Lessons Every Stock Trader Must Learn

Lesson 1: Penny Stocks Will Ruin You

Yesterday I came across a post  that I thought was quite insightful and well written.  What really jumped out at me was the opinion of penny stocks because it's one that resonates with me.  There are lots of ways to make money investing but I am convinced that penny stocks will never get me to my financial goals.  I prefer to manage my risk by working only with true growth stocks.  The sooner you learn to steer clear of penny stocks the better as far as I'm concerned.

Lesson 2: Know Your Trading 

Personality

In my role as a Meetup coordinator for IBD (Investors Business Daily) I am constantly exposed to people who employ all kinds of different investing methods.  For the last 25 years I've thought of myself as an investor but recently it occurred to me that I've actually become a trader.  If you're wondering what the difference is, it really boils down to your time frame. 

I simply don't have the stomach to sustain the types of double digit losses that investors might see over the life of their positions.  Also, I don't have the patience to sit in a position for more than 8 weeks at a time so long term involvement doesn't really interest me.  Knowing that, I've committed myself to planning all of my positions from the perspectives of a trader instead of as an investor.

Lesson 3: Have A Process

My trading process has been methodically put together through years of classroom training as well as trial and error.  I am a Growth Stock trader and the core system I follow is the IBD style of investing in Growth Stocks.    

No matter what process you decide to use, it's only going to work if you stick with it.  The moment you start to stray or take liberties, you've increased your risk along with your chances of losing money.

Lesson 4: Have The Right Tools

If you have the same trading personality as me then the core tools I use should prove effective.  Here are just a few that have enabled me to Out Perform the Genaral Market as measured by $SPY

Investors Business Daily - Pay no attention to the dated website.  IBD is perhaps the best data company in the business.  If you work with growth stocks in any capacity whatsoever, they are a must have.  

Toms Trading Tools - Tom is one of the few people in the investment industry that I would consider a mentor.  I first met Tom when he was with Optionetics and I was instantly impressed with his market knowledge.  What impressed me even more was how he put his knowledge into an actionable process.  Switching from analysis to action is perhaps one of the most important lessons I learned from him.  

Value Line - I look to Value Line to help me get beyond what the daily and weekly charts are showing me.  Typically I keep my process as data centric as possible so that I can stop my emotions from influencing me.  Once I get to analyse my evolving Watch List of Stocks, I do a side by side comparison of the greatest growth stocks out there.  I dig deeper on their fundamentals.  Value Line gives me the objective analysis I need to verify the under currents.    

Lesson 5: Remain Disciplined And Organized

This lesson is easily overlooked which is why I think it's so important to mention it.  There's a common denominator among masters of a profession.  Whether you consider; athletes, business people, artists, crane operators, journalists, or any other profession for that matter, the best performers always bring a high level of commitment to the table.  At this point in my career, trading stocks is my profession so I make every effort to produce with an equal level of commitment.

In an effort to help others stay organized, I put together a handy little spreadsheet that includes formulas for my core criteria. It can be easily updated as the health of a stock changes too.  

Happy trading!

AMIN

Here is an inspirational 30 mins video of Kobe Bryant and his " Mamba Mentality ".

Applying his Principles and Mind set will help you become a profitable trader consistently.

https://youtu.be/Da-v4--Qn0U

30 Minutes That Will Change Your Perspective on Life | Kobe Bryant Motiv...

Investing Psychology - Pride

A. R. Rahman, "Jiya Jale" (Dil Se): Berklee Indian Ensemble (Cover)

Investing Psychology - Greed

Greed

Let's face it, every retail investor is driven by greed.  The key to success in retail investing is to feed your greed in healthy ways. This means you need to limit your risk and exposure.  One way to do this is to train yourself out of looking at dollar amounts and, instead, focus on the percentages involved on your trade.

For example, if a $1000 position pays you $100 of profit in 8 weeks, you have a choice in how you perceive the success of that trade.  Either you're going to look at it as $100 or you're going to look at it as 10%.  Both are technically accurate but, in my opinion, measuring this trade as a 10% profit is the healthier choice.    

Here is why I want you to look at this trade from the 10% perspective - you just increased your portfolio by 10% in 8 weeks.  If you get into the habit of growing your portfolio at 5% a month over the course of the year - you're going to be pretty happy.  

