Archive for January, 2010

How to lose money like a professional stock trader

January 26, 2010 Leave a comment

You are going to lose money stock trading. You are going to lose consistent money stock trading. The you will most likely lose money on 50% of your ideas.

Ok I ‘m glad we got that out of the way. How do you feel? Depressed? Don’t believe me? Quitting the business now?

I have been a professional trader for a long long time now and have taught, mentored and sat next to literally thousands of traders. For some bizarre reason most people focus on being “right” instead of being net profitable.

This thought process manifests itself in many different ways, more often then not I see it when a trader holds an unprofitable trade too long. One that is clearly showing the edge is gone, if there ever was an edge in the first place.

This last comment is what separates those who are pros from everyone else. I make everyone the same PROMISE when they enroll in one of our mentoring programs to trade our capital, “your biggest problem within a month or two will be exiting good trades too soon.” What 95% of the traders who I tell this to hear is “I am going to earn big profits!” What the other 5% say to themselves is “he is going to show me how to find good trades.”

Rookie traders commit capital to every idea. (by the way you can be a rookie for years if you don’t learn from your mistakes) Consistently profitable traders ONLY commit capital to high probability scenarios with an acceptable reward to justify the risk. Profitable traders lose money on good ideas.

They know that if they make enough good decisions over the month they will earn money. They don’t personalize trades because they don’t need all of them to earn money. They take losses according to their plan and when a trade works out they earn more than enough to cover those accepted losses. We call these accepted losses a business expense, spending money to make money.

So what is the magic bullet that struggling traders seem to never get? They don’t consider trade expectation enough. Sure they have heard of it, we talk about it all day every day but it doesn’t always sink in. Struggling traders just want to get in, if they feel they can justify the risk they mistakenly believe they are making a good decision. They don’t consider on every trade does the potential reward justify the risk?

In order to get paid you need for a large sample of your trades to have great profit potential. You don’t need ALL of them to produce great profits but you definitely need the potential. If you take every potential short term entry only weighing the risk and not the reward potential also, your trading account will have a many small “paper cuts” with very limited chance of scoring a big trade. If you get one it was because you were lucky. You don’t want to be lucky, you want to be good. You want to expect to earn money.

You don’t care on a trade by trade basis if you lose money because you are losing money on good ideas that don’t follow through. We see this most evident on our risk manager every day. When the market or a particular stock is “obvious” as we teach in our Equity Trader 101 course 98% of our traders (both students and full time prop traders) are earning money.

When the market gets choppy or in other words the trade expectation for significant follow through is diminished the rookies continue to place trades because the risk is measured without consideration for profit potential and the profitable traders are “flat” or doing nothing waiting patiently for the trade expectation to improve.

The bottom line is profitable traders allocate capital to high probability scenarios with both an acceptable risk and a great potential reward to justify the risk (accepting the potential loss on a good idea). Unprofitable traders do not consistently enough weigh potential profit and therefore are in too many trades.

We saw this yesterday when the market clearly offered nothing more than a potential re test of the support for the last 2 days yet many traders continued to short sell with limited upside. The proper trade was to short sell new lows which presented a much better opportunity for higher rewards.


Day Traders Satisfied with Market Volatility

January 21, 2010 Leave a comment

Today was the type of day that Day Traders far and near have been waiting for. Follow through with volume. The markets sold off hard leaving this as the worst down session in 12 weeks. Threats of a tighter monetary policy in China, Obama speaking of tighter regulation in the banking industry and many selling the news after positive earning from EBAY, Goldman Sachs (GS), and Starbucks (SBUX).

Energy stocks dropped 2.0% as oil prices were pushed to a near one-month low of $75.66 per barrel before they finished pit trade with a 2.1% loss at $76.08 per barrel. Financials were down 3% as Obama anounced plans are being put together to ensure that no bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

Some of our newer traders’ had never witnessed this type of volatility and some even made comments that “trading is easy , when the order flow is clear and the volume is present”. We could not agree more. Trading can be easy, when you are disciplined to follow your plan and trade when the conditions are right and trade lightly or not at all when conditions are poor.

At the close of the day, we had held the 50 EMA on the SPY. We will be watching the $100.74 level in the SPY for the next move in the market. The markets have held the 50 EMA at almost every attempt to break down. If we trade below, with volume, the markets may very well get the correction that many have been long anticipating.

The $VIX climbed from a low of 18.30 to a high of 22.02.

Tis the Season

January 11, 2010 Leave a comment

Earnings season is under way! Alcoa (AA) the first company to report posted a narrower 4th quarter loss as aluminum prices rose and the manufacturing industry showed signs of improvement.  The net loss was $277 million, or 28 cents per share, compared with a loss of $1.19 billion, or $1.49 per share, in the fourth quarter of 2008, when the economic downturn began. 

The company reported an operating loss of $266 million, or 27 cents per share.

Revenue fell to $5.43 billion from $5.68 billion but was 18 percent higher than the third quarter, the Pittsburgh-based company said. Alcoa also had a positive cash flow of $761 million in the quarter.

Analysts on average were expecting revenue of $4.86 billion, according to Thomson Reuters.   Alcoa traded at 52 week highs earlier in the day and currently in after hours is trading down 5% at $16.60.

Volatility was fairly light today as many are waiting for more companies to report to see if the Markets recent strength is priced in or for that matter over priced. Once again today, the markets had a hard time selling off. The Nasdaq was the weakest of all, however rallied most of the afternoon.

Our traders have been taking a wait and see approach as we wait to see what the next move will be. We have reduced share size per trade and have made significant less trader per day. We can only assume the  earning will provide for more volatility over the near term and with JP Morgan reporting later in the week, we will get a sense of where the financials want to go from here.

stock trading mentoring video

January 2, 2010 1 comment

Day trading is a terrific business to earn a great living if you know what to do. Each month Keystone Trading Group holds online webinars that proivide continuing education for both new and experienced traders.

These webinars are designed to take your trading to the next level sooner than later. To watch a 90 minute video from our most popular meeting simply click here.

To sign up for the next webinar click here.

Looking forward to a huge 2010, let’s make it happen together.