Technician's Take

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Think of Your Equity as Inventory

Gary B. Smith

Q: Let's switch gears again. What aspect of trading took you the longest to learn?

GBS: I'd say the view that my equity is the same as a retailer's inventory. Your profit per piece doesn't matter if you never turn your inventory. And your turnover doesn't matter if you're losing money on each sale. What matters is the turnover times profit per piece.

That's the same concept I try to apply to my trading. I start with $1 and want to figure out how to quickly turn that into $10. Most people focus on buying a stock at $20 and selling it at $40, and they rarely care how long it takes them to do that.

However, if during that time I can buy 10 $20 stocks and sell them each at a 10% gain, I'm way ahead if I continue to compound my equity.

Q: Correct, assuming you can find that many new trades to make, right?

GBS: Right, that's the catch. That and making sure with slippage you're actually netting 10% per trade. Overall, it's not an intuitively easy concept to grasp, and it's made doubly hard by the fact that no one ever talks about it. In fact, my friend Wesson schooled me on the concept, Van Tharp talks about it in his book, Trade Your Way to Financial Freedom, and Larry Hite talked about it in Jack Schwager's Market Wizards: Interviews With Top Traders. But they're certainly the exception.

Q: Finally, anything new for you, apart from trading, in 2001?

GBS: Really, just more of the same. I'm in for the long haul with TheStreet.com, so that won't change. Or it won't change as long as people keep reading! And I'll still do the "Bulls & Bears" show on Fox News once a week. That's fun for me and a nice way to end my Fridays. And the response to my "tour" idea was very favorable, so I want to start on that in the first quarter if I can. That should be a lot of fun! And, finally, I'm dabbling with writing a book. No doubt it will mark my demise or the top of the market, or both!

Q: And sell all of 100 copies....

GBS: Exactly, but only if I buy 90 myself!

Q: Parting words?

GBS: A few. I'm damn lucky to be doing what I do. I know that. And I'm sincerely appreciative of all the readers out there.

Q: And parting advice?

GBS: You can make money trading if you have a sensible plan for entry and exit. But most people don't have a plan, so it all comes down to luck. So first, come up with a trading plan.

Second, get a lot of sleep. I really mean that. Most people I encounter are severely sleep-deprived. You might be able to get away with that in the corporate world, but when you're trading, you need to be fresh every single day. Silly, I know, but it has a huge effect on your life.

Finally, avoid negative people. I guess I've become more sensitive to this over the years, but there are a lot of bitter, angry people out there. And when I encounter those people, they drain my energy. So, whether it's via email or in person, my response is the same: I simply hit the delete key and move on!