THISBITISTOMAKETHEPOSTWIDERSOITSEASIERTOREADFellow traders. A...

THISBITISTOMAKETHEPOSTWIDERSOITSEASIERTOREAD

Fellow traders. A week or so ago I offered to write a diary of my first two months of trading and a hundred odd people asked for it. It has turned into somewhat of a novel so a apologise for the length.

Let me start by saying I know some of what I write here will annoy the bejesus out of some of you. But I write this from my opinion only. It is not meant to be THE guide to trading but MY guide so far. In my life and especially my business dealings I have found that all the theory and business plans and hype and hope don't hold a candle to someone with actual experience telling you where you they went wrong. Practical guidance. It's not pessimism, it's realism. School of hard knocks, if you will.

I don't profess to have any more than the most very basic experience, but still it may be more than some. Hopefully the vast majority with more experience will still get something out of here somewhere.

What am I hoping to gain from this? 1) Writing my theories down in an attempt to highlight my own trading issues; 2) share with others the pitfalls I've found and maybe they haven't yet; 3) by being open hopefully get specific detailed feedback that you won't learn from a dozen books.

Perhaps this whole exercise is academic in that it's just more words and unless you actually get in and trade for yourself it will mean sweet bugger all, but I think the difference will be that I'll be documenting specific examples. Hopefully my losses will help you avoid yours - because I can tell you that what is written below will not help you win - but hopefully everything I've written will help avoid losses.

The reason I have written this as a bit of a yarn rather than a strict list of rules is: 1) I was a journo for 15 years; 2) Without the rich tapestry that surrounds it then it is just another list of rules that have no meaning. Everything written in here comes down to "Plan the trade. Trade the plan." But without the thought processes around it and why it goes wrong at times well then it's all just theory. If to no-one else then at least to me.

RELATED LINKS: I highly recommend informedtrades.com to learn about anything in here you don't know about. If you need charting software I use prorealtime.com. Free and extraordinarily good for new traders because it draws trendlines for you which helps learn, but also saves incredible amount of time. Disclaimer: I have no affiliation with either, I just like them.



So get a coffee, beer, red wine or all three and settle in for the tale of....



DIARY OF A SHORT-TERM TRADING KOOK



Definition: "kook" /kuk/ - pronounced like "spook" • noun N. Amer. informal a mad or eccentric person. — DERIVATIVES kooky adjective. — ORIGIN probably from CUCKOO. (Also used often by surfers for someone who can't surf well. My nic Kooke is purposely spelt wrong because I thought it was kooky.)



I completely kooked July 1, 2009. The start of the 2009/2010 financial year. I lost $2K from my $40K "trainee" trading portfolio in less than 15 minutes, but more on the specifics of that later.



It was almost two months to the day since I'd started actively "day trading". I've had stocks via a broker for 20 years, but I had time on my hands and wanted to learn for myself rather than relying on others (even the experts) for blindly going into stocks. And it makes complete sense to me that, even as a long-term investor, why stay in shares when they are in a confirmed downtrend.



So I'll start there. The ASX market "crash" of 2008 didn't seem to make sense to me. I had virtually no shares in the market then thankfully due to business commitments.



But friends would retell their tales of woe at barbecues. Which would lead me to say "why don't you sell them and get back in when they stop falling?". What a Pandora ’s Box you open there!



"You don't lose until you sell" is the most common reply. I beg to differ. If you need to get a home loan and you write down your assets you can't write down that you have "BHP shares that used to be worth $60,000" or "BHP shares that will be worth $120,000 in the year 2040". They are worth what they are worth in cash and that's the end of it.



The other big one is that "they will always be worth more in 40 years' time". Maybe. Maybe not. If we ever find a solution to "green energy" your coal shares might well be worthless, but that's a whole other chapter.



What cannot be argued is that if you bought BHP shares prior to 2008, then sold them when the market dropped in May 2008, then bought the same number of shares back again in November after the market had dumped to $20 you would NOT have lost 60% of your capital. Undeniable fact.



Why do people stay in shares when they are falling? Primarily emotion called "hope" that their shares will turn around any day now. Day after day, week after week. Secondly brokers. If they recommended to all their clients to put their money in cash, there wouldn't be a need for brokers. Before you launch into a tirade - I have a broker. Always have, always will. Anyone who doesn't is probably foolish because a good one can advise better than anyone else. But in my opinion the sooner you realise as a shareholder who uses a broker that it is up to you to say when to buy and sell the better. Otherwise you stay in shares during a prolonged downturn when you should be in cash. No-one in cash last year lost money - they gained at least 3%. My wife and I lost 27% off the value of our Super last year. If I had simply known enough about charting to chart the DOW I would have put the money into cash and actually made 3% or so for a net effect of 30%.



