www.zacks.com/tacticaltrader Zacks Investment Research, Inc. 10 S. Riverside Plaza, Suite 1600 Chicago, Illinois 60606
Contents Introduction 2 Section 1: Investment Philosophy and Trade Selection 3 Section 2: The Mental Aspect 5 Section 3: Getting the Most Out of Tactical Trader 6 Section 4: Follow the Leader 7 Section 5: How to Read Tactical Trader Alerts 8 Section 6: How to Read Tactical Trader Daily Summary 9 Section 7: Virtues of Money Management 10 Section 8: Tying it All Together 11 1
Introduction Thank you for joining me in the pursuit of tactical profit opportunities! The Zacks Tactical Trader was created to offer a dynamic trading service that takes advantage of market swings, sector rotation, and leverage. Let s face it, this terrific bull market will end some day and we want to use all tools available to play the return of the bear too. Until that day, I see big trading opportunities ahead as competing fundamental forces and money managers push the market back and forth in huge swings. This service was conceived by the match between Zacks and myself. First of all, Zacks has had nothing like it until now. This is the only Trading Service to use stocks, options and ETFs in the same portfolio. And, it s not a service with a specific investing style. It is a wide-open approach that will use any and all styles in the pursuit of market-beating performance. Secondly, my trading approach formed in the high-speed, high-leverage world of futures and options. I was an interbank currency trader for nearly a decade, starting with the introduction of the euro in 1999. During that time, I paid lots of attention to how fund managers moved money around the globe, in and out of different asset classes and equity sectors. In early 2008, just in time for the start of the bear market, I went to work for one of the top equity options trading houses in the world. My options experience was taken to a new level as I learned from pros managing billions in times of crisis. Thirdly, when I discovered Zacks powerful earnings momentum model in early 2011, I found it was exactly what I needed to organize and systematize my stock picking. Since many of my tactical trades are based on short-term momentum, the Zacks Rank gave me something that was missing a quantitative qualifier for my techno-fundamental approach. As the bull matures, good stock-picking and fast tactical plays with options and ETFs will be the only ways to beat the market. I look forward to finding many of those swing trading opportunities for us when money moves in and out of thousands of stocks, options, and ETFs. I look forward to investing with you! Kevin Cook, Editor, Senior Stock Strategist Zacks Investment Research 2
Section 1: Investment Philosophy and Trade Selection PROBABILITY AND RISK As a futures and forex trader, I was never reckless. I didn t look at trading as gambling. I looked at every trade as a calculated risk/reward opportunity. In fact, after I learned how to speculate with sound methods, I built a training course to teach traders the fundamental mechanics of probability and risk. The training exposed traders to the dynamics of randomness, position sizing, money management, and decision-making processes under uncertainty and risk. To succeed in the high-speed world of short-term trading, not only must you learn discipline to follow strict rules, you must also battle your biggest enemy your own mind. We can never eliminate emotions from our decision making. That would be like trying not to laugh when something funny surprises us. Behavioral finance and neuroscience prove that humans are naturally irrational when it comes to money and risk. These two sciences come at the brain in different ways and actually prove that we are constantly using emotion to make and manage decisions. But this spells opportunity for investors and traders willing to learn some discipline and take money from the rest. And while we hunt for high-probability opportunities, we will always try to exercise the most discipline regarding a single key ratio: the size of our winners vs. the size of our losers. THE GOLDEN RULE OF TRADING In markets, you can be right less than 50% of the time and still be successful, as long as you follow the golden rule of trading: Cut your losses short and let your winners run. Sounds simple enough. But it s very difficult to put into practice consistently. It takes discipline just to practice becoming disciplined. As my colleague Kevin Matras says If all you did was have one less loser each month, and replace it with one more winner, that could transform your portfolio. By simply making a few changes in how you pick stocks, the results can quickly add up. A trading portfolio like this will have losses. I guarantee it. But we will control and minimize those losses. And we will maximize the winners. How? It all starts with a high-probability entry point, good timing, and knowing when the reward is no longer worth the risk. In every position we take, I will identify the reward-to-risk ratio as I see it. Sometimes a little more risk 3
