Search Results for 'traders'
Small Mistakes = Small Consequences
One of my favorite trading books is Reminiscences of a Stock Operator by Edwin Lefevre. Based on the trading of the famous Jesse Livermore, Reminiscences is full of trading lessons from cover to cover. Although it was written 83 years ago, it still applies to today’s market. Learning from the successes and failures of one of the all-time great traders is hard to beat.
Among the many lessons embedded in the book, one common theme is that a trader should keep his mistakes small. Livermore developed a “probing” system in which he would enter small positions to monitor their activity before he built up to a full position. This way, if he was wrong, it only cost him a little.
Chapter 10 begins with some great advice:
“All stock market mistakes wound you in two tender spots – your pocketbook and your vanity.“
This is so true! No trader wants to take a loss. It costs money and diminishes pride to know you were wrong. The mistake of losing money is compounded into a shot to your confidence which is so important to keep intact as a trader.
Lefevre goes on to say:
“Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.”
I can certainly relate to that. The times when I know I could have gotten out of a bad trade at a better spot but didn’t because of a bad decision is always a shot to my pride. Such a feeling can be very detrimental to subsequent trading results, as the need to “make it back” leads to forced trades and compounded errors.
Make it a point to keep your mistakes small this year. Take small losses – they are easily overcome with winners, and you’ll keep your confidence intact!
Find out how I trade for a living by keeping losses small and locating winning stock picks to overcome them with a 2-week free trial to my stock pick service.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Trading on Margin
The Apprentice finale ended recently, and I was reminded that Donald Trump’s wealth was amassed through the use of leverage in real estate. Borrowing money to make money isn’t just done in real estate, however. Day traders have additional buying power on hand every day in the form of margin, and using it properly can mean significant gains.
Possibly more impressive than Trump's ability to leverage is his ability to balance a dead animal on his head.
Margin is the ability to borrow against cash and/or securities in your trading account in order to purchase more. Day trading margin accounts allow for 4-to-1 leverage intraday, and 2-to-1 leverage overnight against the cash held in the account. This gives the active trader access to the double-edged sword of leverage, generating profits and losses at a much faster pace. Although swing trading stocks and holding overnight on borrowed funds costs interest, day trading on margin doesn’t cost a thing.
Margin trading isn’t for the faint-of-heart. Knowing that you can lose money up to 4 times as fast as a cash account can be scary to a trader, but it’s important to note that it shouldn’t be used at all times. While a designated day trading account inherently comes with the increased leverage, the trader is the one making a decision on just how much of that buying power is to be used.
Consider these 3 ideas when it comes to margin trading:
Margin is for experienced traders only. Beginning traders can be more susceptible to emotional swings that come with trading. The urge to “make it back” after a loss can easily be compounded into a major error when trading on margin. Consider trading on a cash account for a while until you feel comfortable with the added leverage that a margin account can provide you.
Margin doesn’t have to be used every day. On a day trading basis, I use margin more frequently than I do when I’m holding overnight positions. Market conditions and the stocks you’re trading will determine whether you need or should be using margin regularly. If you’re day trading several thousand shares of QQQQ and SPY simultaneously, you may need the additional buying power that a margin account can offer you. A liquid issue like QQQQ or SPY which are index-based will move far less than a headline-driven stock like RIMM, making them prime candidates for trading on margin.
Margin demands your respect. Any veteran trader would agree that only on occasions will market conditions be ripe for going “all in.” Putting the pedal to the metal with regularity will at times no doubt leave you leveraged in choppy markets, digging a hole which will take you some time to get out of. Don’t let the scary stories of margin trading spook you away from using it as an instrument to your trading, just be sure you respect what it can do – both for you and to you!
Trading on margin can offer tremendous benefits to the trader who knows what he’s doing. If the market has momentum and you’re in sync with it, you can make much more money when you’re right and boost your returns significantly.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
The Learning Curve
I had traded for a while on a part-time basis before I walked into my first day trading office at Protrader. I was amazed how much money people were making in there! Two guys my age on that day had each cleared $40k for the day in profits. WOW – how soon can I get up and running?!