Keep reading - I'll get to how that relates to stocks and daytrading soon(ish). But I believe the principles are the same and should be adhered to - within the boundaries of the time you can invest in managing your portfolio.



But how do you know when the market is turning?



RULE 1: The DOW. Until some other better indicator comes along, we (the children of the ASX) will follow the DOW. When it breaks support levels, look out. Of course there will be some sectors that do better than others but if the market is in a general down trend they are going to cop it as well.



RULE 2: Learn about charting (Technical Analysis or TA). There are a million fundamentals that make the DOW, the ASX or your actual stocks do what they do. In broad terms all you need to know is what the chart is doing because that IS the market.



RULE 3: Ignoring Fundamental Analysis (FA) on a stock is as foolish as ignoring TA. A bullish breakout means little if they announce a share issue SPP (Share Purchase Plan) at half the share price (SP).



My thoughts on TA and FA.



A chart can only be plotted AFTER the fact. So fundamentals are the driving force behind what a chart shows.



BUT the fundamentals (and I include "fundamentals" to be anything other than a chart - whether that be balance sheets, hype, insider trading and whatever else) are reflected in the chart via the price of the stock.



There is no way the average investor can possibly know more about the fundamentals than the chosen few like major investors or institutions. And even they are trumped by the rig workers who have just struck oil and ring home to tell their missus to buy. And the stock moves up.



Every night thousands of us are sitting looking over charts and the next day we buy based on what we see in them. And yes, if everyone was scanning for a stock that volume was its highest for 12 months then we'd all be on that stock tomorrow and supply and demand would dictate it would fulfil its own destiny because we'd all be sitting there watching the price fly up as everyone scrambled to get in, confirming our decision to buy.



Then, you can add in all the intangibles - things like Fibonacci, support and resistance, double tops, head and shoulders, and why on earth numbers just seem to add up.



But when all is said and done, unless you are the oil rig worker, a chart is the only way of knowing something is up without knowing exactly what that something is.



RULE 4: Expect the unexpected. Great quote from Trading In The Zone paraphrased by HC member "lindfield". "Apparently a gun technical analyst was teaching a long time grain trader who knew nothing about TA - he had always traded on the floor of the grain exchange (or something). Anyway they're watching a stock track down to a support level and the TA says 'ít will turn there and that will be its low for the day'. The other guy says 'you think so', picks up the phone to his broker and says 'sell 2,000,000' whatever it was. The stock plummets through the support level. Then the grain trader says 'if I can do that anyone can'."



RULE 4: Stop losses are vital. If that SPP is announced, or for whatever reason the share you buy heads south, you need to get out of that stock pronto to preserve your capital. Stop losses are different for every different stock in every different market. But one thing is for sure, staying in a stock that is going down, irrespective of whether it's the one with "the best fundamentals" or "the best chart" is nonsensical. See also RULE 7.



RULE 5: Capital preservation. From what I have read, the golden rule here is you must not risk more than 2% of your capital. This is more for psychology. Studies have shown that anyone that risks more than 2% of capital on trades is statistically unlikely to be successful as a trader.



OK, I'm going back into raving mode to discuss 4 and 5 some more.



Stop losses are buggers of things. You set a stop loss, and get "stopped out" of the trade. Only to see it go back up the next day past your original buy price and into 10% profit. This is sometimes called "whipsawed", especially if you try trading that stock several times.



So your next natural tendency is to set a "looser" stop loss. I'm still working on this one. At the moment, I'm thinking that that stock is a bad trade for a new trader. What new traders need is to find stocks with very solid support. FIND EXAMPLE AND EXPAND



Which brings us to the next rule.



RULE 6: KNOW YOUR OWN STOCKS rather than chasing everything everyone else tips. The great thing about forums like Hot Copper is they alert you to good stocks. The bad thing is that they alert you to everything! For me this ends in one of two scenarios. Missing a trade on something I have been watching for ages while looking at something new, or panic buying, which is nothing better than a punt.



I would go so far as to tell anyone reading this far - if the first time you have heard of a stock is on a forum, or from a mate (unless he's the MD of the company or the oil rig worker), AND you are not 100% confident of your ability to trade, DO NOT trade it. Learn about it. Any tipster probably has the best of intentions with their tips, but you still have to know for yourself how that stock trades or you have little hope of trading it well.



Similarly, going through scans every night and continually picking up new stocks is great. But you have to note them down, let them settle a bit and see what happens. If you trade them without having seen their patterns and how they react to market sentiment you still have your butt in the breeze.



