Description

My basic trading philosophy can be summed up by one simple quote:

"Trade the ticker, not the company" - Nate Michaud


Friday, January 31, 2014

My Early Days of Trading and Challenges I Faced

I get a lot of questions from people asking me about their specific challenges and how to best deal with them when it comes to trading. While I try my best to give good advice, at the end of the day I can really only reflect my own experiences. I believe my story is much more useful to someone in their early twenties, just getting started, than someone who might already have a family or a full-time job. What I'm going to do is give a detailed breakdown of my story and the path I took, from the time I first became a Pennystocking Silver subscriber up until the time I was making enough money to support myself. Hopefully, everyone can find a certain element of this story to relate to and find some guidance.

In February 2011, I found Tim Sykes. At the time I was a Senior at Marquette University, on track to graduate in December 2011. I had a couple thousand dollars to my name, but my parents were paying my rent and tuition (yes, I was fortunate/spoiled). I immediately recognized that any of the brokers I wanted to fund required at least a $3000 deposit, so I knew I was going to have to ask my parents to give even a little more. I remember late in February discussing Sykes and his strategy with them and asking for money to get my ThinkorSwim account open. The answer I received was not ideal. They wanted me to paper trade for a couple months but also take some time to learn the strategy better. I spent February through the end of April paper trading and studying the Pennystocking Silver video lessons. I also discovered Nate's (at the time free) nightly scans and Michael Goode's superb blog www.goodetrades.com. Yes, I was putting in my time studying, probably spending a couple of hours a day on it, but I also paper traded here and there. I had something like 8 winning "trades" in a row and felt like I was on top of the world!

Finally, at the start of May, it was time to begin trading. My parents initially loaned me $1500, and I took $1500 of my own money to use as well. With this $3000, I opened up my ThinkorSwim account. Let me note this now - I had an agreement with my parents that their money would NOT be used for trading activity. It was simply there to keep the account open and help me with margin requirements. My early plan was simple - I would mostly follow Tim's "long" alerts trade for trade, while occasionally venturing off on my own to try my own trades. I figured that it would just be like paper trading. I was wrong. I immediately noticed how SCARED I was anytime I entered a trade. I was taking $1500 positions (or whatever my full personal bankroll was), so it's no wonder. It was "all in" every time. Emotions clouded my judgment, the physical act of having to enter trades slowed me down, and I was not coming nearly as close to matching Tim's entries and exits as I had on paper. I had a very slow start, and by mid-month and the end of my college semester, I was down $150. 

At the end of my semester, my summer job at State Farm began. I was working 40 hours a week and trying to trade from web browsers since I couldn't download any software. I continued mainly trading Tim's alerts, and along the way discovered new challenges that I had not anticipated. I quickly learned that holding an overnight position meant losing that buying power the following day, even after you had closed the trade. I learned that ThinkorSwim rarely had shares to borrow. I learned that ThinkorSwim was not the best broker to be with for OTC executions. I also discovered the frustration of the pattern daytrader rule, as my small $3000 account was restricted to 3 daytrades every 5 business days. It was clear I needed to make some changes.

I once again turned to my parents for help. They loaned me an additional $12,000, which I used to open up accounts at Interactive Brokers and Speedtrader. I split the money up so that I had $3000 at Speedtrader, $3000 at ThinkorSwim, and $9000 at Interactive Brokers. This allowed me 9 daytrades a week, more shares to short at Interactive Brokers, and better OTC executions at Speedtrader. The same agreement applied with my parents, I was to take no more than $1500 positions (or whatever my portion of the account was). However, I did have more daytrades and far more flexibility than I had before. This flexibility - and refining my rules a bit - turned out to be helpful, and I found myself up roughly $300 at the end of July.

