Thursday, December 24, 2015

Why Traders are Hypocrites about Trading Goals and Blow up Their Accounts

Most traders blow up their initial trading stake.  Destroying that first trading account is a right of passage that every successful trader goes through, but few admit to doing.  I don't mind that it happened to me.  I embrace it, I wear it on my sleeve.  In fact, when I was starting out as a brash young punk thinking I could mint money, I blew up two accounts.  Trust me when I tell you that demolishing two accounts has a way of sobering you up real quick.  I decided that I had to figure out what I was doing wrong.

This is when the light bulb went on for me.  I had my aha moment after I actually sat down to review my trades (as suggested in a $60 trading book that offered little else, but was still worth the money for that one piece of advice).  What I discovered was that I was a good stock picker.  I was hitting on 70 percent of my trades, but there was always that one trade that would kill me.  I had no concept of position size yet, or risk management, but on this day I started a journey that lead me to the holy grail of trading.

Today I talk to tons of traders, and inevitably we talk about trading goals.  These days there is more information out there and most beginning traders have some idea of position sizing, so the goal always starts out sober.  It goes something like this:

Just like you Paul, I'll start with a small 5-10K stake, and consistently build it up to $100,000 in a few years.  I will keep position size small and only risk 1 percent per trade.  As it gets bigger I'll get even more conservative.

It all sounds so good.  The problem is, that is not what we really want.  What we really want is to hit the lotto and get lucky with one or two stocks that change our lives.  We tell ourselves we will do it the "right way", but really we just want to get there as fast as possible.

That's why just about every trader that says they will do it the right way ends up doing every thing wrong.  They make bigger bets than their account can handle.  In the beginning they might even get lucky, but greed takes over and they get even bigger.  Whereas they were supposed to start trading more conservatively, they make even bigger bets.  Eventually one of those big bets fails.  Then they make another one that fails.  Now, instead of sobering up and building slowly, they try to win those losses back.  That is the beginning of the end.

This scenario is all too commonplace.  I know because I have had conversations similar to this one more times than I can remember:

Stressed Trader: Paul, I screwed up big time and need your advice.

Paul: You did not just blow up your trading account again, did you?

ST:  No Paul, I didn't, but it's now half the size, so I'm going to start trading bigger.

P: Oh, so you are asking me the fastest way to blow up your account, eh?

ST:  Quit messing with me Paul, I've only got $5,000 left to trade and I need to make back my money fast.

P: Do you remember what you told me when you started with 10K?

ST:  Yes, but I need to make it back and then I'll go back to trading the "right way".

P: I can't help you son, you are going to blow up your account, and you will learn from it.  Come back to me when you have another stake.

Now guys and gals, if you are ever caught in this situation and feel the urge to get bigger:


I feel this kid's pain.  I have been there.  I know what it's like, but I also know I never want to feel like that again.  The average retail investor starts with around $10,000, and the prevailing wisdom is that 95 percent of traders fail.  Why do they fail?

It's because they are lying to themselves.  They don't want to incrementally grow their account.  They want it all now.  Be honest with yourself and ADMIT IT!

Now once you admit it, sober up and fix your brain.  You know you have a better chance getting hot at a blackjack table in Vegas than getting lucky trading.  To succeed at trading, you know luck is not an option.  You must fix your mental trading game.

I know what's coming.  All right Mr. Market Speculator, that all sounds good, but how do I do that?

I'll admit it takes more than what I can write in one blogpost.  It takes hours of dedicated training.  However, you can start by:

1.  Always having a game plan for every trade

2.  Have automated rules in place for position sizing

3.  Never risking more than 1 percent on any single trade

4.  When you feel the urge (and it will hit you from time to time), dedicate yourself to a battle of mental warfare with yourself.  The evolved, intelligent, emotionally sound you needs to beat the crap out of the greedy neanderthal dreaming of a big payday.

