The Part-Time Trader (19 page)

It was once said about Don Shula, whom I regard as one of the greatest coaches of all time in any sport, that he could take his and beat yours, or he could take yours and beat his. It was not about having the all the right players at all the positions, but it was because he knew how to coach and use whatever resources he had been given. On most sports teams, there is a general manager and a head coach that represent two different people (in some cases, the head coach acts as the general manager). As a result of this arrangement, the general manager is responsible for finding the right people on the team, and the head coach is responsible for coaching them. Shula coached and did that by not being consumed with the players he was given by management. Instead, he focused his efforts on managing his players and coaching them right. He was confident enough in his coaching skills that it did not matter whether he had his players or yours; he would beat you either way.

The same should be said of our trading. Our long-term success as a trader is not going to be dictated by how well we pick winning stocks, and stocks that make us huge profits. Instead, it will depend on how well we manage those trades that we are given. You see, the market is our general manager. It gives us the trades that we can manage on any given day. You cannot argue with the market because you only have the responsibly of a coach, and in this case, you are the coach of your portfolio. How well the stocks do depends on how well you manage them and put them in a position that will allow you to succeed.

Far too many traders concern themselves with the “pick.” In the classes that I teach in the SharePlanner Academy, I tell the traders that when it comes to about 95 percent of all the traders out there, I could take my trades and beat their trades, and then on the flip side, I could take their trades that they take and beat my own trades that I would have have traded had I let them be at the helm. It comes across as arrogant, I know, but it is not because I am some kind of genius; rather, it is because I go through the painstaking efforts to make sure that I manage the trade in general and the risk in particular.

That is my focus and not the actual hope of what the stock might do after I get in the trade. I am able to do much better than the average Joe in trading, regardless of what stocks I am trading with. Once you start asking yourself, “If the stock goes up $5 per share, that means I will have made “X” dollars, you have already lost on the trade. Like Kenny ­Rogers said in the song
The Gambler
, “You never count your money when you're sitting at the table, there'll be time enough for countin' when the dealing's done.”

Going through the “what if” dollar scenarios of what future gains might be like is a losing battle. Once you have gotten to that point, whether it is during market hours or not, your focus is off of the trade itself and your mind is now in fantasy land trying to dash forward to what the trade might ultimately do to your advantage. If you are having trouble with this issue, then shift your focus to what you will do if the stock goes against you and how you will manage the trade going forward, and at which point, if the trade is profitable, you will want to move the stop-loss up to and why. This is truly the mindset of the successful part-time and full-time trader alike. Leave Fantasy Land to Disney World tourists, and consume yourself with the trade's risk management.

You could say I have a “prove otherwise” kind of attitude in my approach to trading. I expect the trade to go wrong. I never take it for granted and enter the trade with the predisposition that the trade will result in being a loser. That is not because of some lack of self-esteem in my own trading abilities because I have traded long enough to know what I am capable of as a trader. Instead, it has everything to do with my approach to trading stocks, and my concerns not with whether I will win in a trade, but how I will manage the trade in any and all situations that I am confronted with.

Don Shula was a great football coach for the Miami Dolphins not because he drafted great players but because he was great at managing them. He knew how to extract every ounce of talent and potential out of them and then put a plan together that allowed them to win on Sundays. It is not necessary that you can beat people with their own picks, as stated earlier, but instead, I want you to become consumed with the management of each trade and making sure nothing goes haywire on you that would ultimately compromise your ability to profit consistently from your trading and the market.

Your players are your trades, and making sure that you extract the potential in each trade is your duty. Not making a self-inflicted mistake that could have been otherwise avoidable is absolutely necessary to ensure the long-term profits that you seek.

Further to the point of managing the trade, 90 percent of successful trading in the financial markets has to do with the management and planning of the trade. There is probably only 10 percent of the trade that is actually tied into the stock itself. Managing the trade has everything to do with it. To expand on the Don Shula analogy, I am quite confident that you can experience a relative degree of certain success by placing all of the liquid and tradable stocks in a hat and randomly drawing a stock out of it and then trading it, as long as you have a plan for the trade and manage it as you should. By saying that I sound like I am challenging the notion that stocks and their movement results in nothing but randomness and that whether a stock goes up or down has nothing to do really with the stock itself.