would keep us in a good position. Other times, letting the winner run a little longer would have paid off bigger. We will never get it perfect or get the most of every swing opportunity. Our goal will be to take as many big chunks from swings as we can. MARKET TIMING AND THE TECHNO-FUNDAMENTAL EDGE As a student of both markets and psychology, I also studied behavioral finance and applied that body of insights to how equity portfolio managers play the benchmark outperformance game. You see, one could almost say that most of the time they have to buy stocks and they don t have to sell. Knowing their mandate, you can profit at certain times as they scramble for exposure. Many traders and investors follow rules to time the economic cycle or catch the waves in Dow Theory. I prefer to trade the smaller swings within those waves. We have a higher probability of gauging the first reactions off of support and resistance if we know which way the market is leaning in terms of sentiment and whether fund managers feel underinvested or fearful. We will look at a lot of charts and talk a lot about the mood of the market as we try to figure out the next wave. Sometimes we will buy the fear and other times we will sell the complacency. And as more new ETFs become available to give us exposure to commodities and currencies, we will incorporate those vehicles into the sector mix. Not every trade will be for every trader. The key idea to keep in mind though is that we win in the long run by taking as many high-probability plays as possible. This will not be a balanced or hedged portfolio by any means, but it will be an exciting and diverse one nonetheless. And it is my mission to make it a very profitable one as well. I hope to pass on my trading knowledge as we grow this portfolio. 4
Section 2: The Mental Aspect It is important to realize how much investment success is related to what goes on between your ears. There are so many ways to get distracted and to question yourself while trading. You must be in the right frame of mind and have reasonable expectations to achieve success with this or any investment service. So be sure to pay attention to the tips in this section carefully; they will get you headed in the right direction. NOBODY IS 100% PERFECT First of all, there will be losing picks, but if we cut them out early to minimize losses and maximize gains on winners, then we can achieve phenomenal results. A little known fact is that the Zacks Rank, even with its 26% annual return, is only right 56% of the time. We are extremely confident that over time we will produce substantial returns, but it is important that you learn to take the losing picks in stride. COMPOUND YOUR RETURNS The Tactical Trader looks to use all available tools at our disposal to achieve vast outperformance. We will use stocks, ETF s, and options. While there will be some big winners, it is having consistent smaller gains that will really add up over time. This is what we call the beauty of compounding and how it works to an investor s advantage. Albert Einstein is said to have called compound interest the eighth wonder of the world and this is a prime example. So don t get discouraged when you are only seeing small gains on each respective trade, because that is exactly what this product is designed to do. TIMELINESS INCREASES ROI Let me ask you a question. Would you rather make 10% or 20% on a trade? Yes, it s a trick question. The missing piece of the puzzle is how long each trade was held. So now let s say that the 10% gain was made in 3 months time, which computes to a 46% annual return. On the other hand, the 20% winner took 2 years to achieve and is really only good for a 10% annual gain. This example solidifies the power of timely stock trading that we will harness with this service. Most often we will only be holding on for 2 days to 3 months and stringing together a series of smaller winners. But from time to time we let winners run longer. 5
Section 3: Getting the Most Out of Tactical Trader It is our job to provide you with timely and profitable stock picks, but there are steps that you can take to ensure your success with Tactical Trader. Here are a few things you can do to get the most out of the product. 1. Read this Guide carefully This guide is your friend. It has valuable information on how to use the product and succeed with the assistance of Tactical Trader. It gives you step-by-step instructions on how to receive alerts and what to do when you receive them. It has important money management tips. 2. Have a working email address This is necessary to receive trading alerts. Make sure you can access your email in a timely fashion because acting on trades is essential to success. The Daily Summary email will be sent at around 8:00 p.m. EST, which summarizes the positions as well as what happened on Wall Street during that trading day. Intra-day trading alerts will typically be sent within the first hours of the trading day. Unfortunately, many Internet service providers have software programs that filter out emails you want to receive, like Zacks Tactical Trader Daily Summaries. To get optimal delivery of our emails follow this link for quick and easy instructions. 3. Have an online trading account We are not advocating any particular company for this, but ideally lower commissions will help you achieve a higher overall return. You will make several trades a month, and high commissions can really eat into your profit margin, especially if you have limited capital. 4. Access the site To access the site, go to http://www.zacks.com/tacticaltrader and enter your username and password. This will take you to the main page where you can view the portfolio, any pending trades, and the commentary. 6
Section 4: Follow the Leader The process to receive our trades is very simple, yet we feel it is so important that we are going to spell it out for you. Here are the four steps: Receive the email with the daily summary or intra-day signal Read the email to determine appropriate action Place trades through your broker with the appropriate % allotted Follow the emails to determine when to sell ACT PROMPTLY = MOST SUCCESS And if you don t beat the market, you can take advantage of our 100% Money Back Guarantee. SPEAKING OF THE GUARANTEE. We feel that if we are not able to live up to our word and help you beat the market then we shouldn t be deemed worthy enough to take your money. So in addition to the 90-day, no hassle guarantee, there is a 100% Money Back Performance Guarantee. There are a few conditions that have to be met first, but the bottom line is that we have to perform. Click here for details. 7