I started out looking over a few different traders’ shoulders, watching their moves, mistakes, and profitable trades play out. I learned a lot for several weeks, mostly from their mistakes. I was emotionally detached from their trades, and I came to realize that my situation allowed me to think more clearly than they did in the heat of their battle.
After the first few weeks, my learning rate slowed. The next few months, I continued to learn, but it wasn’t brand-new to me anymore. I was getting a feel for things and able to recognize many conditions which I would have previously overlooked.
It’s now been over 5 years since that first day I walked into the Protrader office, and I’m still learning! The lessons are different now, and the market is my teacher rather than another trader. I’m still learning though, and I’m still in the game (there are 2 of us still trading out of about 35 in that office). I’ve learned a lot about the market and myself since that first day.
The learning curve for trading doesn’t happen overnight! Perhaps you know yourself very well but have some learning to do about the market and trading. Maybe you understand how to trade, but have some learning to do about yourself, your tendencies, and how to deal with them effectively. As you progress down the timeline as a trader, be patient and make learning a priority!
Check out the trading education page, where you’ll find links to trading topics of all kinds to help you in your quest for profits!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Goal Number 1
New traders want to know how much they can make. If they have X dollars in their account, how much stock can they buy and how soon can they get rich?
Veteran traders know better. They became veterans by surviving. They endured the occasional painful losses, yes, but even more so, they were able to withstand the times when trading just has very little to offer. Veterans are willing to wait out the slow trading times without putting it all on the line to make a quick buck or add some excitement. A veteran trader will tell you that goal number 1 in trading isn’t about how much you can make. Goal number 1 is all about protecting your capital and staying in the game.
Trading capital includes the cash you have to trade with…….your seed money…..your bankroll. It’s what you absolutely must have to stay in the game, and only then can you reach toward goal number 2 – making money. Protecting the cash in your account will enable you to seize opportunities when they arrive so that you may profit.
I think there’s a certain amount of emotional trading capital each trader begins with as well. To me, it’s as important as the cash in my account, because I could always borrow additional funds to trade with if it came down to it. I take as many precautions to protect my emotional capital as I do to protect my cash. If I lose my confidence trading, then it won’t matter if I have cash left to trade with! If I get on a losing streak or overtrade when the market is choppy, then I end up confused and clueless what to do next. That’s no way to make money trading! Protect your emotional capital too – get smaller when you’re trading poorly, or step away entirely when things aren’t clear.
Always keep these two goals in the proper order and don’t ever forget your primary objective every day: survival! Protect your capital and you’ll stay in the game plenty long enough to reach goal number 2.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
Trading Your Personality
It’s been said too many times to count – that you must trade according to your personality. In the movies they might call it “being true to yourself” or something cheesy, but it’s a necessity in this job.
Recently I was asked which chart patterns I prefer to trade, continuation chart patterns or reversal chart patterns. My answer was that while I will actually trade either, I suppose the continuation and breakout type of patterns are the ones I trade more often than reversals or buying on support levels.
I don’t think one setup is superior to the other, they both have their pros and cons, and you have to go with what fits your style best.
Buying on support is an anticipatory play, which may take a few extra days to get moving. It can give you a lower cost basis than another trading strategy, but will require greater patience on your part while you wait for the stock to find traction.
Buying a stock which is breaking out puts you (by definition) in a stock that’s already on the move. This is a confirmation play. You get instant feedback on how your trade is developing and how much momentum the stock has.
The setups you select for your trades need to incorporate your personality tendencies on managing those trades once you are in them. For me, I tend to be a bit impatient and I want to know as soon as possible whether or not I’m right or wrong on a trade. Other traders don’t live in the left lane, and they’re willing to give a stock some time to get moving one way or another. They place their protective stop and turn their attention to something else in the meantime while waiting for their trade to make a move. Personally, I prefer to have my money at risk for the shortest timeframe possible. I really prefer the times when the market conditions are producing breakout plays and continuation patterns like the bull flag or ascending triangle patterns.
So, when you’re doing your homework and looking for quality setups to trade, be sure to consider the ones which fit your personality and your style of trading. Those will be the trades which you ultimately will manage the best.
