A Trade A Day

Find a system and stick with it. Earlier in my career, I frequently changed systems. Any new technical indicator I had to try and incorporate. When my current system would produce a few consecutive losers, I would switch to something else. When I switched to a new system or tried a different indicator, I didn’t take the time to completely learn the system. I didn’t trade small if I did try to learn. I never learned the nuances of the system. I never took into consideration my risk capital or risk management plan. I was always focused on how much I was going to make. It lead to washing out twice.

I’m not saying you shouldn’t try new system or indicators. You always need to be aware of what is working and what is not. You need to make adjustments and tweak your system to your own style and personality, but you need to give yourself time to learn the system and its nuances. The way you accomplish this is with experience. Of course you can backtest, but backtesting works best if your computer is making the trades. When it comes to discretionary technical analysis, I see little value in backtesting.

So how does a new trader survive long enough to know a system works? How can you tweak and make adjustments to a system while staying in the game? The answer is good risk management rules. I know I am repeating myself, but it bears repeating: trade small. When you are trying a new system, or made an adjustment to your current system, make the system earn the right to trade larger size. It seems like common sense, but when I was starting out I didn’t do this and I lost big.

One other thing. If you are having trouble sticking with your current system, stop trading. Don’t waste another dime. Spend some time reviewing your past trades, looking for mistakes. Make your adjustments and if you do start again, trade small.

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One question that I get a lot is “how much money do I need to trade for a living.” My answer comes from a cliché about the futures market. It goes: “The easiest way to make a small fortune in the futures market is to start with a large one”. What does this mean and what does it have to do with a new trader? Well, aside from maybe not starting out by trading futures, I believe it says that you can never start with enough trading capital.

New traders do themselves a huge disservice by trying to make money in stocks while being underfunded. What’s the definition of being underfunded? My answer is for those trying to swing trade using a retail online broker. Anything less than 5K is going to make it difficult for you to learn and make money. Now if your focus is learning and trading small then you can start with 3 or 4 K, but don’t expect to make any money. Until you establish some consistency in your trading performance, you’re going to bleed cash on most trades.

If you want to day trade, SEC rules state you need at least 25K, but if you’re just starting out, I would shoot for 100k. The reasons are the same as in swing trading. You need time to learn and in the beginning you lose. You are also trading more often, so this compounds the losing. It also allows you to eventually trade with some size without having to go on margin. I remember when I first took a stab at day trading.. All I could think about was how much I was going to make. Making money was the single focus of both my failed attempts. I never really thought about the learning curve in day trading or risk management. I was too under capitalized for trying to learn to day trade and make income. And I wasn’t willing to give up trying to make income and just learn. Combine that with trading on margin and it didn’t take long for me to wash out. The good news for new traders is you can start trading with very little capital, but you need to focus on trading small and learning.

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I’m starting a new 5 part series on things all new traders should do. Here’s part one. Have a great weekend:

I. Trade Small

When I started, all I could think about was the money I was going to make. I would constantly divide my capital by the stock price. Then buy the max number of shares and multiply the shares by the points I dreamed I would make. I looked for low priced stocks to maximize the number of shares I could trade. I thought if I could buy a thousand shares I could easily make a few hundred or even thousands of dollars a trade. I remember thinking , “if I can buy 1000 shares, and just make a couple of points, it will be so easy to get rich”. At that time, I was a new trader with little methodology and no risk management plan. I lost some and won even less. I was trading 100 to 1000 shares at a time. My capital didn’t last long.

The question you need to ask yourself is if you can’t make profitable trades with 1 share, how are you going to make any money with a 1000 shares. In the early part of your trading career, you need to focus on learning and preserving you capital. Trade as small as you can. Until you are consistently making good trades, resist the temptation to trade any larger. When you are profitable, you can start increasing your share size in small increments. I did 20 share increments. Again, the point isn’t to make money yet. It’s about learning and preserving your capital. When you get to 100 shares, you need to look at more sophisticated risk management techniques like using a percentage of your capital on each trade. Until you are consistently picking winners, trade small.

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I love to analyze and research, and I like to help others. Here is a stock pick from theirry, a frequent commenter: “Have a look at FRO i would like to know if this fit your methodology ( that you have to explain ) thank you, thierry”.

So Thierry, here’s my analysis:

FRO had some decent looking setups the base on base would have worked out well, but I probably wouldn’t have taken the trade. The reason is the amount of overhead resistance. Typically the 50 and 200 day SMA will provide significant overhead resistance. Now, taking a look at FRO, the stock blew through the 50 and 200 day SMA’s, so Theirry, you would have made some points on this one. I personally would have looked for a trade with less risk. I try to have the moving averages underneath the price if I am going long and above the price if I am going short.

I guess the “bad” thing about the way I pick trades is that I will rarely get in at the beginning of a move. I almost always am picking up a few points off retracements. TIVO is a winner that is atypical of the trades I look for. Now that it’s probing its 200 day SMA, I’ve taken some profits because of the likelihood that it will bounce off the 200 day SMA. It was a higher risk trade because of it’s position relative to it’s moving average just like FRO.

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So I was stopped out of WYNN today. Actually, I wasn’t just a stopped out. WYNN gave me the a big FU!!! That’s ok though, I deserved it for staying in the trade that long. This is what should ideally happen: When a stock breaks out you need to see a surge of volume and rapid price movement.

What happened with WYNN is there wasn’t a volume surge and the price never really showed strong downward pressure. The price kind of bounced around. It acted like it wanted to head lower, but in reality there wasn’t the conviction (volume) to necessitate the price move I was looking for. Support from the 50 day SMA in conjunction with the overall NASDAQ direction didn’t help.

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