Your Number of Shares Is Irrelevant! 

Time and again people tell me:

 "Oh I like that stock, but it's too expensive for me!"

When I probe them on how much cash they've got available, though, it's always enough to get a few shares of that pricey stock.  I have found that many retail investors cling to the idea that if they can't buy 100 shares of something, they can't take that position.

While there's some merit in that line of thinking, I would personally rather have 1 share of a $700 stock versus 700 shares of a $1 stock.  Remember, expensive stocks are expensive for a reason.  Conversely, cheap stocks are cheap for a reason.  When you look at the price of a stock, you're looking at it's perceived value from the markets point of view.

If you're still hesitant to follow that approach, keep in mind that option trades like credit spreads or debit spreads are a great way to get involved with an expensive stock, even if you don't have the funds to actually purchase that stock.  The point is, you should feed your greed by getting involved with stocks that are out competing the general market.  

Use Pride To Your Advantage

I wrote a post about a trade on $AVGO that went against me.  The biggest take away from that scenario is that I used my pride as a trigger to action.  In that case, the action was a post mortem on the trade that helped me learn why the trade turned out the way it did.

Unfortunately, most day traders and option traders will lose their entire portfolio within 5 years.  There are a number of reasons why this happens.  In some cases, there's a lack of education and understanding of the market.  In some cases, the risks involved weren't clearly understood by the trader.  I think that pride plays a role here too, though.  I have found even in my own circles that traders are hesitant to admit when they are wrong.  Without admitting your shortcomings, it's impossible to fix them.  

Think You Can't Be Wrong on a Trade?

Prove it!  Either the data on a chart proves your hypothesis, or it doesn't.  The worst mistake you can make is to start down the path of:

 I think, I feel, I hear, I hope etc about a trade.  

Keep in mind that a stock is only good if it's going up.  If you decide to trade a sideways or falling stock because of non-chart related data like, speculation of earnings or a new product launch, an IPO or stock splits, news of mergers and acquisitions, be aware of what you're doing.  It's perfectly OK to get involved with stocks for those reasons but don't fool yourself into thinking that it's a good stock.

The bottom line is that you have to be honest with yourself about what you're doing.  Remember, If it's a good stock it doesn't need to "come back" - it's already moving up!

Conclusion

Hopefully this post helps you get you pointed in the right direction when it comes to greed and pride.  Next week I'll finish off the theme by showing you how to balance the personality of a stock with a few different trade strategies.  

As always, keep me posted with your thoughts on my blog topics and...




Happy Trading!

AMIN

Using Fear & Hope To Your Advantage 

 The 4 Deadly Sins of Trading: Fear & Hope

 

This month I'm breaking down what I consider to be the 4 Deadly Sins of Trading - Fear, Hope, Greed, and Pride.  Last week I gave you a brief overview on the topic and this week I'm going to dig deeper into fear and hope.  Let's jump right into how you can recognize when these emotions are taking over, and how you can turn them to your advantage. 

Fear 

Before we talk about trading, I want to take you through an experience I had in the early 80's when I worked for the airlines.  What started as a routine flight into Boston turned into one of the scariest moments of my life.  I was in the back of the plane as the crew supervisor and it was the last flight of the evening so everything was pretty quiet.  If not for the quiet I may not have noticed, but the engines revved to a high  RPM  and then I felt the plane banking out of the landing pattern.  Just based on experience, I knew that the pilots had aborted the initial attempt to land and were lining the plane up for another approach.  A few minutes later, the same thing happened and at this point, my fear started to rise.  I glanced out the window and noticed that a massive bank of fog was obscuring the runway lights.  Knowing the dangers of Logan airport I started to worry about a potential water landing.  As an employee of the airline, my training kicked in and my fear moved to the back of my mind.  I was reminded of my responsibility to my crew and the passengers on the plane.  I had to prepare my crew for a possible water landing and make sure that passengers were strapped in safely.  I had to trust that my pilots possessed the know how to see us through this situation and when I accepted that - a sense of calm settled in on me. I immediately started focusing on the things that I had control over. 