I know this sounds like a bit much, "battling yourself with a war in your head".  Trust me, I've read all the self help NONSENSE.  I do not want you to become a self help junkie.  That just becomes another headache in and of itself.  Nor do I want you to create a ton of complicated rules.  Just get in your head and beat the greed out.  It's that simple.

Once you have won a few battles, it gets easier to fight your true nature.  A feedback loop will form a HABIT and at some point you will no longer be a hypocrite.  You actually will want to build it the right way and the thought of taking on too much risk will make you sick.

Finally, once you start analyzing your trades with a focus on risk and position size instead of stock picking, that when you know you have achieved true TRADING ZEN.

Taken from the  trade diary of Paul, a market speculator who trades stocks and commodities using technical analysis, chart patterns and trend following methods.

Below are my personal trading rules that I have adapted from my 2 years in the market.  I adapt and refine these rules/procedures as I become more proficient in trading.  I truly believe the secret of my success has been my ability to trade within myself and sticking to being conservative in my trading. When I tried to ramp it up to fast, which I did from the end of October through November, I failed miserably.  I started 2 weeks ago going back to the basics with slightly higher position sizing and I made up for 6 weeks of losses in 2 days.  You have to trade within yourself and gradually build yourself up to it.

You can't follow the mods in the room trying to match their trades.  That is the main reason that we do not post $ profit amounts of our trades.  We do not want traders feeling that they have or are failing because they are not making what we're making.  I trade a lot of the tickers that Mike trades but if I was trying to match his profits, I would go broke because he trades more aggressive and with a larger account than I do.  I trade within myself.  Too many traders try and compare themselves to other traders in chat and try to follow those that are posting trades all day long.   Most are paper trading or calling out trades they didn't take after the fact.  24 tickets in Suretrader will cost you about $175.  A killer for a small account.  The few that are actually trading in most rooms will not post trade after trade all day.  After a while you will know who is live and who is Memorex, but the point is no matter what you should not follow or compare yourself to other traders in terms of profit.

1.  I always have a plan prior to entering into the trade.  I have a target entry point/level that I base my trade off of, my stop level, and my profit targets to book profits on the way to my ultimate profit target.

2.  I only trade the tickers that meet my criteria and I only trade my strategies.  I will not follow anyone into a trade based on their setup or strategy.

3.  I will always have my watchlist ready to start the trading day.  I will write down my thoughts on each ticker on my watch as well as potential entry,stop and profit target levels. If I do not have any tickers to qualify for my watchlist, I focus on my opening range scan to identify potential opening range breakouts or breakdowns.

4.  My profit targets and stop are determined by support and resistance levels.  This could be based off of daily chart levels, moving averages, or psychological levels such as whole and half dollar marks. I also factor in my risk ratio.

5.  Do not take a trade that my risk/reward would be less than 2:1 at my first profit target.  This will be calculated based on the range between my entry and profit target.

6.  Even though I have a small account I don’t worry about how “expensive” a stock is or how many shares you can buy.  A volatile $100 stock that moves 10 percent is better than a  $3 stock that moves 5 percent, regardless of your position size.  I focus on percentage gains, not point gains.

7.  When I determine my position size, I will focus on my risk amount and adjust my position size accordingly based on how far my entry is away from my stop target.  For instance if my risk on a trade is $100 and my stop is .20 away, my position size will be 500 shares.  This also means that my first profit target must be at least .40 away from my entry for this trade to make sense.

8. I stick to my profit targets and stop once I am in a trade unless the price action dictates a change.  I will not micro-manage a trade, but I will monitor the price action throughout the trade.

9.  I strive to keep losses small and in check while letting my winners work keeping my wins larger.  I embrace small losses because if they are withing my risk parameters I consider the trade a win. Successful traders do not have small wins and big losses.

10. I always pay attention to the overall market (SPY) when trading individual stocks.  This helps me determine the likelihood of my trade plan being a successful one.  For instance if the SPY is trending down and trading below the VWAP, a long trade would not make sense for me to trade.

