Thursday, October 27, 2011

An ART OF TRADING Member Asks For Help

An ART OF TRADING member of 4 months has been going thru a hard time in the market lately, here's what he writes me. Rather then simply answer his question like i normally do, this time i wanted to do something different and i asked other ART OF TRADING members to help him out and give him their BEST advice on his very familiar situation.

Here's what "JOHN DOE" writes me:

"HI Stewie,

this is my current situation as of now.

I started out with around 30k capital , and am currently down to around 22k, (-26%)
using the law of percentages, I need around 36.9% to break even.

My greatest loss was in a TZA trade, which cost me around 10.5%, which was pure stupidity because I didn't obey the stop losses that I put into place. (Pure greedy)
I think my total losses in $TZA has been around $6,960 , which amounts to 22.8% of my capital. (BIG Mistake there)

As of now, I am under the PDT rule and am unable to day-trade more than 3 times.. my first aim is to get back to 25k.

My current strategy:

I usually follow your trades/alerts if I am on the computer. I personally prefer the momo breakout trade setups
I have a1% stop loss in any trade, calculate the stop & entry to determine no. of shares and check target to see if it's realistic
If trade target is realistic, I go in.


My question(s) I have for you:

- Is my stop loss too high now that I am under 25k?
- Is my current strategy realistic enough to get back to my first target of 25k?
- You mentioned just now that if you were me, you would skip day-trades and do swing trades instead be very selective about the trades.. could you give me some guidance on this?
- Could you work out with me a trading plan that I can stick by? I understand that this takes time, and there are no fast ways to go about doing it.

If you need more specific information please let me know!

Thank You Stew, really appreciate you helping me, my 4 months in the chat room has really taught me so much about trading!"

Let's help him out guys!! Share with me your ideas! what do you suggest? There are no right or wrong answers. Thank you in advance!

Here's what "Bryan" and "George" wrote back: These are two of the better answers in my opinion and wanted to share it here on the blog. Hope it helps some of you newer traders out there who could be going thru a similar situation:


With a starting account size of $30K, he should have been using proper position size in each trade. I would normally use 10% of the account in each trade (so in this case $3000). Since he was a newbie, I would have suggested only trading one stock at a time so that only 10% of his account was at risk. Any additional positions should have been paper traded. I would be willing to bet that his position sizes have been way too large.

The number one rule of trading is to avoid big losses. Before placing a trade, he should have a stop loss price established. I do not necessarily like using a blanket -1% stop but I understand that many traders do use percentage stop losses. I would normally find the nearest logical support location (such as a moving average, or prior resistance that has been broken, etc.). My stop would go just below that support level. I would then identify where I expect the next resistance level to lie (broken previous supports, moving averages and such). This level would be my target price. I would like to see the potential reward from entry to target price to be 2 - 3 times the potential risk (from entry to stop price). I don't follow this rule when scalping but I don't believe that a newbie should be scalping yet.

A newbie trader with little experience should not be trading any triple, double leveraged ETFs such as TZA. They are inherently risky and the potential loses will deplete his account before he learns how to trade. Instead of TZA he should trade RWM or an individual stock. He has to avoid leverage for now based on his experience level. When you are a new unskilled trader, leveraged ETFs magnify your mistakes by 2 - 3 times.

Having the mindset that you need to make 36.9% to break even is very destructive. That goal is very, very lofty and will put undo psychological pressure on him. He has to consider that $7000 loss as a learning fee. An expensive lesson that stops must be honored, position size appropriate, greed controlled, expectations lowered. Trading is very difficult. You are competing against all other participants in the market. Many of these are seasoned, experienced and skilled traders. When you are a newbie trader it is like a Pee Wee football player going up against the Green Bay Packers. It takes years of education to become a doctor, lawyer or engineer. Trading is just as difficult as these occupations yet people expect to start trading with no experience and education and to be successful immediately. Personally, it took me about 2 years to overcome all my stupid mistakes and tendencies in order to become somewhat consistently profitable. I still trade only a small portion of my available funds. He has to focus on one trade at a time, reward vs. risk. Focus on potential profit and loss on each trade. Forget about making some large break even amount. Also, remember not to over trade.

For a newbie, swing trading would make the most sense. Unfortunately, the current market has not been stable enough to allow overnight holds of positions. Most traders are scalping and daytrading in this market.

I would also recommend that newbie traders not trade as a source of income. Having to come up with a profit to pay the rent is tremendous pressure.

Bryan. " ART OF TRADING member for almost 2 years


Two quick ideas from reading this:

1. I see some anchoring here. Obviously when down we all just want to get back to breakeven - I know because I've been there. But it's really important to learn to view each trade as an isolated risk vs. reward scenario, and let the results, like getting to break even, take care of themselves. If you anchor hard on that 25k number you'll probably make bad decisions. Trading, as far as I can tell, is mostly psychology.

2. Swing trade classic patterns conservatively. That's how I learned what little I know. The big head and shoulder in the SPX before the August dive. The parabolic move in GLD followed by a nice double top. The double bottom most recently in the SPX (a little more chutzpah required). Those patterns are relatively easy to spot - and everybody sees them, so if they get some movement behind them they play out nicely. I have no idea if the member can size positions appropriately to get back to breakeven, but you have to trade what you can understand. My guess would be that it is imperative for this fellow to stay away from aiming for big scores with leveraged ETFs. That seems like a nice way to blow yourself up.

