the know-nothing investor

…money doesn't grow on trees, you know?

Tag: Trading

6.10%

After I wondered if my strategy was the right approach to win in the markets, I held on to my backtesting and first months of trading. Certainly, I would in a frame of time go positive again, I just thought that I need to have more strength in my convictions and be more sharpened focus in my trading. What did this really mean? Going crazy and forget all about I had learnt. I started risking more capital per trade, about 3%, and during the trade I would change my stops influenced by market micro-swings. I was opening positions because I want a certain price action not because I had identified that price action. Believe in what you see not in what you want to see.

I started to feel anxious and having bad night’s sleep. I was going fast in stupidity lane. What happened to me? I was so good with paper trade account. The problem was real money. I had started to put money where my mouth was. That pressure was immense and I could handle it. All that wishful thinking, about making tons of money and quit my job, were being torn apart. I was having a reality shock. I was learning that trade is really difficult and learning it the hard way, with losses. With that kind of scares you read about ten thousand times, but we quite don’t understand it because we never feel it. Probably this kind of pain is necessary to avoid future mistakes and at some point grand majority of traders have or will experiment this.

When we trade with our real money, some of our worst human feelings start popping out, greed, euphoria, panic, despair, self pity. These feelings cocktail  are so powerful that if you don’t have mastered your mind you’ll make real bad decision. You will act by impulse like if you are under attack and your rationality will be underpinned by your survival mode. The market is fighting me or market is controlled by big corporations to doomed the little guy were excuses that I used when I was losing.

But markets don’t care about your feelings. You’re not especial. You’re simple one more going with the crowd. If you lose it’s your responsibility.

I was immersed in overthink when I was saved by my hard limit. I was rational enough to hold on to my first and most important rule.

In ten months I had lost 10% of my total capital. It was time to stop…

 

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5.TRADING DAYS

I had almost everything to start and the last step was to find a broker. In Portugal there is not much to choose from and commissions are almost the same between brokers. So I chosed an international broker with confirmed credits that was operating in Portugal for a few year

I also must say that, subliminar or not, I went for the one with the most appealing presentation. Is incredible how much decision we make everyday based on what matters the less.

After I opened the account I was really glad with myself. I was taking risks like an entrepreneur does when he starts his business. That made me feel very grown-up.

When I saw 10000 USD deposit in the account I was so eager to start I forgot a lot of my strategy. Of course I looked at some charts for identifying some trends, but I didn’t use the same setups that I had used in backtesting or even looked at screeners to find stocks based in my predefined parameters.

In fact I bought 9 different equity shares, 7 longs and 2 shorts, in the same day and I didn’t even care if they were near a new higher high and probably heading for a market correction.

I thought as long term trader it would not matter, but this was an excuse to be immediately part of the game. I could not control myself and I was not able to make a good market-entry timing. At that time I didn’t even notice.

Even stock picking was so bias, I chose basically blue chips that I am used to. Is incredible how I didn’t see it. I bought Visa, Mcdonald’s, Ebay, Starbucks, Unilever, Royal Dutch Shell, etc., companies that make part of my daily live. Why I didn’t I buy shares of a company that I’ve never heard before? I guess we tend to choose what we know best, it represents comfort and reliability. But what have these two adjectives to do with buying or selling shares? Nothing, I must say…

I was starting to accumulate really big mistakes, but I was still convinced that I was at the top of my game. Basically because in the two first month of trading I had a possible profit of 5% of my total account. I remembered thinking how could be that easy? Silly me…

Then Mr. Market when for a correction and I saw my virtual profit come down to 0% again. I tried to convince myself  “this is just a phase, as it went down will go up again”. At this time I was starting to doubt my trading system. I was accusing some pressure and I decided to talk to my wife about my wonderings.

Even though my wife was very supportive from the beginning, she is a bit sceptical about the risk involved in trading which is good to keep my feet in solid ground and it makes me more cautious avoiding failure – failure is always present you can only try to fail less.  So when I approached her to share my feelings I started telling her that my account had had an increase in its value of  500 USD in just two months, but now we were in a corrective phase and the account was back to square one. I still can remember her words “It doesn’t look a great deal of a system! Why didn’t you sell when you were making money?”

Those words really affected me. Now, I know why but by then I thought she had a point and I was starting to wonder if I was doing it right.

4.THE STRATEGY

I had gather 10 000 USD in two year, which for Portugal standards is a considerable amount, especially if you have a young family to support and you just saw your pay-check cutted to less than 1500 USD per month.