Study the chart hard and check patterns, learn how the shareholders react to news. Do they hold tight or panic? What happens when the commodity price falls etc etc. Then trade it.



RULE 6b: Because you know your stocks doesn't mean you can forget about any other rule here.



Kook file: My worst example is my shocker on July 1 this year. I have been a long-term follower of UNI - unilife. It had been in holding pattern for months awaiting news of a big Industrialisation Agreement with Sanofi Aventis. While in that holding pattern, it range traded like clockwork with 10% swings. Traded it a couple of times for profits. As fate would have it, I was at home when the news alert went off on my trading system on the signing of the agreement. This is going to go gangbusters just like I had seen PRW, ESI and NEU done very recently among others. Right? Yep, for the first 15 minutes. It gapped up at open from 31 to 37. Guess what price I paid? Yep. Stop loss. Nope. Then I watched it fall back to 31. Then, possibly THE most ridiculous thing. I sold half at 31. Why did I think it would fall below where it had solid support? A few days later I sold the other half at 33.5 because I thought it was the top and it was back to range trading again between 31 and 34. Nope. The next day it traded as high as 38. Now I'm waiting to see what whether if it will range trade again. I suppose it could have been worse, I could have bought back in at 38? My lowest point yet. I threw everything I have learned out the window. The money will be forgotten one day. The absolute self-loathing may not.



RULE 6c: Thanks to my new-found friend "mowerman" for his guidance here. "I looked up the chart and see that you must have bought at 37c on a gap up opening. A BIG NO NO. A gap up open is a time to SELL not buy. Watch for the retrace, which did happen, then buy. I do not chase the gap ups. If I miss out then so be it. Not my style. Experienced traders may get away with it, but it can bring grief."



Kook file: Bloody oath it did.



RULE 7: "Let your profits run" versus "take your profits". This is even more frustrating than stop losses. Effectively if 2% of your capital is $200, then you need at least one winning trade of $200 or more for every losing trade. Simple right? Ok, let's say you get that down pat. Then you need to let your winning trades run to really capitalise. Why get out of a winning trade to go looking for the next winning trade? Because at some point that winning trade will retrace. They ALWAYS retrace. Just that no-one is quite certain when or by how much. So how much are you going to let that stock retrace before you take your money off the table? A trailing stop may be the answer. A mate of mine only takes trades when the price moves above the 5, 20 and 50 Simple Moving Averages, and closes out of that trade if the price falls below any of them. Great for a bull market: rare to even find a trade in the current market. ANYONE KNOW ANY BETTER? IS THERE A READY RECKONER TO STOP LOSSES WITH REGARDS TO TARGET TIMEFRAMES OR MARKET TRENDS? ie daytrading versus T+3 trading versus "swing trading" versus "momentum trading".



Study the time frame you have target range for. So if your target is to make an estimated 10% in a week because that's what the weekly chart is telling you is possible, your stop loss has to be set according to the volatility on the weekly chart and you need to let that trade play out for the week unless your trade is stopped out. You will still need to study shorter timeframes to confirm that it looks like an uptrend. An uptrend starts with a one minute chart and so on and so forth until your target time frame, so you still need to be aware of those. The disadvantage of the longer trade is that the risk of market trend turning against you. See RULE 1. In a downtrend or sideways market you either have to sit on the sidelines, or do very short term trades. The longer the term of the trade the more increase in risk of a downturn. That seems too simple. But I don't think I've read that anywhere else. THOUGHTS ANYONE?


Kook file: Just before the dot bomb crash in 2000, I bought this little speccy uranium miner called Paladin. Woke up in Perth with a hangover, someone had given me a tip off that it was going to be the next big thing and I bought 36,000 worth of PDN @ 11c (about $4000). The markets dived and eventually the 36,000 PDN went to being worth less than $50. I sold them. God only knows why. Broker even felt sorry for me and didn't charge me brokerage. Then I watched them climb to $10 a share. $360,000. I hated Paladin shares. I wish he would have said "don't be stupid, what is $50 going to do? What if they're worth $10 each one day. I should never have let the share price continue to fall in the first place. This is one story I just can't "let go". I think the only way to do so will be trade PDN again, which I intend to do shortly.



RULE 8: Don't forget about your losing stocks. I think a lot of us are preconditioned to "hating" a stock we've lost significant money on (or is that just me?). If you have your stop losses in place it should be hard to "hate" something you lost 2% on anyway, but look at it another way. You lose on a trade in a stock and you close the trade and find another stock. Why? You now have a history with that stock. Wait for it to do what it does next and trade it accordingly. You don’t HAVE to, but it makes more sense to stay watching a stock you at least know something about. If you trade a stock and lose, it's because you bought on a dip. The next swing is up. It can only be up. You don't know when or how far up but there is only one opposite to down. Or you go to another stock and start all over again with a 50/50 chance of finding a winning trade.



