How I Became a Dummy Trader

September 7th, 2006

After reflecting back on all the interviews that I’ve done, I thought it would be worthwhile to detail how I started trading the way I do now. I’ve recently started Dummy Trading after never even considering day trading at all. The fact that I could control my risk even better by day trading really surprised me. First of all, let me give credit to some folks that really opened my eyes: Chairman MaoXian, Trader Mike, Ugly, and Trader-X. Whether they realize it or not, these guys provide an awesome resource for traders and I owe them a ton of money. ­čśë

Read on for more about how my trading has evolved over the years.

In the Beginning

In the late 1990’s, I started investing fairly seriously in stocks. I knew enough to not trade with money I needed to pay bills and I started off quite well (like most everyone at that time). I didn’t know what a stop order was at the time – I guess you could say I was using “mental stops.” I was supposedly following the 8% rule that William O’Neill recommends, but when it came time to actually use the rule (and bail on a loser) I hesitated and watched a couple positions take serious dives. At some point, I just said the heck with it and kept holding and stopped trading for a year or so. I realized later that I really didn’t know how to admit I was wrong with a stock and get out. I’d say that is the best lesson I’ve learned over the years is how to be wrong.

One Small Step

In late 2003, I started getting the bug again and started looking into investing (but this time I was going to do it right!). I dusted off my online brokerage account and took stock of what I still owned (I completely ignored my holdings for about 2 years). I stumbled upon Bruce Brotnov while reading the IBD Forums. I decided to sign up with his Poormans Investment Newsletter and started communicating with Bruce and trading his picks. He picks stocks based on fundamentals and finds entry points based on technical analysis. He only goes long and sets price targets based on FA.

Bruce was a mentor for me and I learned a ton about the markets during the first year with him. (Bruce doesn’t know I’m writing this and I don’t get any kickback for anything I’m writing about him – he probably doesn’t even realize the impact he had on my trading.) My (relative) success during this time was enough motivation for me to start doing a ton of research on the markets. Being a do-it-yourself kind of guy, I was never really comfortable blindly following a stock picking service.

The Risk Control Era

After stumbling upon Trader Mike, learning about R, and reading Dr. Van Tharp’s book, Trade Your Way to Financial Freedom, I started developing my own system for trading the Poormans picks. I really wanted to incorporate hard stops into his system to define my risk and calculate the long term expectancy of my system.

I began by taking his entries and coming up with a stop that I was comfortable with. There was really no science here – sometimes it would be relatively tight, other times it would be looser. Almost always it was below some obvious level of resistance. I would size my position accordingly by risking 1.0 – 1.5% or so of my total portfolio size.

Bruce’s system works very well when the market is trending up. It’s also a very easy system to trade because the pace is slow – just enter your limit orders after hours and wait for them to get filled (almost always these were pull back buys).

Up until the downturn in May of this year, this system was working great. It turned out to be the kind of system that has a low win rate (30 – 35%), but has a few very large R multiple winners that make your year. At one point I was sitting on a 30R winner and two other double digit winners. Here is one of my posts from May 1st just before the downturn. My expectancy was over 1.0 for most of the year before May. If I had to pick a StockTickr user whose system seems similar it would be alibawla. I don’t know all the details about his system, but he was posting many similar stocks as I was.

Problems with This System

Bruce’s system works very well when the market is trending up. When the market is going down, it’s tough. I learned this in early May when I lost 9R or so of my gains. I was also looking for a system that could a) make money when the market trends down, and b) had more opportunities to trade.

During May when the market was tanking, I started swing trading. For some reason, it never sat well with me. In fact, I had a streak of 12 losses in a row and 13 of 14. Perhaps I didn’t give that system enough time, but I just felt it wasn’t matching my personality (I guess 12 losses in a row will do that to you). Here’s my R graph during at that time:

R in Late June

My Switch to Dummy Trading

After I met with Trader Mike a few weeks back, I spent a month creating a plan to dummy trade. There was just something about being 100% cash at the beginning and end of every day that appealed to me. Before I met with Mike, I had it in my head that day trading was risky. It dawned on my somewhere in the Atlanta heat that day trading was actually less risky – those overnight gaps that had killed my swing trading were completely avoided by day trading. And those listless, trendless markets could be avoided by shortening my timeframe (if you look hard enough, something’s trending every day).

I spent the entire month of August dummy trading and ended up with a little over 9R. Here are my results in a calendar form that StockTickr Pro users will have access to soon. As you can see, there were basically three days that made my entire month – the rest of the days were a wash.

I’ll try to post next week some more thoughts about how I’m dummy trading and some tools I’m using that have made it a lot easier.

My August Trading

1 Comment

  1. Stop Loss » Blog Archive » Worth reading Said,

    September 7, 2006 @ 8:41 am

    […] Dave from├é┬ástocktickr├é┬áhas a good post on “How I Became a Dummy Trader“. […]

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