Tag Archives: Charlie Wetherall

The Holy Grail of Stock Trading: Testing, One, Two, Three, Four

I know you’re just dying to know how my fourth test panned out

Well, “panned” is a probably poor choice of words, unless, that is, you’re talking about separating useless gravel from the glittery stuff. And in that regard, I hit pay dirt. Again.

Santorini@My “be-all-to-end-all stock trading formula” turned a profit this time of $5,456. Arguably, not bad for a day’s work. It’s not enough to buy that Jaguar F I wrote about but it will pay for a week’s stay on the Greek isle of Santorini this winter.

The astute reader will, of course, aptly point out that my result is kinda misleading since it occurred Monday (Aug. 10). And I’m the first to admit it.

The Dow kicked off the week by soaring 239 points while the Nasdaq-100 zoomed up  52 points. In other words, you could have bought a dead fish of a stock and it would smell like a rose at the close of Monday’s trading. That’s especially true is you were prescient enough to have purchased the stock on Friday’s close—not on Monday’s open when most stocks had already gapped up. Even a lackluster issue like Keurig Coffee (GMCR), which lost 30% of its value in the previous week, reversed course on Monday and earned more than a buck. In other words, of course my new trading strategy worked. Any trading tactic would have worked when the Dow goes triple-digit. So, what else is new?

Riding the One-Trick Pony

All of which illustrates the key problem of trading stocks: You never really know what Ponythe tide may bring. I pointed that out in my previous post: When a stock or a market is moving in your favor, it’s easy to make money. But when the tides of sentiment shift, and they often do so without warning, well, then a variety of issues can crush your holdings. Witness the trading action on Tuesday when, surprise!, surprise!, the Dow fell another 200+ points taking most stocks down with it. Ouch!

That’s why investors usually build portfolios of assets: A group of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. They hope to spread the risk inherent in owning income-producing instruments over many different asset classes and years of time. And I suppose that strategy works, but omigod, how boring.

Day trading, the sort of thing I’ve been doing for 15 years,  is a sometimes frenetic step in the opposite direction. A day trader attempts to profit by making rapid trades intraday, often using margin to magnify the returns generated from small stock price movements, sometimes as small as a quarter-point. A day trader often closes out all trades before the market close and does not hold any open positions overnight.

But my latest attempt at creating the Holy Grail of stock trading plows headlong in a spooky, neither fish nor foul netherworld. It doesn’t create a portfolio of stocks and other assets. It doesn’t try to chisel a few bucks here and there by darting in and out of the market with a series of “day” trades. My latest trading strategy puts all of my eggs, all of my money, into one stock traded only under certain circumstances, which usually arise only several times a month. I’ve created the very definition of what some might call investing insanity: the one-trick pony. And trust me, the trading brio required to put that plan in motion doesn’t come easily. Especially the trick of holding a trade overnight.

It’s Not Psychologically Easy Trying to Become a One-Trick, Whole Hog, Throw-Experience-t0-the-Wind Trader

Over the 15 years I’ve been day trading,  I’ve developed a healthy, profitable comfort zone of trading that pretty well matches my available trading capital. That means I’ve been reluctant to place “big” bets on any one trade because any trade can go painfully wrong. Just ask Mark Barton, the guy who lost more than 100-grand in seven weeks of day trading and then took out his  ineptitude and misguided wrath by killing 12 employees at two separate stock trading brokerages.

In the past, I’ve tried to keep my losses the mentally sensible side of the Mark Barton trading rage. Still,  I know how Mark must have felt. Back in 2008 I lost something like $26,000 by placing a bet on a single stock, Scottish Re, a reinsurance outfit that shockingly lost its bid to be purchased and later was delisted. Overnight, when the news hit the street, that one trade wiped out nearly all of my trading capital. It was a bitter lesson to learn, but I committed that stupid mistake a couple more times before I finally internalized a trading n0-no: Never, ever gamble on a binary, heads-you-win, tails-you-lose stock trade that conceivably could wipe out most or all of my trading capital. This principle is so deeply embedded in my psyche that it never even occurs to me to make such a trade anymore.

Accordingly, for years my trades have been in the 100- and 200-share range, and the occasional 500-share buy. That level was the outer edge of my tolerance for risk since I tend to buy stocks in the $100-$150 range. And I place fewer than, say, 5 roundtrip trades each day. That suggests I might have only $30,000 to, say, $60,000 at risk at any given time on any given day. And let me tell you it’s hard as hell to change a pattern so deeply ingrained after so many thousands of trades.

But “small” buys begat small profits. And that makes sense since day trading is a dicey business. No matter how good you believe your system of trading, your profits are entirely commensurate with the amount of money you risk: The larger your share-purchase, the bigger the potential profit—or potential loss.

But What If . . . 

But what if you could reduce the risk to a point where it was almost negligible? Wouldn’t that allow you to make bigger trades and reap larger profits? And if you used to be scared shitless to make big trades, couldn’t you learn how to make these big trades like the big boys? Well, that’s what my latest trading brainstorm portends to do. Capitalize on the stock that performs so dependably, you can risk big money.

To do so I’ve had to chip away at that comfortable, angst-free way of trading and purposefully inject some real fear into my life.  I’ve made some 2000-share trades with this plan. But I’ll make a few more tests before wagering anything larger. And if that’s sounds like I’m a wimp, I am.

But pretend for a moment that you are risking an unknown fraction of $250,000 or a half-million dollars on a single trade. Now go change your underwear.

LimitsI readily acknowledge that’s pin money for some traders. But that’s still big stuff for guys like me who have $1 million or less in their trading kitty. But if there’s one thing I’ve learned in this life it’s this: No risk, no reward. And if you stick with only what you know, what you’re comfortable doing, you’ll never achieve anything truly worthwhile.

And that’s precisely what I like about my latest dream scheme, so far, anyway. Despite market fluctuations, the Fed’s threat to hike interest rates, devaluation of the Yuan, debt defaults in Italy, ethnic wars all over the Mideast, the strategy always works. And that improved level of dependability has rewarded me with added bravado, if that’s what it is, to place bigger trades. (FYI: the trade I mentioned at the open of this blog was a 2000-share trade. And I make no apologies for “risking” $250,000 to earn slightly more than $5,000 in one trading day).

The Bottom Line

In conclusion,  as I’ve pointed out several times, this is still pie-in-the-sky stuff. And I’ve seen so many “can’t-miss” trading schemes on the Internet I routinely ignore them, much as you will this program. Hence, why bother telling you what it is? I’ll just show you the money.

So hang with me. I’ll take the risk with my money; you enjoy the ride. In the meantime, I’m going to check out that island pad for a January vacation on the Aegean Sea.

Charlie, the R.T.