In August, suddenly the wheels came off. I learned another series of lessons, and this round of lessons was far more painful. One promoter I had been particularly interested in early on was "Awesome Penny Stocks." I had tracked on my own the % of the time they gapped up after a green day and what the average % gap up usually was. It seemed to be a setup with exceptional odds. This is when I learned the lesson, "Not all promoters are the same." I tried to apply this rule to a different promoter and wound up getting smoked on a morning panic the following day for a $300 loss, my largest ever. I also took large losses trying a strategy called "Boxing" with a promotion, which cost me approximately $800 over a couple of weeks while toying with the position. For whatever reason, to this day I still can't really handle "boxing." Some strategies just don't work for certain people. I suffered a few other emotional losses, and by the time I was headed back to Marquette I was suddenly down $1300.

I had already set up my Fall class schedule at Marquette to accommodate trading, scheduling as many night classes as possible. I was faced with a tough decision. I could cut my losses and move on with my life, or I could take one more chance. I felt like I knew where I had made my mistakes, and I knew I had learned from them. I made about $4500 from my summer work at State Farm, so I decided to plunge an additional $1500 of my own money and give trading one more try.

This entire four months I had carefully tracked all of my trades, and it was clear that I performed best in two situations - buying new stock promotions and buying stock promotion breakouts. At the time, both of these strategies were much more consistent than they are now. I focused in on these two setups and ignored all else. Every now and then I had to miss trading for a class (only if it didn't allow laptops), but most of the time I was able to stay in front of the market. I also spent quite a bit of my time in the Pennystocking Silver chatroom, likely driving chat moderator Michael Goode crazy with all the questions I was asking. Slowly, I dug my way out of the hole. Many days I would not even make a trade. I was just waiting for the setups that I was comfortable with. By November 2011 I was back to break even.

I had seen what sticking to my "best" setups had accomplished and how much more consistently I now traded. By clawing back to break even, I now had $3000 of my own money in my accounts. I decided that I was confident enough to jump up to $3000 positions. In mid-November, it paid off. I finally hit my first major trade, making over $2000 on new Awesome Penny Stocks promotion AMWI. My immediate instinct wasn't to keep aggressively growing my account; rather, it was to hug these gains. I continued trading $3000 position sizes, getting away from my "all in" mentality. Trading slowly became less scary, as my overall account risk became lower. By the end of 2011, I was up about $4000, and I knew that I wanted to trade full time.

My Marquette graduation came and went, and I convinced my parents to let me live at home and trade full time rather than use my market experience to go out and find a job as originally planned. Living at home came with a stipulation though - I had to make $10,000 from trading in the first quarter of the year. If I wasn't able to accomplish this, I would either have to get a job or find my own place to live and trade.

Trading the first couple of months wasn't super eventful. I slowly grew my account, mostly through the same two setups I found success with up to that point. I had shuffled around my brokers a bit, as I had closed my ThinkorSwim account and moved money over to Broad Street Trading, a prop firm that would allow me to trade with no Pattern Daytrader Rule. Broad Street didn't allow me to trade a lot of the OTC tickers I wanted to though, so my time there was short. I moved over to Suretrader very briefly, just to have a broker that wasn't affected by the PDT rule. I only opened a $3000 account there. I can't say I made significant money there during my first stint with them. In February 2012, I finally hit the big moment I had waited for, I grew my accounts up to $25,000 total (including my parents' loan money). I quickly withdrew money from most of my accounts and merged it all into my Speedtrader account. I chose Speedtrader because up to that point, I had the most success from quickly buying new pumps and Speedtrader best fit that strategy. I now could trade freely at Speedtrader, and I began to get a bit more adventurous with the setups I would trade. It was at this point that my profits began to accelerate, and every couple of weeks I would pull a little money from Speedtrader and move it to my Interactive Brokers account so I could short sell again. 

By mid-March 2012, I had accomplished my goal of $10,000 for the first quarter. I continued to live at home, because the low costs allowed me to keep more money in my accounts and less money flowing out to pay bills. The highlight of the next couple of months was nailing a couple massive trades on new promotion releases, further propelling my accounts. One frustration that I experienced during these months was tax estimates. Every few months I would pay my estimated taxes and draw my accounts right back down. My accounts also occasionally suffered as I slowly paid my parents back the money they loaned me. Despite all this, by August 2012 I was up roughly $100,000 on the year; so I moved to Columbus since I knew I was finally ready to be self-sufficient.