Everybody has to pay their dues - which means literally paying those dues. Hopefully he can trade smart, and if he needs to, recapitalize himself a little bit down the road so that he can follow your alerts in a disciplined fashion. If he can do that it sure looks, from my limited time here and from looking at your record, that he can be successful.

I hope this works out for him. It's tough to breathe underwater!

George" ART OF TRADING member for 2-3 months

Hi Stewie,
Here are my thoughts for the fellow member

1. First of all newbie should not trade 3x ETFs. Even 1x ETF's is hard to trade. Individual stocks are easier to predict, so it is easier to trade and get profit.
3. Stop is mandatory! You always must know your stop. Stop must be set on every position you have.
2. Find a one chart pattern that you like, understand and know how to play it. Look for that pattern in various stocks and trade it. Don't try to learn everything at once. Learn to perfection one pattern and only then start learning another. If you cannot find chart with that pattern, wait and learn do nothing.
3. When you find good chart ask others what they think of it.
4. Draw trend lines and your thoughts on charts, put a date and look at them after a week, month, three months.
5. The first goal is stop loosing money and only next to get back to 25k.
6. Not being able to day trade is a positive thing for a newbie.

Best regards,

Hi Stu,

I'm not a super successful trader but i've been doing it a long time... the way i have survived and profited (modestly), if i had to think of one thing is position sizing... i am religious about it. On a risky trade or boredom trade i risk 100. on a trade later in the day after a nice run of good trades i risk 200. on trades i think are a "lay-up" (grade a) i risk 300-500. no matter what i risk i always run it through my position size calculator... My second rule is i walk if i lose 300-500 in any combination of trades. i also only risk .1% to .25% (yes those are fractions not whole numbers) per trade of my capital, so if i do have a bad day i can stay in the game mentally the rest of the day or the next day. The best offense is a good defense. this advice is coming from a mediocre trader who without these techniques would have never survived!!


I've been on the same boat. Some thoughts from my experience....

- Always enter a stop immediately after you enter the trade. No mental stops to take emotions away from the trade. Would seem like preaching to the choir here.....but only using mental stops killed me for a year (i've been trading only 1.5 yrs now). I had 70-30 win-loose ratio but those 30% trades took away more than my profits.

- Never hold leveraged ETF overnight. Only exception would be if you're deep in the money and willing to give away profits. Market direction for next day is a random walk.

- 1% stop usually doesn't work on low priced, low volume stocks. Classic example was ZAGG today. We would've been stopped out a few times if we had a 14c stop. It works for large cap...i usually use 1pt or 2pt stop on AAPL, GOOG etc, which is usually less than 1%. These trades have worked out well for me since they move well with the market direction.


Here are some suggestions:
Risk management is the key! Know your risk before you go into a trade. I would advise you to risk no more than 1-2% of your account on each trade. This means that if your account now is $22K, and you risk 1% on a trade, then you're willing to lose no more than $220 on a trade. Follow Stewie's stop loss and calculate the number of shares you buy to match your risk. For example - if the stop is $1 from entry and your risk is $220, then you buy 220 shares. This way of managing risk will avoid situations like the one you described above. And of course - obey your stop!

If you're planning to do swing trades on your own, then you need to give your trades more room to work, which means a wider stop, and under the above system will mean less shares.

If you're planning to give each trade a stop of 1% of the stock price, then again you should calculate your risk according to the above system. (Another way of setting stops is according to the ATR of the stock, instead of a percentage of its price).

I hope this helps.



DeeTee77 said...

Posts like this are super helpful for me to read too! Thanks to 'John Doe' for asking and thanks to the members for sharing. -- DeeTee77 said...

The hardest thing for a new trader is to cut losses. What if I take the loss and the stock turns around. To make money you don't need to be right 100% of the time, be quick to Know when you are wrong and is ok to be wrong. Take for instance a baseball player, they can make millons of dollars by getting a hit 30% of the time . One need to have an exit strategy before getting into a stock. I usually set my stop loss as soon as I either short or long a stock to avoid emotions. Being under the PDT might be the best thing that could happen to you. You will be force to stick to one trade per day and that will force you to be more selective and focus on the best setups. don't be discourage all traders go through the same process. Learn from your mistakes and stuck to your plan

Is It Possible said...

I agree with above opinions but I am very surprised that no one is pointing out Market Timing!!!

No matter how good the fundamentals/technicals are for a particular stock/etf/mf/etc, if the market is not favorable then it is bound to fail....

TZA is an inverse ETF. If market timing model gave a signal where market was becoming bullish, trading inverse ETF at that point would be absolutely foolish and prone for disaster.

There are many ways to identify market timing and the easiest to follow is $BPNYA, you can read a strategy around it on below site:

Trade right kind of investments in right type of market to avoid getting trapped on other side of the market.

harry said...

Someone should put out out a plan too:
1) position size
2) how many trades to get back even. Get back $8000.
3) Strategy
4) Stop loss choosing?

Day trading help said...

It's truly one of the helpful featured source for me. The massive conception and information of this source really drives me on the most craziest way about it. Thanks for sharing.

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