The Part-Time Trader (9 page)

To say the least, of all the traders I have met, helped, and coached over the years, I have never seen a single person who has come up with this “game plan” and actually achieve its final outcome, or in this case, a cool $3 million. Instead, those who have tried to game the stock market with this kind of a hokey spreadsheet were left with far less capital than what they started with.

Other traders have come up with spreadsheets or unrealistic goals of making 2 percent per day in their trading. They come up with some quirky system of trading leveraged 3× exchange-traded funds and believe they can hyper-trade them enough throughout the day to make a cool 2 percent on their overall capital
each day!
On the surface they justify their irrational gains over the long term with the belief that somehow 2 percent per day is not much to make, but they do not account for the position size, volatility, and their false belief that they will not experience much in the way of losing trades. But let me just say, it is a hokey belief that is far more outrageous than the individual who thinks he can average in his losers with a 10 percent per trade return.

I've always been a firm believer that trading should be boring. Once it starts to get that heart-pounding feeling, and edge-of-your-seat thrilling, you have already lost. The prospect of trading successfully when you have the adrenaline rushing for the six and a half hours while the market is open will create an emotional experience that will leave you near penniless and borderline insane at the end of the day.

Another shortcoming of traders and particularly those stuck in a desk job is the fantasizing about future wealth—here again another shortcoming of my own as a trader long ago—when a trader begins to think that he is in control of the market and not the other way around, that somehow the market is going to bestow upon him access to sums of unfettered wealth.

Making projections and trying to form-fit the market to your goals, desires, and beliefs for what you want to achieve is one of the worst mistakes a person can make when starting out in trading. The disappointment that will come when the cooling-off period begins and reality sets in will undoubtedly cause carnage to the mental capacity of the trader trying to remain unemotional in his or her approach to trading.

A downfall in projecting future returns on a market that is every bit as unpredictable day to day as who will become the next winner of the Powerball lottery is where a person manages a trade that will be centered on the spreadsheet itself. Instead of managing what the charts show, the person will be telling himself that he needs to net 10 percent on this trade, and more times than not will let 9 percent in gains turn into a loss simply because he was trying to conform the trade to the story he had created with his very own spreadsheet.

What is even worse is if the individual is coming off of a trade that “needs to be averaged in with the next winning trade,” then even the slightest loss will require the trader to make at least 20 percent on the trade before he can sell out of his next position. That is a losing proposition under which no trader can perform. Who knows the excruciating kind of pressure he would be under if he lost two or more trades in a row! So avoid it. Avoid any notion of trying to trade beyond the day that you are currently in and what the market is willing to offer.

There is no other industry where you can see the compounding of your capital faster than you can count it than when you are on the right side of a trade. Being long on a stock that is squeezing the shorts to cover their positions is an incredible experience, no doubt.

I remember one such occasion, where I was in a training session being taught a new skill for my job. I was paying attention but not quite as much as I should. By the way, if you are ever in a training class at work where there are rows of computers, always take the one in the far back corner if you plan on watching the markets simultaneously. Since most training sessions are mind-numbingly boring, most part-time traders would choose to do so.

The reason for choosing the back of the classroom, away from a door, and in the corner of the room itself, is that you will not have anyone who sits behind you with a clear shot of your monitor. Consequently, you will not have to worry about someone assuming that you are not taking in everything that the presenter has to say.

Back to the story, though. When I was in this class, they were teaching us Microsoft Excel, and since I was pretty much a pro on all things Excel, particularly after creating my faulty trading/retirement plan years before, I tuned out and watched the markets. At the time, I was trading Smith Micro Software Inc. (SMSI), which was trading at a much higher price than what it is currently trading at the time of this writing. The stock had been idle for days upon days, and I was growing quite weary of it at this point. Then just as the presenter was getting into the meat of the presentation, I witnessed a massive short squeeze get under way, and one that was probably the largest I had been a part of to date. The stock was in the $9s, and then minute bar after minute bar the stock was pushing up 1 percentage point after another.

Within 10 minutes that stock was up nearly 10 percent. I was probably up a cool $1,000, which was far more than what I made in a day while on the job. It is funny, though, because I wanted to fist pump and bang the table in excitement while the presenter continued on in the quiet doldrums of her presentation, but I simply could not do that considering the circumstances. So I painfully kept it to myself.

But here was where my flaw was as a trader, and this is a huge issue for many part-time traders as well. That is, instead of managing the trade and the price action and responding accordingly as to whether I should buy, sell, or hold, I instead started counting the dollars and trying to manage the trade based on how much the trade was worth in actual dollars, minus my original total share value.

You have lost the battle if you start counting dollars in your trading, and if I were creating a new trading platform today, I would not let traders view the dollar value or how much money was gained or lost on a trade until they were completely out of it. That is what gets so many traders in trouble. You see, if you are up $500 on an individual trade, you start visualizing what those profits will buy you; perhaps it is an iPad or a need for which you were unsure how you would pay, like a new set of new tires for your car or braces for your son or daughter.