At TheStockBandit.com, winning stock picks of all kinds are shown from reversals to breakouts, so come check it out and take the free trial to find out how we make our living as traders!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Selling Your Stock – When and Why
There’s another side to look at. It’s not all about buying. It’s not all about knowing where the entry is and when you should get in. Trading well doesn’t just come down to some timing indicators that tell you when to get long. To make money in this game, you’ve got to sell, and you’ve got to do it at the right time.
When it comes to selling, knowing your exit ahead of time is half of the battle. Trading according to a plan will take you miles beyond the results you see if you trade on whims. Is this a momentum trade? Is this a swing trading candidate? Is this a trend trade with a trailing stop, or am I looking for a particular number to be reached before I sell? These are the kinds of questions to ask going into the trade.
Once you’re in the trade, there are a number of reasons to sell your stock:
The most common time to sell out all of your stock is when you’re just plain wrong. You’ll know when you’re wrong, because your P&L will tell you so, every minute, tick by tick, dollar for dollar. When your stop-loss gets triggered, sell out! Be disciplined and pull the trigger when the time comes to do so, or else set an automatic stop-loss order through your broker.
Selling in the face of a stagnating market is also wise. Perhaps you caught a nice move but the trend has since stalled out. Your stock hasn’t yet rolled over, but it’s not going higher anymore either. Reducing your exposure and freeing up cash in a market that isn’t moving means less risk to you. You will then have cash on hand to put into new trades, whether for new buys or for short selling stocks if the market weakens.
When your profit objective has been met, do some selling. Making sales after an advance to the area you planned to see is simply good trading discipline. Sell all of your stock if it is now facing overhead resistance, because you can always re-buy if and when the stock clears resistance and breaks out. There’s just no reason to own a stock in an area where the sellers clearly have had an advantage.
You don’t have to sell it all at once! Many traders think they are either in or out of a trade. They look at it like it’s an all-or-nothing type of thing, and it doesn’t have to be that way. In fact, in many cases, it shouldn’t be that way. If you are following a trend, it’s often wise to make partial sales along the way. This books incremental profits, while freeing up cash for other trading ideas. It also helps to satisfy that urge to sell that so many of us fight. Selling off stock in pieces as the trade shows you a profit is a good way to manage money AND emotions.
When you plan your next trade, consider where you will want to sell and where you’ll need to sell. Whether it’s on the profit or loss side, know your exit!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Downtrending Stocks – Don’t Buy!
Everyone wants a great deal. If you don’t think so, just consider the day-after-Thanksgiving sales with people lined up outside the stores at 5am to buy merchandise on sale. We want things now and we want them cheap! When it comes to stocks, however, I know better.
They say to buy low and sell high. It’s a good concept if you can get it to work, but it implies that buying low is the first thing to do. Novice stock traders look to buy “cheap” stocks, whether it’s just a low-priced stock or a stock well off its highs. Remember, cheap stocks tend to be cheap for a reason!
Low-dollar stocks often fall into one of two categories: the former high-fliers which have split so many times and come down so far that they are simply too liquid and “thick” to make much of a move (LU, NT, etc.), and stocks which are cheap because they fizzled out long ago and no buzz has been generated since. These kinds of stocks don’t move enough for an active trader, unless you are as interested in trading so many shares that your broker makes as much in commission as you do in profits.
A downtrending stock is making lower highs and lower lows. Money is coming out of it. People are walking away in search of finding something more attractive. When you buy a stock, you want it to go up, so look for stocks with some buzz, some positive activity, and some momentum.
An example of how disastrous it can be to buy a downtrending stock is MOVI. This stock began trending lower many months ago, and has shed most of its value.
MOVI continues to trend lower, and buying a “cheap” stock would have been costly!Consider the novice traders who wanted to buy a stock off its highs. They may have moved in to pick up shares in late June near $27 or so, which was more than $7 off the recent high. Those buyers never saw their trade turn profitable. What if they “averaged down” in the $20 area, hoping to catch a quick bounce to let them out? All they did was compound their losses. What about now that the stock is trading near $5.00? Would you feel like getting up and running after falling off a 20-story building? This stock probably doesn’t either. It’s best to stay away from chart patterns like this until the buyers regain control and the stock begins to build some upside momentum.
Buying stocks in downtrends is a recipe for disaster. Save your bargain-hunting for the retail stores and holiday shopping, but prepare to pay up if you want to buy a stock and turn a profit!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