I recognized my Fear as a result of the abnormal behavior of the aircraft and I relied on my training to get me moving in the right direction.  As a trader, I recognize my fear when the behavior of a stock doesn't line up with my predictions.  So how do I get moving in the right direction?  I pull up my trade plan (remind myself of what was I thinking at the time).  Consult my charts to see if my trade plan is still valid If valid, I make sure that my contingencies are properly prepared and If there's something I've overlooked, I fix it ASAP.

  Scott O'Neil has a really interesting take on how fear impacts traders.  You can check out his video I posted earlier today.  Save it and refer to it every time you get fearful with your trades.

 

 Hope 

Plan for the worst...but hope for the best.  You're probably familiar with this phrase because so many people use it.  Unfortunately, the phrase is used so often because so many people ignore the common sense behind it.  In trading, when you choose a stock you're obviously going have a hope that it will perform the way you want it to.  However, you can't overlook the realities of the world.  You've got to plan for as many outcomes as possible.  In my case, I like to prepare for every potential outcome on all of my trades.  To keep hope from leading me astray, I like to do a few things before I place my trade.

1. I work off of the 8 day EMA (exponential moving average) or the 10 day SMA (simple moving average) because it's the single most important measure of health for any momentum stock.  Now I don't have to rely on hope or guesses - the data is clear. 
2. I open a separate chart that just focuses on the sector that my stock belongs to.  The sector chart is what I use to give me a heads-up on the intentions of financial institutions.  I review charts on the direct competitors and related industries of the stock I'm looking at.  For example, if I'm looking at Nike, I'm going to do a quick check on Adidas and Reebok as well.  I'm also going to spend a few minutes reviewing the health of Footlocker. 

Next week I'll dig into Greed and Pride to show you how to fully recognize their advantages too.  

This is the type of pre-trade activity that keeps me from having to rely on hope to hit my goals. 

Happy Trading!

AMIN

Investing Psychology - Fear

The 4 Deadly Sins of Trading

Your   Instincts   Are   a   Problem

In August, I'm going to talk through what I consider to be  "The 4 Deadly Sins of Trading "  - Fear, Hope, Greed, and Pride.  

For the length of my trading career, several of my mentors have stressed to me that I need to remove all emotion from my trading.  So I started coming up with ways that would help me to approach life with an almost Mr. Spok-like attitude.  Unfortunately, I failed because I just wasn't able to tune out all of my emotions.

Scott O'Neil, who I admire greatly, has a pretty awesome series of videos on this topic.  Definitely worth checking out so I'll be embedding them in my posts through this month.  

He's one of the proponents of removing all emotion, which I don't 100% agree with but I still recognize that there is a ton of merit in what he's saying.  However, I modified things to line up a bit closer with my own personality.  

My Alternative

I realized that there had to be a better way for me to do things.  A way where I could somehow use these potentially harmful emotions to my advantage!  I assumed this would be a risky adventure given that nobody else was talking about it, but I knew I had to pursue this for my own financial well being.

I also knew that my instincts and emotions existed within me for a reason.  It's because there's an evolutionary advantage to them!  Think about it, fear of risk is a useful tool for survival when you live in a dangerous world, full of animals that consider you to be a part of the food chain.  Our greed encouraged us to eat as much as we could in times of plenty which helped us survive through times of need.  Instincts helped keep humans alive and have been passed on to every one of us as a result.  

The Technique

I decided to start treating my dealings with markets the same way a Cro-Magnon man would deal with a world full of saber tooth tigers.  I began to nurture my instincts to limit their negative impacts in my trades.  

Training myself to recognize when I'm feeling one of these emotions was the first step.  For example, when I recognize that I'm feeling afraid, I force myself to take a deep breath and step back.  I wait a few moments for the fear to subside, and with a calmer state of mind I turn my attention to charts and data. 

Now, some may say that what I'm doing is actually still eliminating my emotions from trading but I think my unique perspective here gels better with my over all approach to living life. Using my emotions as a trigger to action makes me feel more in control of my trading, and that's a must for me.  Incorporating instincts into my process may be one of the smartest things I've ever done.

Wrapping Up

Now that I've gone through a basic introduction to my approach, next week I'll go through the specific dangers of Fear and Hope in trading - and how you can turn both into an asset.

As always, feel free to reach out to me if I can be a resource in your trading education.

Happy Trading!

Amin