The next step in this faulty trading progression is to tell yourself that if you close the trade right now, you can have the assurance of being able to afford that luxury or item or need. While you might be closing out the trade for noble reasons, it will have drastic long-term consequences on your trading.

Ask yourself how the trading mindset that I have described has anything to do with trading stocks and having a valid reason to close the trade and lock in the profits you were holding. The simple answer is absolutely nothing! That is why watching the profit/loss column on your trading platform could not be more wrong for you. It will ensure that you remain emotionally based in your trading and decision making. In fact, the very notion of comparing your gains on a trade to what it would allow you to personally acquire if you were to close the trade out now is by its own definition “emotional trading.”

There is a big difference, though, in what I am speaking of versus being oblivious to the losses you might be piling up and refusing to acknowledge or being aware of a certain flaw in your trading technique. If you are piling up loss after loss, it will be pretty obvious, and not doing anything about it will be even worse. What I am trying to pontificate is not to become absorbed with the dollar aspect of the trade. Stay focused on the percentage gained or loss. Watch the price action and what it is trying to tell you. If the stock requires that you book the gains because it cannot break through resistance, then sell it. If you are short a stock and the prospect of a short squeeze is becoming increasingly possible, then consider taking some of the position off and tightening the stop loss on the rest. This is the way we are supposed to trade, not holding on a stock that you are up $1,000 on and hoping for $2,000, simply because you “need” that money and cannot settle for less.

The same can be said when you are on the losing side of a trade. For instance, if you are losing on a trade, and for good reason you placed your stop loss on the trade 5 percent below where you entered the price, you may panic if the trade goes against you, as many traders do. Let's say that a trader is down 4 percent on a trade on a $10,000 position. He will look at that $400 loss and panic once he realizes that it is a month's worth of groceries or a car payment. In order to avoid making the trade worse for himself, he will close out the position before giving the stock an opportunity to really play out.

Unless the stock, based on the chart itself, requires that you sell out of your position at a 4 percent loss instead of a 5 percent loss, you are simply trading out of emotion due to the thought or prospect of losing any further capital on the trade. That emotion is quite simply fear, and it, too, can cripple your trading in a permanent way.

If you are closing out a position based on the dollar gains you are seeing or the losses you are experiencing and not basing it on chart and price movement, you are trading out of emotion, and those emotions are lulling you into the false sense of hope that you are trading for all the right reasons, and that you took the actions that you did for noble reasons. However, the true problem underlying this behavior and the emotionally based decisions it is driving you to make is not because of the dollars at hand being made or lost; rather, it is the size of the position. So if you are watching the dollars far too much, realize that you are probably trading with a dollar amount per trade that is probably too much for you to handle on a steady and consistent basis.

Your money is emotional. What you do with your money is often based on an emotion of what you “feel” that you need, want, and desire. The problem with the stock market is that there is no room for any of that if you wish to be successful as a trader. The less important the dollars are to you, the better you will become as a trader. Far too often, people trade beyond what they can afford to lose, and if that is the case, no matter how well you understand technical or fundamental analysis, you will more than likely not make it in the long term. I am strongly opposed to trading with life savings, loan proceeds, college funds, or anything else that you think you will need the money for at a future date. The less important to your future the capital you are trading with becomes, the better it will be for your overall trading.

Case in point: have you ever wondered why paper trading (i.e., trading stocks without any monetary risk) is so much easier than when you finally go live and actually start trading with your own money? Simply, it is because what you are trading with (i.e., fake money) does not make you feel any emotion, worry, or excitement, and that is because nothing is really at risk. Throw in your own hard-earned money and the wheels will really start to come off the bus. Money and our attachment to it is usually what stands between us and profitable trading.

Let's dig a little deeper into this discussion because it is truly paramount that you understand the position sizes when trading and how it will affect your demeanor in the workplace if you do not understand the implications of trading with position sizes that are too large.

The bigger the better when it comes to trading stocks:

Because the exact opposite is true when you lose and the true reality of the above statements really becomes:

Evaluate yourself:

Question:
Are you afraid to hold a position overnight, even though you find yourself to be a swing trader?

Answer:
Then you are trading too big.

Question:
Are you scalping with big positions and settling for pennies on the dollar and finding some satisfaction with it?

Answer:
Then you have too much fear in your trading, and you are trading too big.

Question:
Are you checking your positions incessantly every minute of every day and getting emotional on small pops a stock might have during normal trading activities?

Answer:
Then you are trading too big.

Question:
Are you becoming moody at night with the wife/husband/friends/kids and checking futures when you should really be sleeping?

Answer:
Then you are trading too big.

Sounds extreme? It isn't. A lot of people will read this and relate to the large majority of the questions I have asked here. But take some time after the market has closed or during the weekend and really ask yourself, with your average position sizes, what kind of angst and stress is it causing you? If you are watching the profit and loss on your active trades more than the actual price movement of the stock itself, then you probably need to take a step back from trading and figure out how much you need to reduce the position size of your trades.