A Trade A Day

1. I consistently make money.

I roll my eyes when I hear or read this statement. If there’s anything I’ve learned it’s that the market is not my personal ATM. Sure, over the course of a career I’ve become net positive, but its had some ups and downs. When someone says they’re consistently making money, are implying they always make money? I believe you can be a consistent trader, but if you told me you consistently make money, I would call you a liar.

Consistent trading and consistently making money are not one in the same. Good, consistent trading is not always a money maker. Trading at its core is a losers game. The objective is to be the best loser. If I can lose 6 times or less out of 10, I’m consistently making money, but I’m not making money all the time. Learn to make the distinction.

When you hear a statement like “I consistently make money”, be sure to look at the context. If they’re trying to sell something, chances are they’re full of shit.

2. It’s easy to make $/month.

I’m sure at some point a trader can gauge how much they can pull out of the market. I’ve been trading for 13 years and I still can’t tell you exactly how much I’m going to make in a year. There are too many unknowns. I trade the same setups and manage my risk with the same method, but I don’t know how well it will work in the future. When someone tells you how easy it is to make $3 to 5K each month by trading , be cautious. What is the context? How much would I need to make that, $3K or $10 million? What about the system? What’s the best market to trade it? Are we in that market cycle now? If you can swallow your greed, you’ll be able to clearly see the lie in the “It’s easy to make $/mo” kinds of statements.

3. My system makes money in any market.

Wrong, they only system that makes money in any market is a savings account. Each system has it’s own ideal set of criteria. Anyone who has spent even a little time trading knows that the market changes and setups that worked over the past 6 months, may not work as well over the next 6 months. This kind of phenomena is due to many factors from market direction to trader effect. The point is that to say your system makes money in any market flaunts your ignorance and makes me laugh.

4. Trading is easy money.

Trading is the hardest thing I’ve ever done. It’s a constant battle every day to keep my emotions in check. To exercise discipline in my trading decisions and in how I spend my time during the day (Do I trade, play video games, research or blog. See how this could be a problem?)

5. I can teach you how to trade in two weeks.

This is actually true. In fact, it was the exact same time frame that Richard Dennis used to teach the Turtles his trading methodology. Maybe I should have called this article 4 lies and one truth traders tell. Anyway, Good, profitable trading doesn’t have to be complicated. Now consistently making money after two weeks? That’s a different story.

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With the market giving back weeks of gains and the talk of recession beginning to crescendo It’s time to talk about “recession proofing your portfolio” Now, you can go to your favorite mainstream media’s business section and read about buying “defense stocks” or gold etf’s, but they’re subject to supply and demand like everything else.

No matter what sector you did buy, a drag on the economy will drag them all down eventually, and as the US economy falls deeper into a recession, foreign economies will follow. So investing oversees isn’t a silver bullet.

So what’s the best course of action during a recession for people with money in the market? Here’s my top 5:

1.Take a more active role in your portfolio’s management.
Having a clearly defined plan will give you the power to move in and out of positions with confidence. When I hear the word recession, I think about the people who are going to lose their jobs, not my portfolio. That comes from knowing that I can trade my plan and make money in any type of market.

2. Learn to trade technicals
Trading on fundamentals will cost you during a recession. There are a lot of good companies that are going to see their stock price plummet. Learning to trade stocks using technical analysis allows you to target the best time to buy a good stock. This will minimize your downside risk and allow you to get a position at the best price.

3. Learn to short
If markets aren’t moving up, then learn to make money when they’re moving down. Learning to short may sound intimidating, but I am willing to bet that being afraid to short comes from not knowing how. Shorting gives you the flexibility to profit when the market goes down. Why do I like shorts so much? Look at two weeks ago. It took three weeks to go up 5% and that was wiped out in 3 days. Down moves don’t last as long, but the gains come quickly.