As I said before I would trade stock’s CFD because of the leverage that I could achieve, which meant that I would have about 100 000 of total funds to invest. Pretty nice, hum?

I also establish that the most I could loose from my total capital was 1000 USD or 10% if you prefer. This rule was my first and I tried to be the strongest rule. If I would lost that amount of money I would stop for somes months for rethink my strategie. But for sure that would not happened.

The trading style that I was more comfortable to practise was trend-following, because it was simple enough for me to understand it and It was quite simple to identify trends.  I even got to do some programming based on the moving averages to give me entrance and exit points. My backtesting was quite profitable. I was getting really good…

I also defined that I would buy 10 equities shares for some diversification and mitigation of risk. I would buy 7 longs and sell 3 shorts, based on the 130-30 portfolio strategie because at the time I had read a paper that this was the way to have better returns with smaller risks.

Picking stocks

I started looking for blue chips that were near highs, because if they are near all time highs there is a great possibility that they will go higher. In opposition, to go short I chose stocks that were in a downtrend and were making new lows.

I also looked for stocks in uptrends that were near 50-day moving average for a buy and stocks that were under 200-day moving average for a sell.

I even used screeners that gave me a complete list of stocks in similar situation.

The idea was to catch major trends “à lá turtles” way. Real simple plan that I could easily understand it and mastered it.

I also tried to diversify geographically my stocks, because there are some differences between countries’ economic cycles and therefore I was reducing my risks.

Money management

Money management took me a great part of my learning. I know that in this game I will lose money. It’s part of the game and you must accept it, but It was a non-option to lose all my capital and my 2 years effort in saving that amount of money. It would be a great failure and the emotional pain would be so devastating that I probably would never look again for stocks’ investments. So I look at money management as my safety net.

My money management was really simple I would pick a stock that would meet my predefined attributes. Then I would identified a low point near 50 day moving average or some new higher low on the uptrend movement. Here I would define my stop area and I would tried to buy the nearest I could from this point. The difference between my entry and stop point would be the equivalent of 1 to 3% of my total capital. This was the amount of money that I decided that I could loose in a single trade. This implied that I would have little space for error because I would stop trading If my losts achieved 10% of my total capital.

Nevertheless I was confidence that I could have success.

Pyramiding Profits

On the other side, I established if I had correctly spotted a stock’s uptrend I would take advantage of market corrections and I would buy more of that stock, maintaining the same risk. Let always make your profits run, professionals say.

And this is very simple to do. Imagine that you bought stock and you risk 1% of your capital. After few months, you have a possible profit of 20%. Meanwhile the stock enters a corrective phase and the price falls 8%, not going lower than the previous time (where you had established your first stop), making a new lower high.  Then if it rebounds that means that the worst has passed and the uptrend is still intact, therefore you can move your stop to the new lower high area. This means that you are not risking 1% of your capital anymore and you have a  profitable trade. Now you can raise your position size on that stock, maintaining the same initial risk of 1%.  This can really boost your profits.


Example

Fig.1 – Visual image of a simple money management and how to pyramid profits

Market Timing

I didn’t take much time thinking on this. Now I know that is an important part of a strategy. By then I thought that I would go with the flow, as long as the trend lasted.


This was my approach to take my fare share of what markets have to give. A simple plan because reality is so complicated that you shouldn’t add more layers of complicatedness.

 PTEN

2.WHY TRADING?

Why trading? I guess it is all about me. In a world where since day one everyone says what to do and how to do it, trading is extremely appealing because you are alone and you have all the power to decide when you want to buy or sell, how much will you invest and what stocks will you choose. Freedom is the word. Trading is freedom and making life of it it sounds like hitting the lottery jackpot.

If in my daily job when something goes wrong, I can shove responsibility on my colleagues, how chiefs decided and even how the organization is established, in trading your decision is your responsibility, you are alone. Take profit or you will lose. No excuses can be shared.

And this sounds so wonderful to my ears. Having an activity where I depend of myself to prove that I am good at something, with no interferences from other, where luck or knowing the right persons does not matter, it is an activity where I want to take part of, it is where I belong. The only things I need to do are to study hard, to maintain focus, to stay curious and humble…at least this was what I thought in the beginning.

Nevertheless, I was pretty sure I would succeed. Afterall I am no ordinary guy (which is what everyone thinks of themselves 🙂 ).

But can we as humans handle unlimited freedom?

PTEN