It was a long and complicated journey for me, and as you can see, I received quite a bit of support along the way. Do I think I could have still succeeded without those initial loans from my parents? Yes, I believe I could have. However, I will readily admit that I think the process would have taken me much longer. This is the path I wound up taking, and you all will have your own unique paths to travel as well as you build your stories. I hope that my experiences can be of some use to you!

Wednesday, January 29, 2014

Question: "How much time do/did you put in to be a trader?"

I frequently get this question, but my answer now would be different than it was when I was getting started. Obviously, I am/was in front of the market from 9:30-4:00 (when it is open), but my time outside of that is what has varied. When I first got started, I had to put in a considerable amount of time outside of market hours to develop my skills. I needed the time to pore through video lessons, track my favorite setups to see how consistently they performed, and try to find the latest-and-greatest promoter websites. I think it's safe to say that I would put in 2-3 hours a day outside of market hours on average.

Now that I've matured as a trader, I don't need that time to sift through content. With experience I have found the setups that I'm successful and comfortable with, so I find myself studying much less than I used to. I'm now at the point where I probably spend 20-30 minutes per night getting my watchlist prepared for the upcoming day or tracking new setups that I may want to start trading. The bottom line is that you need to put in the time when first getting started if you want to be successful. However, as you grow as a trader and (hopefully) become successful, the time commitment begins to become a bit less demanding.

Question: "How do I get started trading?"

First, I recommend you check out my posts "Is trading right for me" and "How much money do I need to start trading." If I haven't scared you off yet, the next items you need to consider are what broker you will use and whether or not you want to sign up with a trading service or not. Personally, I believe it is helpful for beginners to utilize a service rather than jumping in blind with no guidance. The trading services I have used and recommend can be found here; however, there are plenty of others out there that I have no experience with and that could very well be a better fit for you. When signing up keep in mind you should NOT be signing up for "stock picks." That will get you nowhere. Rather, target a strategy that you want to LEARN inside and out so that you can become self-sufficient.

Once you've found a strategy that you like, you are going to need a broker to trade with! Different brokers suit different types of strategies. I'll have a detailed post on what brokers I have used and recommend coming soon. Until then, I suggest checking out some broker reviews at investimonials.com and investigating whether you can track one down that will fit you well. Good luck guys!

Tuesday, January 28, 2014

Question: "What trading books do you recommend?"

Believe it or not, I really never did any reading about trading. I've read Tim Sykes' book, "An American Hedge Fund" which I thought was a really good read. Beyond that, I'll be no help in this area. Sorry!

Question: "How do you deal with emotions when trading?"

One of the most difficult aspects of trading is controlling your emotions. I won't claim to have all the answers, because I still struggle with this. To some degree, I probably always will. However, there are a few things I've picked up along the way that have certainly helped me improve:

  • "If you're scared, you're in too big"
If you constantly find yourself making emotional decisions or feeling scared while in a trade, one possibility is that you're holding too big of a position. Try decreasing the size you trade with and see if that makes things more comfortable. That doesn't mean stop respecting your stop losses or take the trade less seriously because you aren't in as big. The point of this is so that you're less worried about having money on the line and more worried about what the stock's price action reflects. Your decisions should be based off of price action only.
  • Hide your "unrealized profit/loss" column in your broker(s)
When I finally took this step, it made a surprisingly large difference. I no longer had my unrealized gain or loss staring me in the face. Although I knew in the back of my mind about how much I was up or down, I didn't have to constantly see it. As I mentioned above, this allowed me to focus more on price action and less on my potential profit or loss if I closed the trade that moment. As a trader it is imperative that you are trading primarily on price action. When other factors such as your gains/losses creep in you will begin making trades for the wrong reason.
  • Accept that you're not perfect
Many traders picture the perfect trade. They buy dead bottom, sell dead top, and everyone marvels at what a genius they are. Unfortunately, the vast majority of the time it doesn't work out this way. Rather than trying to nail perfect entries and perfect exits, accept imperfection. On the best setups, you don't have to be perfect. You can catch the meat of the move and still walk away with a very nice gain. Strive for nailing the easy part of the trade, strive for consistency, don't strive for perfection. It is consistent gains that grow accounts, not the rare perfect trade.

