2011, trader Stephen Weiss, partner at Short Hills Capital, said the only way to play the market was with leaders, not laggards. With Europe’s financial crisis and a slowdown in China generating uncertainty about the U.S. economic recovery, fundamentals didn’t matter to the market. Buying momentum was the only trade that worked.