11.  I have said it before and I will say it again.  I am from the K I S S school.  Keep it Simple-Stupid. I only have the indicators on my chart that are necessary to my trading.  Indicators only reflect what we see in price and volume.  I only use moving averages and VWAP

12.  I keep a trade journal and I study my trades every night.  I could not be successful without doing this.  Reflection is a very powerful tool.

I teach and mentor traders everyday in the Averagejoe Trading community.  I stress education and practice before you start risking your own money because blowing up a paper trading account is a lot less painful than losing your personal savings trying to learn how to trade.  I have the tools and personnel to give you all you need to be successful.  The rest will be up to you.  If you would like to learn more about how I trade email me at  I host Sneak Peek Wednesdays every week.

Sunday, December 20, 2015

Stock Market Outlook for Week of 12/21

Stock Market

The market ended a tumultuous week slightly lower. Stocks had rallied over the first three days and jumped Wednesday after the Federal Reserve raised interest rates for the first time in almost a decade. The move was a vote of confidence in the U.S. economy. But over the next two days stocks were hit by some fear of weakness in the Chinese economy, slowing global growth, and weakening demand for energy and metals.

Bank stocks fell the most and technology shares suffered more declines as a bad December got worse for Apple. The world’s most valuable publicly traded company sank again, bringing its monthly loss to 10 percent.

Technically, the overall trend remains bearish as the broad market continues to trade below the 50, 90, and the 200 day moving average. While the tech sector still looks like it could lead the market higher, the overwhelming percentage of stocks trading below both the 20 day moving average and the 200 day moving average tells us that bears have complete control of the market at the present time and sector imbalance remains strong.

The double top set up that developed last month appears to be intact, and it will take the the broad market a strong rally above the 212 level, which could happen if the FED data comes out slightly worse then expected over the next few months, which would imply slower rate hikes in the next few quarters, which would ultimately give the stock market some support.

As things stand at the present time, the sentiment remains bearish and until I see at least 60% of stocks trading above the 200 day moving average, I doubt we are going to see sustained buying pressure come into the market.

If we break the current support level, the next level down doesn’t come into play till we hit the 195 level on the SPY, but I don’t see a major catalyst that would cause the market too go too much lower, especially with the current momentum level pointing to oversold levels once again.

Energy Market

With 2016 drawing near, commodities investors should temper expectations for a legitimate oil rebound next year.

Last week, crude oil prices fell to their lowest levels since early 2009 after OPEC’s meeting Friday ended without an agreement to lower production. OPEC has been fueling a global supply glut in an attempt to maintain market share and squeeze out high-cost oil producers.

OPEC has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers.

Technically, we can expect some relief from the downside trend, but over the next few months expect prices to continue moving lower. Because financial markets “price in” everything known or anticipated, the impact that lower energy prices is having on big oil companies will diminish, since the recent downside pressure was largely priced into the stocks price last quarter in anticipation that oil prices would soften.

Sunday, December 13, 2015

Stock Market Outlook for Week of 12/14

Stock Market

A slump in oil prices sparked a global sell-off in financial markets on Friday with losses spreading from Asia to Europe to the U.S., where stocks fell sharply.

The selling was broad, with all 10 sectors of the Standard and Poor’s 500 index ending down. By the end of the day, the S&P 500 index had lost 39.86 points, or 1.9 percent, to 2,012.37. It was down 3.8 percent for the week, its worst showing since August.

As I explained last week, the overall market sentiment was bearish, even though growth stocks and tech stocks were close to old price highs. The percentage of stocks trading below the 200 day line, never rose above 40%, telling us that the bears control the long term trend.

The most likely scenario is a bounce back up to the 50 day moving average and possibly a test of the upper resistance level, till the overall momentum levels show that at least 60% of stocks are trading above the 200 day moving average.

First major support level on the SPY doesn’t come in till the 196 level and with tech holding above the 50 day average, I doubt the downside selling pressure will be sustainable. In other words, the most likely outcome is more continued range bound trading action ahead.