Monday, January 27, 2014

Question: "How much money do I need to start trading?"

There are a couple factors that need to be taken into account when deciding how much money to start trading with. The first and most important, DO NOT RISK MORE THAN YOU CAN AFFORD TO LOSE!

The vast majority of traders will blow up their accounts once or twice before success. I am a firm believer that everyone should start by trading small (whatever "small" means to you) while they're first getting started, because you're going to make mistakes, and they are going to cost you. Six months into my trading career, I had to re-fund my account due to mistakes I made along the way. You don't want these early mistakes to wipe you out. Had I traded larger, I wouldn't have been able to re-fund my account, and I never would have had a chance to succeed once I'd gone through the growing pains.

One final factor to consider is your specific broker and your commission structure. Let's say your broker offers a rate of $4.95/trade. That means it will cost you roughly $10 total to buy and sell your position. You need to trade position sizes that will prevent commissions from cutting into your profit too badly. If you are trading $1000 positions, with this rate you would need a 1% gain just to break even. If you're trading only $200 positions, you will now need a 5% gain just to break even.

A combination of these factors should be taken into consideration when deciding how much money to trade with, but at the end of the day only YOU can decide your risk and if trading right now would make sense for you.

Question: "If I send you money, will you trade for me?"

.... No. I'm not licensed and cannot trade on anyone's behalf.

Question: "Is Daytrading Right for Me?"

I truly do believe that daytrading is a superior way to play the market as opposed to a long-term investment strategy. Perhaps some of that thought comes from the fact that it's a better fit for my personality. However, in my opinion the potential to exponentially grow your account simply does not exist with a long-term investment strategy. That being said, daytrading can also be extremely risky and puts your capital at far greater risk than a long-term strategy. I believe that I've excelled as a trader because of a few key factors. Before deciding to pursue the path of a daytrader, you should honestly reflect upon your own situation and decide if this is right for you. There are two main factors that I think are necessary to give you a chance at succeeding:
  • Ability to Stay Disciplined
I'll be the first to admit that I still have lapses in this area, and when I do it costs me money. However, I have overall been able to stay disciplined and stick to my set of trading rules. The ability to cut losses quickly, avoid over-trading, and not trade off of emotions (such as making a trade because you are "bored," or trying to make back losses) are absolutely essential to succeed in this field. Be honest with yourself, are you a disciplined person? Much like a poker player will go on "Tilt" after a bad beat, can you avoid getting emotional and reckless after taking a loss? This is a KEY area, so do not take it lightly.
  • No Need for "Quick Money"
Daytrading is not easy, especially when you're first getting started. Everyone has a different learning curve, and I can only speak to my own experience; but when I was getting started, I took three months to watch video lessons before diving into the market. Despite this lengthy preparation, I found that once I was trading live it was a totally different game. Trying to identify setups in real time, plus battling against the emotions of having my own money on the line (this can really cloud your judgment in the moment), was not nearly as easy as I had expected. After four months of trading my small account, I found myself $1300 in the hole. From the day I watched my first video lesson, it took me a total of nine months just to claw back to break-even and another four months to have $10,000 in total profits. The point I'm making is do not expect to jump into this and be making thousands of dollars immediately. If you need fast cash, daytrading is more than likely not the answer.


Even if you meet both of these criteria, there are no guarantees in this game. I took a chance, and it worked out for me. There are plenty of experienced traders out there who are willing to try to help. But if you know that you can't stay disciplined or are just in this for a quick buck or out of desperation, in my opinion, your odds for long-term success are very low.