I am Not a Day Trader

Let me be honest. I am not a trader. When I buy a stock, I do so with the expectation of keeping it forever. Of course, if a stock gets so high I can’t sleep at night or it drops and doesn’t come back, I will sell it. However, trading is not what I do. I tried it twice, made money once and lost money once. I decided that trading just wasn’t me. It is a perfectly good and proven discipline for some people. However, I am not one of them. Some of these ideas come from two books I read a long time ago, Futures and Options for Dummies and Technical Analysis for Dummies. The financial books in this series are actually pretty good places to start. They are written by knowledgeable professionals in a style that assumes you are bright but pretty low on the learning curve. The rest of it I just picked up somewhere along the way.

Before you start, count the cost. How much are you willing to lose in this experiment? Set that amount and no more aside and account for it (including all brokerage fees) in an Excel spread sheet.

Become an expert. Decide what you are going to trade, a particular stock, stocks from a particular area, an individual commodity or something similar. Learn all you can about that stock, its price history and absorb all the fundamental research you can find. Yes, just like all value investors are aware of technical analysis techniques, all traders need to understand the underlying fundamentals of their stock. Consider, Bank of America. Its price is extremely sensitive to public perception, changes in accounting rules, law suits, and major moves by powers like Warren Buffet. Even as you buy and sell on price movements, you still need to understand what is driving these changes.

Before you make a buy, write down something coherent in your Excel spreadsheet explaining why you are making that buy. Recording your logic for further study is an important part of the learning process. It will help you build your decision making model and then constantly refine it.

Likewise, when you sell a stock, write down why you sold it and study the results.

Successful traders recommend setting price targets and using stop loss orders as a further discipline that will take emotion out of the decision making process. Emotion is always the enemy of successful investing. It will cause you to buy at market peaks and sell at market bottoms, exactly what you should not be doing. Here is how the process works. At the time you put in your order to buy a stock at market price. Set a stop loss limit. What this limit might be is up to the individual investor. Some people recommend 10% as a maximum acceptable loss in any given trade. The stop loss order will trigger a sale if the price drops to your predetermined number. Do this on the day you purchase the stock and never, ever, for any reason change it to a lower number. If you lose 10%, so be it. Learn from your mistake, take the tax loss, and move on. If your stock goes up in value, reset the stop loss number to reflect that increase. That way you will never lose more than 10% of the current value of your investment.

Some traders take it a step further. They will set a price target on the same day they buy the stock. I remember one author thought that if one of his trades went up by 25%, he should take his winnings and look for a new opportunity.

As you make your trades, always entering them into to your spread sheet calculating the gains or losses, you will watch your starting number (the maximum you are willing to lose) increase or decrease. If you lose all your money, you are obviously not a trader. If the process makes you excessively nervous, you are not a trader. If your stake increases and you find the adrenaline rush of buying and selling is better than sex (just kidding) you are a trader.

Trading, like value investing, is a discipline. Study and learn before you try it out. Keep a practice log in Excel (just like the real thing but without using real money) before trying it out for real. Also, remember if any given investment is small, say 1% or 2% of your total portfolio, even a bad loss in that particular stock won’t kill you.

Take this article as nothing more than a starting point for further research. I am not a professional advisor. If I was all that smart, I would be retired and living in Hawaii. However, I want to share what I have learned with my readers and hope you will find it of benefit.

Now, let’s be careful out there.