Trading Lesson of the Week

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The Early Years of Trading

In This Week’s Issue:

  • Upcoming Events – Free webinars this week
  • Stockscores’ Market Minutes Video – Market Correction Update
  • Stockscores Trader Training – The Early Years of Trading
  • Stock Features of the Week – Wait for the Break


Upcoming Events – Free webinars this week

  • Tuesday Oct 30 6pm PT – How to Become a Successful Day Trader
  • Thursday Nov 1 6pm PT– How to Become a Successful Investor
  • Saturday Nov 3 9am PT – Stockscores Training Overview


Stockscores Market Minutes – Market Correction Update

The market continues to be abnormally volatile and many investors wondering what comes next. This week, I look at where the markets are and where they are likely to go. My regular analysis of the overall markets plus my trade of the week on SPY.

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Stockscores Trader Training – The Early Years of Trading

The clock beside the bed said 8:32 am; in my time zone the stock markets had been open for a little more than an hour. As was my custom, I had crawled back in to bed, not because I was in need of more sleep but because I needed some time to assess what I had done through the first part of my working day. I did this each morning, a celebratory ritual most days as I was on a hot streak and it was easy to make money. I had got in to the habit of analyzing what I had done right and what mistakes I had made each morning, knowing that trading is more art than science and it was impossible to profit from every trade.

"How much today?" asked my fiancée (who is now my wife). She was still in bed, half asleep.

"55" I answered back, half smiling, knowing that she would probably fail to add the number of zeroes that I had intended. She rolled over as she mumbled "that's great" in a sort of unenthusiastic but pleased way, obviously more interested in continuing sleep than pondering my trades the way I was. Our wedding was a few months away and she had been up late working on the plans.

$55,000 will not sound like a lot of money to a professional money manager or Wall Street power trader but for me, it was a good day. I was not yet 30 years old and did not have a real job. I lived in a small apartment which also housed my home trading office. Only two years prior, I had made less than $55,000 over the entire year.

I had aspired to be a trader since my first year of University but success had taken time - too much time! While those that I graduated with had now taken well-paying jobs with big corporations, I had been working evenings so I could study the market by day. There is not a lot of glamour in deejaying school dances but it afforded me the daytime to digest the market. For eight years, the stock market had been my hobby. Over the previous year, it also became my primary source of income.

Today's profits had come quickly, I had taken a few positions the day before, held them overnight and unloaded them in to a strong open. This was something that I did often, each day spending an hour at the end of the day and an hour in the morning, entering one day and selling the next. Some days I might buy five or six stocks but on others I would do nothing. I had already learned the hard way that you have to let the market tell you what to do and never try to work harder if the market was not prepared to give you profits. Today the market was in a giving mood.

As I lay there thinking about stocks, I could not help but remember what a University professor had told our class of eager business school students,

"The stock market cannot be beat" he said. "The markets are efficient and short term profits will be balanced out by losses and ultimately, you will earn what the market earns. Trading the market has no benefit; you are better to buy and hold an index fund rather than try to time the market."

Was my success just good luck, destined to be balanced out by bad luck over time? It did not feel like it, but the words of the legendary stock promoter Murray Pezim stood out in my head,

"Profits in the stock market are just short term loans."

I certainly hoped that was not true. I had been having a good year, growing the 20 or 30 thousand dollars that I had saved over a number of years in to a nice sized trading account, something better than half a million dollars. My success had not come by hitting on one or a few lucky trades; I had done it one day at a time trading hundreds of different stocks over a year. Sometimes losing on individual trades, but making much more when I was right, my account had been growing steadily day after day.

Would I give it all back if the markets turned against me? I had seen strong up trends reverse before and felt that I had learned a lot from the experience of letting winners turn in to losers. I had studied reversals and knew the signs of a changing trend. I was sure I would not get caught paying back my profits, but only time would tell.

Right now, I knew that my simple set of rules was working well. Although I could explain my trading strategy in less than 30 seconds, it had taken a long time to develop my approach. Eight years earlier, a friend had told me about someone he knew that made a living trading. This person's career was buying and selling stocks.

I had grown up believing that you made money by doing something that added value to society. You sold a product or service that people needed or wanted. The notion that you could make money simply by buying something, not changing it at all and then selling it a short time later for a profit did not make a lot of sense to me. I did, however, love the idea.