That is not what I am saying at all, though. The point that I want to make is that stocks will rise and fall on their own merit, including growth, earnings, revenues, technical analysis, and so on. As traders, we are trying to be successful managers of stocks. Realize that the aforementioned traits all play into a stock's movement, but your ability to trade successfully is not going to be based on how a stock trades after earnings, whether they get FDA approval for their latest drug in development, or the random upgrade/downgrade issued by one of the brokerage firms. The management of the trade comes down to the pretrade studies and screens that you conduct, the entry price you decide upon, the market direction of the broader markets, and how you will trade off of them.

Once you are in the trade, successfully implement your plan, which includes getting in at the desired entry price and putting on a stop loss according to your analysis. If the stock goes against you, then you will want to make sure that your order executes at your stop-loss, and if the trade goes in your favor, you will need to proactively manage the profits to prevent a winner from turning into a loser.

It is so much more than finding that
“it”
stock that somehow does all the work for you. Even when someone does buy into the stock that rips higher and higher, often the trader is so scared about booking gains, as if it might be some kind of sin to do so, that instead of booking what can be rightfully his, he will watch that trade ultimately come all the way back down to where it first started, and then drop even further. I've seen it time and time again.

I know two people who slaved away at desk jobs during the 1990s' dot-com bubble, yet managed to buy Sun Microsystems (now JAVA) and Qualcomm when they were trading for pennies on the dollar, then rose to astronomical prices, and they both practically became overnight millionaires, if they had simply put in a “sell order” to book those gains. But they did not do so. Instead, they were so afraid of selling out of fear that the stock might go higher still without them, and that was a chance that they were willing to bet their millions in profits on; in doing so, they lost it all. One of them actually is holding out hope that one day JAVA will return to its glory days like the prodigal child he unfortunately believes it to be.

Why do I even bother with technical analysis then? The answer is simple: it can give us an edge by which we can exert the 90 percent of the effort toward managing. There is absolute worth in technical analysis, but it is a useless exercise if you do not have discipline and a willingness to manage the trade. The charts provide you with the road map by which you can manage the trade, which includes defining the ideal entry to get in on and defining the reward and potential of a trade, while also determining where below resistance you are going to place your stop-loss once you get long or short on the trade. The technical analysis might be only a small factor of the trade, but it is still much needed because it is what the 90 percent management factor is based on.

Take a door, for example. A typical door opens and closes and does what you want it to do, but the only reason it can do that is the three tiny hinges that allows it to go back and forth. Those hinges happen to be your stock, and the door, which represents nearly the entire apparatus, represents the management of the trade.

You need a stock that gives you an acceptable probability to profit at an acceptable level of risk. Without the door you have a set of hinges that serve no purpose, and with no hinges you have a door that can't stand on its own. So it goes with trading—if you do not manage the trade, your stock picks are useless, but your management can work only as long as there is a stock that provides you with the parameters that have been detailed throughout this chapter.

There is no doubt that you can trade if you apply the principles in this book to your trading. But while I provide you with the way to become a successful part-time trader, you have to be willing to follow the road map in order to get there. It is not simply about finding some stocks and throwing some money at them, thinking you can just sit back and watch them grow. Like crops in the field, you have to diligently tend to the garden, and if you plan on reaping the profits, you better take care of your crops until the harvest comes.

T
here is a great sense of urgency to get to our final destination in trading, as if there actually is one. The fact of the matter is that trading the financial markets is ever changing and the education never ceases to end. You will always find yourself learning how to trade better and constantly having to adjust to the challenges that the stock market presents you with. So the idea that there is some kind of final state that a trader reaches in his or her progression is a complete fallacy. Over time, if you apply yourself to the principles that I have outlined in this book, you will no doubt get better, and as you experience and see more out of the financial markets, your ability to trade better will increase likewise.

The concepts that I have outlined in this book, the “Do's and Don'ts,” come primarily from my own shortcomings as a trader. I have made more mistakes as a trader than you could ever imagine, but I am a successful trader today because of those experiences and the learning curve I had to experience to get where I am today. I have also had to learn to trade despite personality traits of my own that can get in the way of my successfully trading. Trading is hard work and any attempt to cut short the learning progression and experience that is necessary to equip you, the individual trader, for success, will be met with disastrous results.

A part of the financial industry that truly enrages me are all of these trading courses that sell you on the promise that if you spend the thousands of dollars that their course costs, you can make the same millions of dollars that they were able to make. They also use the element of time to appeal to your need to buy their course. They will do it over five days and somehow in just those five days you will magically become self-aware about all things trade related and therefore ready to take on the markets with all of these secrets that you have been equipped with.