I highly recommend taking time to go back through every trade you can and analyse why it went wrong. I went through 75 trades on the weekend and it was incredibly enlightening on stupid mistakes, emotional mistakes, some just simply the market dipped, and some I have absolutely no reason for what I was thinking when I bought what I did.



Most of all though, I found two main themes: PATIENCE. Patience to buy at good price and AFTER a retrace and on the next upswing. If you have seen the downtrend, the only way is up. It might one day of up, it might be one hour of up. It might be one month of up.



RULE 9: Buy at the right price. Wait for the retrace. That might not be today, it might be next week. WAIT! There is (yet another) saying "It doesn't matter what you buy for, it's what you sell for." Dunno who made that up but, firstly, it makes no sense to me anyway. Secondly, for short-term traders

the buy price is EVERYTHING. Over 20 years yeah your buy price means nothing. But for a trader it might mean doubling your profit. And, if you have bought right on a support line it makes it a much better risk/reward trade. So if solid support is at 75c, you might have your order in at 76 on the way down, or wait for it to confirm the support and buy on the way back up. Whichever you choose, your stop loss can go as tight as you like under the 75 level. Buy at 79 and you've still got to have your stop level at the same price but the risk/reward is far riskier. Thirdly, if you hit your target in one week, not four, you don't have your capital tied up and can be trading something else.



I think there is a LOT to be said for finding something at solid support, waiting, confirm the uptrend, get on with tight stops just below support. Not going to return as well as trading the hell out of things but probably half the risk, a quarter of the brokerage and 5% of the workload.



RULE 10: Don't overtrade. I did 75 trades in two months. I now know that is ridiculous but I thought it was what you did. 10 would probably be too many for a new trader. Most of mine comes from impatience mainly. Many of them I wasn't stopped out, I just got sick of waiting and change to a different stock, especially if I was somewhere near my stop. Many times the stock then shot up, so all I had to do was show some patience.



A good tip from “mowerman”. "You seem to have a lot of stocks on the go at one time. I limit it to 3, and watch them closely as I continue to follow my list. You have NO control over the market. What you can control is what, and when, you trade. Slow down mate!"



RULE 11: Not really a rule but another "big picture" question. Setting targets. Maybe my biggest problem being a "trader" is I’m trying to make medium term money from short term trades. Think about it. If you had 10% return on your money per year you'd be pretty happy right? If you got that "daytrading" day in, day out, you'd be the smartest person on the planet.



RULE 12: Even when you've mastered everything else, you have to master your own self. Not a chance I know the answer to that one.



Here's how the psychology goes:

You sit down, study charts and news releases for weeks and watch the patterns until you decide to go for a trade.

You say to yourself "That's a great stock and a great chart. If that drops to 15c that will be steal."

Market opens, price drops from 17c to 15c and you say to yourself, hmmmm price is dropping, maybe there's something I don't know, I'll wait.

Price goes up to 15.5. You say, yeah but it dropped to 15 cents from 17, might be something wrong and this is just a false signal.

Then it goes to 16 and you put your buy in the stack at 15.5, because there's no way you're paying 16c for it - it was 15 just a minute ago after all.

Then it goes to 16.5 and you say "well it's gonna fly from here I need to get in" and buy at 16.5 and you do.

Then it drops to 16 and you panic and tell yourself "it's tanking" and put your sell in at 16.5 hoping it'll get back there. It hangs for ages and you panic more. You change your sell to 16 but there's too many sellers at that price, so you change it to 15.5 and stop yourself out.

Price then goes to 18.5 and you wonder if 30 minutes after the opening bell on the ASX is too early to start drinking.



Or is that just me??



RULE 13: The one thing you can't speed up is time. Experience is the key.



RULE 14: Refer to RULE 1.



IN A NUTSHELL



"Share Trading" now means to me buying at aggressive prices and not staying in a stock that is falling unless everything you've learnt is telling you it's the right thing to do. It doesn't mean trading the hell out of everything that moves.



And if you take all of the above as THE answer to trading, well you've learnt absolutely nothing, because if there is one thing you should know by now is that no-one has THE answer.



If you've read this far, thank you.

Also, sincere thanks to a host of people, especially those on the Day Traders' thread. I've found that for now daytrading is a bit heavy for me in such as sideways market, but hell have I learnt quickly. If you have any answers - or even questions that might help get closer to an answer - please post them.



And just for fun, check out despair.com - it cracks me up and if it gives you a giggle then you're probably on my wavelength.

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