I had bought my first stock on a tip from a friend. I ignored his first recommendation to buy but I did watch the stock and, of course, it climbed higher. After watching it move up week after week, I finally bought the stock with the little cash I had and some that I borrowed from my Visa card. I bought the stock after it had more than tripled in price; the upward trend seemed to convince me that my friend's tip was correct. It turned out that I bought the stock near its high and it only went lower once I owned it. It was a tough first foray in to stock market trading yet, despite the loss, I was hooked.

From that first trade, I set out to study everything I could about trading. At the time, trading was not something commonly done, there were few books that focused on it and the Internet did not exist in the way it does today. Company information was much harder to get and stock charts came from aged chart books.

In my early trading, I drew the charts myself, pulling the daily price information out of stacks of newspapers that I had saved.

Trading has been my passion for over 20 years, occupying more of my time than any other pursuit. In his book, Outliers: The Story of Success, author Malcolm Gladwell discusses the 10,000 hour rule. This rule states that to be a master at something requires 10,000 hours of practice. I estimate that I have spent more than 20,000 hours trading and analyzing the stock market.

The success that I achieved after the first eight years of my trading career was only a start, since then I have continued to learn and develop my approach to the market. Why do I spend so much time working toward mastery of the market?

Simply, it is because I love it. Trading is about outthinking the thousands of others market participants that are out there. It is constantly evolving and it is impossible to ever stop learning something new. It is a very fun game to play, but one where there are real stakes that can have a profound impact on life.

There is no profession that has a higher income potential. In 2005, the magazine Trader Monthly published its list of the top 100 traders based on income. At the top of the list was T. Boone Pickens with reported annual earnings of $1.5 Billion. To be in the list's top 10, a trader had to make more than $300 million in one year.

Of course, these are traders managing billions of dollars within a sophisticated organization. While these ultra-successful traders may not be individuals trading out of their homes, it is possible for the home based trader to make more money than most can imagine.

One trader went from building swimming pools to holding the world record for one year stock market portfolio appreciation. Between June 1998 and December 1999, he turned $10,775 in to $18 million. The methods he used are similar to my own.

Money was my motivation for learning to trade, and I do enjoy what making money has allowed me to have and do. However, I believe the greatest benefit of trading is the freedom that it offers. Technology today allows me to be in touch with the market from anywhere in the world that has an Internet connection. I can work as much or as little as I want, making trading the ideal profession.

Do not be fooled, trading is not easy. The vast majority of people who trade eventually fail. However, we must put this in perspective. In trading, there are few barriers to entry. Anyone with some capital can open a brokerage account and trade the stock market. There is no educational requirement or accreditation from a professional organization. Many believe that they can become a trader simply by reading a book or two.

Imagine if a doctor conducted his first operation after reading a medical text book, would we expect him to succeed? How about a lawyer who went to court for a client after a weekend legal course, would she win the trial? Of course, people in these situations would likely have a high failure rate too. Since their failure affects others there are requirements in place to prevent them from practicing. There are no such requirements to stop someone from becoming a trader and so most who try ultimately fail.

Even among those who work very hard at learning how to trade, there is still a high failure rate. Aspiring traders underestimate how hard it is to beat the market. Most traders are focused on the entry decision and obsess with finding the right formula for picking stocks. I did that for many years and was a very good stock picker but lacked consistent profitability. It was not until I realized that trading is about a lot more than picking the right stock that I was able to succeed.

Keep in mind that if you do what everyone is doing, you will be average. I trade on ideas that do not fall under the title of "conventional wisdom", but which I have found to be effective. Don't be afraid of concepts that sound strange, it is only that they are uncommon.

How I analyze stocks is relatively simple; I can analyze any stock or market in less than 10 seconds by focusing on five simple concepts. With the tools that I have developed, it is possible to search the entire market for opportunities in 10 minutes. Anyone determined enough can learn how to do the same. Take the time to learn my approach and you can be an expert on any stock or market.

Stock trading is simple, but it is not easy. Mastery of the market is more about mastery of self than it is anything else. Consistently beating the stock market requires skill but, more importantly, it requires the emotional control to execute those skills without influence from your emotional attachment to money. This is no different for the home based trader than it is for the multibillion dollar hedge fund manager. Trading is an art, not a science.

The market has no prejudice; it does not care about the color of your skin, your social status, your age or whether you are physically attractive. You can trade from a beach or an office, the market does not know the difference. The market does not care whether you make or lose money and will never exercise a vendetta against you, although it will often seem that way. The market appears cruel because it gives the test first and the lesson second, but the market does not know you or care about whether you succeed or fail.

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