Let me just tell you something, if they are trying to sell you their secrets to success, they are not secrets, they are well-known facts and in some cases, well-known fallacies, and nothing that you will ultimately benefit from.

The education that I have provided through the SharePlanner Academy over the years has not been to provide a stop-gap measure, all-in-one solution for traders to miraculously go from the beginning trader to one with expert knowledge. Not even close. Instead, my academy is there to help you along your journey.

Your approach to educating yourself should be to teach you different concepts and theories, strategies and understandings when it comes to trading and doing it successfully. When someone completes one of my courses, I expect them to get better, assuming that they apply what they have been taught, but it is not, nor will it ever be, your holy grail to trading success.

If you are going to become the trader you want to become, it is going to be because you took the time and paid your dues in becoming that trader. We look at skill sets like playing the violin or learning to tickle the ivories on the piano or strum out a melody on a guitar, and not for a moment does one believe that the professionals who plays this instrument achieved their success overnight, or bought some course that took them from unskilled and into someone who was ready for the London Symphony Orchestra. Not a chance. Instead, they learned to play their musical instrument through blood, sweat, and tears, by studying every facet of that instrument, and learning the theories behind them and how to play musical numbers of increasing difficulty. Then and only then, after years of experience did they finally get there.

Take professional athletes, for example. Did former Miami Dolphins quarterback Dan Marino just suddenly walk on the field one day and become the starting quarterback for the Miami Dolphins? More so, what about Peyton Manning, who is well known for practicing when no one else is practicing, and studying every game film he could get his hands on of his opponents, so that he would know every facet of the game. I can assure you that what they did not do was go on the Internet and find someone who said if they bought their quarterbacking videos, they would somehow be ready for the NFL.

These great athletes started when they were just little kids, wearing shoulder pads that were wider than they were tall. By the time they reached the professional level, they had eight years of experience just at the high school and college level under their belt, not to mention all of the time they spent in the little leagues.

The same goes for trading, too. We simply believe that we can watch a couple of videos, buy a few penny stocks, and suddenly be rich like Warren Buffett. It simply is not possible. But, of course, most of those trading web sites that promise instant success and exotic riches will trot out personal testimonials, both written and filmed in tropical locations, showing you how their customers have benefited from their service and gotten rich in the process. Know this, though— most of these testimonials are false. That's right, they are false. People do not actually say that. They are either part of the company, a friend, or paid to come up with garbage testimonials to convince you that they are true and legit.

What you have to do is come to grips with the prospect that it will take years and years to get to where you want to be with trading, and even when you think you have arrived you still have an endless journey ahead, as you have only scratched the surface. There are no shortcuts, but there are plenty of good resources that you can take advantage of to help assist you in your trading endeavors and your progression over time.

Another shortcut that traders like to take is overleveraging themselves in hopes that having more money to trade will lead to more profits to be had. I have seen traders max out credit cards, take out lines of credit on their house, deplete their savings, and even take a penalty on their 401(k) just to gain access to additional funds. That is a huge red flag, and the primary motivation that arises from these actions is greed, and underneath that greed I would not be surprised if there was a huge addiction to gambling as well, whether that person realizes it or not.

Remember, when you are trading, you are doing everything you can to not create a major setback, because even just one major event can mean that you work even more years on the job and for someone else's benefit. Keeping that in mind, do not push the envelope just because you can. With most margin accounts, you can be matched dollar for dollar in terms of how much capital can be committed to one trade.

Let's say that you took advantage of every last dollar you had available for trading, meaning you were 200 percent long in your portfolio. Let's also say you have an average stop-loss of 5 percent from each of your entries on your positions. Assume as well that the market had one of those unusual days where you were in high-beta stocks, and there was a 4 percent market pullback, which was enough to stop you out of each of your positions. For an account that was fully capitalized in the market, that would be a significant setback of 5 percent in losses across your entire portfolio. But because you were 200 percent long using the margin that was available, you lost 10 ­percent of your account value in just one day, and just to get back to your original starting point, you will have to make 11.1 percent against your existing capital. Depending on what type of market you have on your hands, that can take months to get back.

Trading is difficult, and the last thing you want to do is bury yourself in a hole that you spend most of your trading year in just trying to crawl out, at which point, if you are lucky enough to survive the psychological impact it has on your trading, you will only break even, still needing to increase your portfolio value in the limited amount of time that you have left in the year.

