Tango Azul Labour Day Weekend ... Enjoying the music while I analyze 150 stock charts. Market took a tumble and it's time to be defensive with your stocks. Don't ever allow + 20% to +25% gain in a stock evaporate. Start scaling down and raise some CASH now.

 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