RunawayTrader

I received an email from a kindly gent the other day who asked me for advice about trading stocks. He is confessedly new at the game, and like anyone with brains, wanted to avoid the pitfalls that savage the naïve tenderfoot.

Here’s his note.

Dear Charlie,

You have done a great job on your blog! I have just finished exploring your site and I loved it! There are so few of blogs like yours. I think in all of the searching that I have done yours is the second and by far the best I have found. It is very inspirational to see your success. And now I have more confidence then ever before that it can be done. I just wanted to say thank you for creating your web site and for sharing all of your knowledge and experience. I was also wondering if I might ask you how long it took you to achieve your current success on the markets? I’m just starting out trading the markets and I was wondering if there is any advice you could offer that would contribute to my future success. Maybe some books or possible web sites to view? Thanks Again. Best Wishes, Your Friend, Daniel

I am afraid that offering advice is a nettlesome business because so few recipients (I include myself in that headstrong company) actually take the advice and benefit accordingly. It’s only after countless pummelings that you really begin to understand. As the poet Keats observed, “Nothing ever becomes real till it is experienced . . . ”

That’s why the myriad of books written about trading (and day trading) rarely turn tyros into trading champions. The only way to get good at anything is to stay the course. Sooner or later, you’ll learn how to be a winner. But here’s the kicker:  IMHO, the fewer personal hangups you have, the sooner you’ll become consistently profitable, since anyone can learn the technical aspects. But if you can’t overcome your private tics, you’ll never make money.

With that in mind, here’s what I’ve learned at 10 or 12 years of trading. Perhaps other readers can add their own “do’s and don’ts.”

1. Anyone can make money in the stock market—if you hang with it long enough. I say that because everyone reading my words has to overcome what I think are personal hang-ups to become successful. Some traders, for example, are overly fearful about losing money; others are overly greedy, and still others might not have sufficient time to tend to their trading garden, and so. In other words, it is not training and experience about the technical aspects of trading that spell their ruin, but rather, their emotional baggage.

2. The more money you bring to the table, the easier it is to make money. I am unsure of why this is true, but it is. Perhaps the scarcity of capital enhances one’s fear factor and leads to more “emotional trading.” After all, if you’re trading with your unemployment check or your social security allotment, placing a profitable trade is not just nice, but necessary for your survival. But maybe you’re the kind of person (again, think about personal hang-ups) that trades more confidently when you’ve got plenty of capital to cover your goofs. Or that rare individual who trades just for laughs. Money, either losing or winning, doesn’t mean a thing.

That doesn’t mean that, as a neophyte, you should throw your life’s savings at the market. Obviously, there’s a learning curve to this kind of gambling, and your beginning bets should be in line with your ability to absorb losses—since you’ll have many. But once you’ve developed the critical mass of trading skills, having plenty of capital is a surefire way to earn lots more. In my case, I (again, an experiment of one) didn’t feel really comfortable trading until I had $50,000 in capital. That enabled me to trade, with margin, anywhere from $150,00-$200,000 daily.

3. Avoid betting the farm on long shots. If you’re looking for a foolproof way to lose every cent you own, bet on binary trades: the yes/no, X/O trades that crop up every so often. From my personal experience, I have lost more money trading those few stocks than all other trades combined. And once you lose your trading capital, the game is over. It’s the sort of thing that drives trader over the edge (guys like Mark Barton, for example). My comeuppance was betting 8,000 shares of SCT wherein I took a $30,000 overnight tar and feathering that took years to fully recover from. But, in my last post I mentioned the bets traders are taking on DNDN. That’s a binary trade: Heads, the FDA approves the stock (and it soars); Tails, the FDA does not give approval (and the stock craters). Yes, I own some DNDN but only a few hundred shares—yet if you read the comments on that blog, there are many others who are betting fortunes on this turn of the cards.

4. Cut your losses; ride the winners. This bit of advice, offered by every trader who’s ever written a book, should nevertheless be your mantra. Never, ever, hang around to take what I call, The Big Hit. I never allow a stock to backpedal more than a few percent since it might well keep on going down. Yes, it hurts like hell when you sell the stock and it reverses field, but it’s far more painful to take the full brunt of a loss which could be huge.

On the other hand, let your winners ride. I admit I’ve been trading for a dozen years and still have trouble with this pair. I have to practically beat myself to avoid cashing in too early (yes, I know you’ll never go wrong making money).  But, I’ve got this hangup . . .

5. The trend if your friend. Boy, I’ve heard that bromide many times, but I never took it to heart (remember what Keats said?) until I witnessed some major swings in the market that spell hyper-profitability or mega-loss. I felt, for example, that the market really turned a corner back in January, and I started to take some longer term positions. I wrote about that back in March.  But, the market is now riding so high it reminds me of the dot-com days when you could buy a BMW with the profits from an afternoon of sharp trading. Yes, you can afford to be aggressive. Yes, this kind of market makes everyone feel like they’re trading pros. But, that won’t always been the case. Strategies that work today may not work as early as tomorrow. This market is going to fade, and when it does, I’ll be sitting on the sidelines until it makes up its mind where it’s going. If you don’t know; wait.

Now it’s Your Turn

OK. That’s what I’ve learned. On yeah, I have my own bag of trading tricks I use allthe time, but I think traders — through trial and error — develop their own “rules of engagement.” If you can to share, add some thoughts to the comment page, or even email me a whole guest blog if you like. I’m sure my reader Daniel, and many others, would appreciate it.

Charlie, the RT