Section 5: How to Read Tactical Trader Alerts This strategy will have trading alerts during the trading day. When a Buy Alert, Sell Alert, or Intraday Alert is sent out, you should receive the alert within the first hours of the trading day detailing what stocks or options are being added or sold and the rationale behind the moves. It is important that you act as soon as you can. Here is an example: Subject line = The type of alert. The subject line of the email will say Buy, Sell, or Intraday Alert. Company = The name of the company that is being added to or sold from the Tactical Trader portfolio. For options, this column will include month and strike price of the option Sym = Ticker symbol of stock or option being added to or deleted from the portfolio. Type* = For stocks, this column will denote if the stock is being bought (long) or sold short. For options, this column will also include long/short ( L or S ), as well as if the option is a call or a put. %Val = The percentage of your allotted portfolio to allocate to this position. +Date = The date on which the stock was added to the portfolio. Tactical Trader Portfolio Commentary = As part of the alert, Kevin will explain his rationale for the addition or deletion. You will learn his reasoning for adding or selling the stock and the current price at which the stock is trading. If the recommendation comes out in the end of day summary email, then the price added equals the average of the opening and closing price of the security on the day after the recommendation is made. If the editor uses a limit price, then the price added will be the lesser of the previous rule or average of opening price and the limit price. 8
If the recommendation comes out in an intraday alert, then the price added equals average of the price in the email and the closing price for that day. If the editor uses a limit price, then the price added will be the lesser of the previous rule or average of the price in the email and the limit price. Section 6: How to Read Tactical Trader Summary The Daily Summary provides a wide array of details for Tactical Trader each trading day. This summary may have new signals as well as the current open portfolio with daily commentary. The % allocation for each stock or option is also shown. This is valuable information as it conveys what our game plan is, why we are in each trade, when to get out and why, as well as any relevant news. This is emailed to you at 8:00 p.m. EST. In regards to the price added/deleted for the portfolio, Zacks uses the average of the price at the open and the closing price on the day the stock is added or deleted. 9
Section 7: Virtues of Money Management Money management can be the difference between realizing large gains and going broke, even if the winning percentage is the same. How can this be? The key point is that winning investors know to ride their winners and cut their losses quickly, and stick with a plan that has proven to work in the past. Here are a few rules that you can follow to further improve your returns: First of all, don t dump your entire portfolio into these Tactical Trader picks. Only allocate that portion of your capital that can be comfortably devoted to speculation. This portfolio will typically hold 12-15 positions. You should be able to sleep soundly and act rationally if you are only trading with your speculative money. Keep in mind that reinvesting profits and the power of compounding are your friends in this portfolio. Those frequent singles add up to be a home-run in the end when the phenomenon of compound interest works its magic. EVER-PRESENT CLICHÉ RINGS TRUE Tactical Trader will have many recommendations coming at you each month. It has been said millions of times before, but it is so important it needs to be said again: Don t put all your eggs in one basket. Even if you are the most brilliant investor in the world, there will be losing trades. The key is staying in the game and building your equity over time in a systematic way. This can only be done when diversification is put to use. Not that we have to remind you, but the main point is that your capital was earned through years and years of hard work. Capital conservation sounds boring, but without it, you are fighting a losing battle. We don t want to see the money you have put your blood, sweat, and tears into evaporate due to lack of discipline. 10
Section 8: Tying it All Together It is our goal at Zacks to enhance your trading results via Tactical Trader. This booklet touches upon the details of the service and provides several useful tips to realize the vast potential that institutional investors hold. We feel it is our job to let you know that we are here to help you get the most out of Tactical Trader. Again, let s go over some of the important points made in this booklet. Small Gains Add Up To Big Results Not Every Trade Will Be A Winner Timeliness Is Of The Essence Money Management Matters Greatly Have A Working Email Address We Are Here To Help The last point is important as we have free customer support that should be taken advantage of. Any additional questions that you may have can be answered by just picking up the phone and giving us a call or emailing us: 1.888.775.8348 (outside the US, 1.312.265.9309) tacticaltrader@zacks.com Disclosure information 11