4. Stay in cash
A great trader once told me, cash is a position. If you’re not finding setups, don’t trade .This may sound cliche, but don’t let market swings keep you up at night. Get into cash and let the recession work itself out. Then when the market bottoms, you’ll have your cash ready to go.

5.Wait it out.
You’re a glutten for punishment. Shorting isn’t for you and neither is cash. Buy what you want, but you’re going to take a beating.

Good Luck!

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Lately, I’ve been investigating option strategies as a way to leverage my current portfolio. There are a few ways I could use options in my own trading. One way in which I’ve gained some valuable insight is by reading other people’s experience. I wanted to share 5 options blogs that I think are worth a read and an add to your rss reader.

1. My Trader’s Journal
I like the way Alex takes the reader through his put writing experiences. I’ve learned quite a bit from him during the short time I’ve know about mytrader’s journal.

2. Options Pundit
Options Pundit is flat out one of the best blogs for option traders. There’s a lot of good material, and I like reading his trading results.

3. Options Trading Blog
I’ve known of this blog only a short time, but I find Toni’s experiences to be useful.

4. Options Trading Beginner
Sounds like myself, actually for beginning a beginner OTB does an excellent job explaining core option trading concepts.

5. Option Trading - Akalwoo
I really like this blog because he posts his experiences. Another good options blog.

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I’m almost finished with Way of the Turtle by Curtis M. Faith. In the book, there’s a section on some of the cognitive biases that traders and investors experience. A cognitive bias, according to the book, is a “distortion in the way people perceive reality”. I thought it would be interesting to list my Top 5 and how I’m dealing with them.

1. Loss Aversion:
Simply stated, it is the preference for avoiding losses instead of acquiring gains. When I follow the rules of my system and lose $100, I feel the pain is more intense then if I had missed a trade that would have made me $100.

Where I have seen improvement is I would rather take a trade because I am following my rules and lose $100 then not take the trade because I ignored my rules and avoid losing the $100. Traders who are prone to loss aversion would rather ignore their rules and not lose $100 than follow their rules and lose $100.

The reason loss aversion is “bad” is that it causes the trader to violate their trading rules. Your trading rules are what give you the confidence that you will win over the long term. Trading rules are what give you an edge. When you ignore them, you’ve just thrown a huge monkey wrench into your viability. Ignoring your trading rules would indicate that you really don’t have confidence in what you are doing. Without a clear, unemotional decision making process for your trading activity(trading rules), you are gambling.9

2. Outcome bias
When I judge a trade based on how well the trade performed rather than how well I adhered to my system, that’s outcome bias. I struggled with this cognitive bias early on. When I had a string of losers I would begin to question the trading method I was using. It would cause me to flip flop methodologies which ultimately led to my 2nd demise. First it was CANSLIM style investing, then I hit a couple of losers and I was scalping futures, then trading gaps intraday. I ended up losing my second trading stake pretty quickly.

3. Recency bias
Recency bias is placing greater weight on current trading performance relative to previous trading performance. It goes hand in had with my outcome bias. When I was flip flopping methods, my current performance had far more weight in my decision making process than any success I had previously with other methods. I had made up my mind that if it wasn’t working now, it wasn’t any good. It was such a train wreck. I don’t think I write well enough to do it justice

4. Bandwagon effect
The Bandwagon effect, as Mr. Faith states in his book, is the tendency to believe things because many other people believe them. I would like to think I am a little more independent than this bias sounds. However, it’s important to be true to yourself. I know in the past, I have tried trading methods and taken stock picks because I’ve heard it mentioned by several sources. What really sucks is that these weren’t even trusted sources. I believed it because I heard it enough.

5. The Law of Small Numbers
Borrowing again from Way of the Turtle: This is “the tendency to draw unjustified conclusions from too little information”. How could I have switched trading methodologies so quickly when things weren’t working. I mean, I was switching the way I traded when the system didn’t work after a few days. What kind of indicator of performance is that? At most you would think I would have stayed with CANSLIM investing from the beginning. There’s decades of examples that imply this system is profitable. Not that I am advocating trading on the implications of a system’s past performance, but I had no experience in back testing at the time. Ultimately, the belief in the law of small numbers was just another nail in the coffin.

