War Is Hell, and So Is Trading By Ken Wolff Special to TheStreet.com 5/29/01 4:00 PM ET

Ever see the movie Saving Private Ryan starring Tom Hanks and Matt Damon? In the film, the character played by Hanks is charged with bringing back Private Ryan, played by Damon, the last survivor of four brothers sent off to World War II, after the elder brothers were killed in action. This graphic film, directed by Steven Spielberg, had me plastered to my seat and left me shell shocked at the end. I, like many others in the theater, sat there in silence far after the final credits rolled.

Although I found the story very interesting, what I found both fascinating and disturbing was the slaughter that took place at the Normandy landing. It was not the slow, progressive climb up the beach that most carefully edited military footage from the past shows. German mortar fire immediately sank several ships, but the thing that stuck in my mind the most was the troop transport ships approaching the beach. As soon as the doors swung open and the soldiers took their first steps toward the beach, they were mowed down by fortified machine guns carved into the cliffs high above.

The carnage was horrific! The Germans were just waiting for each troop transport ship to open its doors so they could spray the unsuspecting soldiers with a relentless hail of bullets. Ship after ship hit the beach, only to have its precious cargo massacred in the same exact manner. The chances of survival in the early stages of the landing were almost zero. Over and over again it happened until the number of soldiers who finally made it to the beach overpowered their deeply entrenched enemy. As soon as they captured several strategic locations, the level of danger decreased exponentially.

Now, I don't want to make light of this very serious event in history, but I would like to draw a parallel between trading and what happened in Normandy. I am writing about the topic this week because I am starting to see many more momentum traders who are sensing the market is again safe to trade and are coming back in droves. It may seem that I am trying to push traders away from momentum trading but I am not; just giving them food for thought before they return. I have seen many traders lose their entire portfolios because they did not learn the very lesson I am trying to teach in this article.

As wave after wave of new traders enter the momentum trading arena, many take the time to study and educate themselves on what it takes to succeed as a professional trader. Those that do, prosper. Unfortunately, this is not an overnight process and many simply skip this step, jumping directly into the game with a full portfolio and their finger on the "buy" key. They see the tremendous gains being made by other traders and they want a piece of it now!

It is true that there are tremendous gains to be made from this highly leveraged form of trading. It is also true that a good momentum trader can squeeze momentum and maximum profits in both up and down markets. But it is even more true that those that don't take the time to educate themselves in the methods, techniques and tools of the trade prior to jumping in and trading real money, end up looking like those soldiers who were mowed down in the early stages of the landing as they opened their doors.

Why do they do this? In the past they may have spent literally hundreds of hours researching a stock prior to "investing," yet leaped feet-first into momentum trading with little or no preparation. I have seen traders attempt to trade without even knowing the basics of the market such as the difference between the bid and the ask, the importance of the spread and stop-loss discipline. They blindly follow others into and out of trades. Traders who do not do their own research and follow blindly ultimately are led to the bottom of a very steep cliff. There are only a few things I feel absolutely certain about when it comes to the stock market and this is one of them -- if you don't educate yourself, you will get burned.

Those who take the time to educate themselves more than level the playing field. It's like watching the Normandy landing from a high vantage point, mapping out which routes are best and which ones are absolute suicide. Then, once you know which routes are the best, you slowly work your way safely to the beach and up the cliffs. Eighty percent of momentum traders fail for the simple reason they fail to educate themselves. Those who don't, normally end up following someone in and out of trades. Here are two examples I saw just last week.

On Monday, May 21, I was watching some of the free chat rooms that were following Network Appliances (NTAP:Nasdaq - news - boards) in the premarket.

As you can see from the chart above, it opened at $22.86, then started to dip. At this point several traders in these free rooms were screaming Short NTAP HERE! I saw many follow these traders into the short and when it bounced three minutes after the open at 09:33 EST to $22.93, they were screaming HOLD ON, ITS GONNA DROP! Well, as you can see, it didn't, and ended up closing at $26.65, 3.79 points above the short call. Many lost thousands of dollars following others into this trade.

Friday, May 25, I saw another example. Again, I was watching some of the free chat rooms to get a feel for how active daytraders were. I heard several traders touting their long positions in Juniper Networks (JNPR:Nasdaq - news - boards) in premarket trading and it was going to go TO THE MOON!

Wrong again; Juniper opened up at $54.47, climbed momentarily to $54.86, and then dropped all day long, closing at $52.16 -- 2.31 points under the entry price. These very same traders were screaming that it would bounce any moment. Again, many traders followed them into this trade for no other reason than they thought they were good at calling trades. There are two things wrong with this scenario: First, never simply follow anyone into a trade. Second, there was no stop-loss discipline involved in this trade.

The point is, this happens all the time. Never enter a trade if the only reason is because someone else says it's a good trade, no matter who he or she is -- even handsome, powerful experts like myself. Do your own research, use your own methods and take responsibility for your own education. If you don't, save yourself some time; mail your money to charity and start looking for that day job now!

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