Stick To The Plan

I have been on a bit of a hot streak lately. I’ve been trading from a very focused mindset and looking for a couple of specific types of setups.

Until…

…an alert came through from a service I’ve been a subscriber of for a long time. Somehow, all logic went out the window, and I abandoned the plan in favor of some impulsive trading. Big mistake.

What had been a solid mindset, trading according to a very specific plan, with specific risk and position sizing, on paper no less, turned into a free-for-all that was more akin to the wild west of trading. It was pretty sad really how quickly I fell apart. Not only did I deviate from the plan that was working so well, I broke my month-long May rule of paper trading only. I put real money on the line to blindly follow a “guru”.

Needless to say, the next few minutes resulted in a nice quick loss that was over 5x the size of my average loss all month, followed by a couple of hours trying to make it back. We all know how well that mindset goes. Fortunately, I took 2 more trades, one flat, and one that covered the amount lost, and walked away with a very valuable lesson:

STICK TO THE PLAN!

I have to remind myself every day that the market is always right, and it always wants to take my hard earned money from me. The moment I think I’m smarter than the market, is the moment I’m headed for a nice big loss chalked up in my corner.

You need to come to the market with a plan. Predetermine what types of setups you’re looking for, what your max risk on any one trade is, what your target exit points are on a trade, and what your goals are for the day. Then stick to the plan. Don’t let an alert from a guru, a Twitter message from someone you’re following, a message board or chat room, or any number of other data avenues tempt you to deviate from the plan.

It’s not always easy, but at the end of the day, I’d rather make or lose money based on my plan and my plays than I would being a sheep simply following what some other trader says I should do.

Know Your Weaknesses & Come To Play With A Strategy

The markets just closed and I just wrapped up my 4th blow up session in 3 years. It’s embarrassing, sad, and angering. I know exactly what caused it. Heck, I even knew going in to trading today what could potentially lead to my demise. Yet, I ignored all that and went ahead and broke the rules.

I’ve realized I’m an optimist when it comes to lots of things in life. I see potential in all sorts of things like business ideas, people, deals, and yes, stock symbols. Optimism is great when it serves part of a pre-defined plan or within the context of dreaming. However, it is what kills accounts both small and large when left unchecked.

I fall prey to my optimism when looking at random stocks, charts, etc. That’s why I finally cancelled my Investors Live subscription. I just jump from ticker to ticker completely driven by emotion. And I may have a few winners, but I ALWAYS end up losing. ALWAYS. I’ve found that I’m not ready to take part in chat rooms for this very reason.

I want to remember how I feel right now. And how I felt the other 3 times I was in this same position. I will NEVER be successful at trading if I continue like I am now.

Even a day later (I rambled through part of this then left it for a day), I’m so extremely frustrated at myself, I can barely stand it. I’m not mad at circumstances, the people in the chat room whose ideas I followed blindly. It’s not any of their fault. I have only one person to blame…ME.

I want to learn from this latest round of stupidity and learn to trade reliably and look for patterns. To trade with a plan and have the discipline to follow rules designed to protect me from myself and overly optimistic mindset when it comes to stocks.

Bottom line…Need to come to the table with a strategy and know what you’re going to focus on for the day. Traders like me need more structure like that.

I WILL be successful and get this figured out. I WILL develop the discipline to not only recognize my weaknesses, but put rules in place to help me avoid the losses that keep me from being part of the 10% of traders that actually make money trading.

Take Losses Quickly

I just looked at my trading journal from the last couple of months of trading mostly penny stocks and specifically the losses. I’m definitely in the 90% camp (90% of all traders lose money in the stock market) at this point. It was a bit discouraging until I looked at my losses and made one change.

I changed all my losses bigger than $200 to only $200. That turned things around giving me nearly a 50% profit on my starting investment pool of $5,000. Of course I can’t go back to change anything, BUT, this emphasizes probably the most valuable lesson I think any trader can learn.

TAKE LOSSES QUICKLY

Gotta cut them short and head into each trade knowing how much you’re willing to lose. I got bit hard by SEED not following this advice that has been pounded into my head over and over by Timothy Sykes among others. In fact, with SEED, I was actually in the red before that turned around, I got squeezed big time and lost $3,000 before I finally pulled the plug and called the Time Of Death on my trade.

Tomorrow as I start a new chapter in my trading life, I’m working to no lose more than $200 on any trade. If that was the only thing I changed, in theory, I would be a profitable trader joining the ranks of the small slice of traders that actually make money trading on a consistent basis.

Review: An American Hedge Fund by Timothy Sykes

I first came across Timothy Sykes about 6 months ago on some blog post about making money online. I read about how he had turned $12,415 of Bar Mitzvah gift money into $1.65 million trading stocks from 1999 to 2002. In 2007, he decided to give it another go and prove he could repeat his rags to riches feat.

I bought into the hype, of course, and subscribed to receive his Tim Alerts letting me know what plays he saw coming each day and what moves he made. Finally after watching one of his Friday Livestock broadcasts on the Internet, I decided to see if I could actually make a go of what he was teaching and ordered up his Pennystocking DVD course. I didn’t know it came with his book (I had no idea he even had a book published).

When I cracked open the package, I really didn’t think much of the book. To be honest, I thought it looked a little cheesy and I had no interest in hedge funds. For some reason, though I picked it up and started reading. I was hooked by the end of the first chapter.

Now I buy quite a few books, but I don’t tend to read too many of them. All part of my information collector problem. So it’s rare that I have a book I can’t put down, but I literally could NOT put this down. I read the whole thing in a few days, staying up until 1am and 2am reading.

His recount of the early days of his trading career and some of the huge plays he made was awe striking and inspiring. I couldn’t believe that a high schooler could be so resourceful and driven to learn as much as Tim did in such a short period of time.

The “How much did Tim make today?” game with his college roommate and making $123,000 on a trade which, because of slow executions neted him an extra $10,000 almost seem to good to be true. Then to hear him recount his story about starting his hedge fund and the roller coaster ride was very interesting as well.

Although a lot of people mention disappointment or wanting more out of the book, I was pleasantly surprised and will not hesitate to recommend Tim’s book to anyone interested in investing. I found it funny, inspiring and full of little “don’t repeat my mistakes” principles hidden throughout.

Order the book from Amazon here:
An American Hedge Fund: How I Made $2 Million as a Stock Operator & Created a Hedge Fund

Initial Investment Approach

I’ve thought a lot about how to best approach this blog and helping ensure I’ll actually get off my butt and do something (Goal #1: See About IH post). My initial thought is to choose two to three strategies or investment methods to apply to different accounts. This will allow me to try different things simultaneously, while also providing a little more benefit to others by offering strategies that fit different styles and personal interest.

Also, I have run across a couple of strategies that I don’t feel super comfortable with, but I’m interested in trying because of the technology they utilize. I’d like to always have at least one more conservative method or account that represents a more traditional approach to investing.

I was thinking about starting with $1000 in each of 3 different accounts and tracking the following broad things on a frequent (possibly daily where appropriate) basis:

  • Current account balance
  • Up to date profits and/or losses
  • Amount of time spent employing the investment method
  • General feelings about the strategy overall

I’m happy to consider alternatives to this style if anyone wants to weigh in. I’d also be interested in hearing what others are trying or would like to see tried on this blog.