As I write this post, I get a pit in my stomach. If I had known about how important psychology is to trading successfully, I would be farther ahead, and would not have blown out twice.

However, experience is the best teacher. Without making all those mistakes, I never would have become the student of the market and of trading that I feel I have become.

How did I recover? I got a mentor, learned a system, and focused on trading that system as best as I could. I still grapple with these cognitive biases. I’m not a machine and being a discretionary trader doesn’t help.

I’ve learned to deal with my cognitive biases in three ways:
1. Focusing on being the best trader of my system that I can be.
2. I also my risk and reward in terms of R multiples. The helps because I no longer think of risk and reward in terms of dollars.
3. Trade longer time frames. The less I am in the market, the less these biases can impact me. I still day trade occasionally, but trading with a slightly longer time frame really helps.

Hopes this helps. If you haven’t read Way of the Turtle, I highly recommend it.

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Investing for a living is a dream for many people. The freedom from the rat ace. The opportunity to make your own hours, to control your own destiny. The ability to pull money from the market like it’s your own personal ATM. Well, maybe not the ATM part.

However, in order to get started you need capital. How much capital depends on who you ask. Throughout market history there are stories of traders who started with a a minuscule bank roll and turned it into a fortune. Traders like Richard Dennis and Jesse Livermore started with a grubstake and a dream.

The point is you need capital. Whether it’s $250 for to open a forex account or a couple of million to start a hedge fund. There are ways to get capital. Here are my top 5.

5. Bum it off a relative.
There’s a couple of ways to do this, but I would recommend pitching it like a business proposal. I actually acquired my first trading stake through this method. In my case, I created a business and trading plan and presented it to my relative. He thought it was a great idea and I got funded. Then I lost it. So I asked him if I could have more. Which I then preceded to trade into oblivion. If you’re going to try it this way, make it as formal as possible. Create a business plan including milestones to pay back the loan. Chances are you will lose your entire stake, so consider it before asking Aunt Betty for the cash. How will your relationship suffer after you’ve blown cousin Gertie’s hard earned money on your stock market dream.

4. Credit Cards and Bank Loans.
As an American, I’m very much into immediate gratification. Credit Cards and Personal Loans through your bank are a great way to get cash now. And for the astute trader there’s a second added bonus. Credit cards require that you achieve. Consider that to keep up with the 30% interest rate they will charge you, you’re going to have to trade better than a Turtle to keep afloat.

3. A second mortgage.
If trading wasn’t such a losing proposition for most would be traders, I would actually be serious by suggesting this. Interest rates are typically lower, and the equity you have built up could be enough to actually make a legitimate start. But like I said trading is a losers game. Most will fail, and do you really want to face the Mrs and explain that you blew the nest egg on cocoa options?

2. 401K or IRA.
I trade my IRA right now. Of course I can’t “make a living” off it. I do think that everyone should learn to be proactive with their retirement account. Whether it’s active trading or buying an index fund, if you can’t trade for a living try focusing on making good investment decisions with your retirement.

1. Work for it.
Sorry, but if you really want to trade, you should start saving money from your current income. It is the best way.
Why? Because you will not value anyone else’s money more than your own. All the other methods of acquiring trading capital add stress. True, you do not want to lose the money you’ve made, but the fact that you made it should give you confidence that you can make more if you need it. You have no one to answer to except yourself, and you will do a better job of research, and execution because it is your money that you are trading. Not making enough money? Get a second job whose earnings are specifically for your trading account. Consult, start a blog, write a book. There’s lots of ways to earn some extra cash. Learn to spend less and save more. Consider it training for those streaks when you aren’t making much. Macaroni and hot dogs never tasted so good.

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