So stay away from the use of margin. I'm not saying that there is not ever a reason to go into margin. I personally draw the line when I am 100 percent vested in the market, but I do think the large majority of traders have no business dipping into margin one bit. Since you are trading while on the job, the last thing you want to do is begin leveraging yourself and your account to the point where, if the market goes against you, the emotions are magnified and the frustrations increased unnecessarily. That kind of trading environment coupled with the pressures of your job will lead to your making a decision you otherwise would not make.

In the primitive years of my trading while still in the corporate world, I became increasingly frustrated by some of the decisions management was making. I had stellar reviews each year and was a valued member of my organization (still during that time when I was actually considered a “rising star”). I had been around for a few years and been promoted once, but then I started noticing they were bringing in these know-nothing, new grads into the organization at a pay rate about 20 percent higher than the salary I was being paid. Pandemonium ensued. Meetings—of my own doing, actually—were held, and the “we'll take an ‘action' to look into that” statements were proclaimed, which is typically no better than someone telling you to “get a life, you're not worth our time!”

It ultimately took three different bosses and a couple years of my life to get the salary adjustment I deserved, and, of course, by that time, inflation had made it where I was just making a new-grad salary despite my not being so newly graduated.

I felt like I had to take matters into my own hands. I was not going to sit around and let the boss man screw around with me and all these years of my life, just hoping to garner the attention of management, thinking that they would come around to paying me what I was really worth. As a result of all this corporate baloney, I decided to use some of the money I had in a line of credit against our home. It was exciting at first. It was not a lot of money, but at the time I did not have that big a trading account and was in the primitive stages of seeing the portfolio increase in size. Before, I only had enough capital to trade two or so stocks at a time. Now, all of a sudden, I had the ability to trade up to eight stocks at a time.

“Just imagine how awesome it would be to make all that money in all eight stocks instead of just two stocks,” I thought to myself, and at this point, mistakes are already starting to pile up on me, just by the mere thought.

First, I was trading with money that I was not comfortable trading with and money that should never be used in conjunction with trading. Second, I was trading with more positions than I had become accustomed to trading. I had been used to trading only one or two positions at a time, and now all of a sudden I was increasing it to eight overnight. That was moronic on my part. Finally, I started to fantasize about what might happen, once all these positions were profitable for me. Here I was, overly confident, thinking that my newbie success was scalable without nearly enough experience under my belt.

I was literally trading with the odds stacked against me, even though I was ready to throw a party on my own behalf without having placed the first trade using the additional capital.

Once the newly acquired capital was transferred to my account, I proceeded to place seven new trades right away. I was already in one trade as it was, so this brought my total up to eight in all. The first day went well, and I was doing well. I was riding cloud nine under the belief that it was all coming together for me and I would discard that measly paycheck they thought was adequate and finally be trading on my own.

That was Monday. On Tuesday, the market opened down 1 percent. Those eight positions I had were all long positions. I started using the breathing techniques typical of what is taught to a pregnant lady in labor in hopes that I would avoid hyperventilating. This money I was losing was not my own; it came from my line of credit, and all that early success that I was experiencing might be down the toilet for me. While I hoped the market would pull a reversal on my behalf, the market declined my request and simply headed further south. Toward the final hour of trading, I had had it. With my bottom lip quivering, I sold out of all eight positions and took my lumps in the process.

In hindsight, the money was not all that much, but I was experiencing losses that I was not used to experiencing. It was the worst trading day of my life, and while I have had far worse since then (from a dollar standpoint) and handled them as part of the job of a trader, at that time I was not equipped. When I was putting all that new capital into my account, it never crossed my mind that I might actually lose on the trades, and to make matters worse, this was the second time I had made such a bone-headed move in my trading career. You'd think I would have learned my lesson the first time.

I thought I would be banking the coin on all eight positions that I could take on at a time. My experience, expectations, and knowledge that I had as a trader were ill-equipped for the trading environment I was entering into. I was so rattled I could not focus on my job the least bit. I was roughed up big time emotionally, doubted myself as a trader, and just thought of myself as being “plain stupid.” I went down to the warehouse where all the shipments came in; at this time of day, they were all gone already, and I just carved out a hole in between all the boxes and pouted for the next hour or so.

After I was done, I had to find my way over to the IT service area (good thing I knew somebody there!) and asked my buddy Greenwood for another mouse and keyboard. The keyboard was missing a few keys, since after I slammed the right half of the keyboard on the edge of my desk while holding the other half, keys had gone everywhere. I also needed a mouse because after I closed out of my trades, I decided to put the exclamation point on my fouled-up trading day by repetitively slamming it on the table as well, to the point where the mouse's internal organs were rattling all around inside.