trading stocks: what do you think of my strategy (im new)?
February 4th, 2010
I’m new to trading stocks, I have been "mock trading" online at this website where everything is real…except the money of course =). I have been meeting all of my goals so far. I’m too afriad to trade multiple times a day, it’s too risky for me…with the whole 15 minute delay after you put an order out to buy or sell…alot can happen in 15 mintutes. So what I’ve done is, I took ,000 (pretend money) divided it into 4 stocks so 00…and I usually might buy all 4 Monday…and my goal is to get rid of them (sell them) by friday..so that gives me 5 days…and all I want is a 3% profit. I’m not going to risk it at 5,6,7,8 percent. So I have been meeting all of my goals and I am making atleast a 0 profit a week. Does anyone else use a method similar to this? They always say new people lose all their money, but you don’t lose anything until you give it away (sell it) or the company goes bankrupt. If I didn’t meet my one week goal I could and would wait for that 1/4 of my money…even if it took 3,6,12 months to go back up. Any comments/adive/imput? Thanks =) I also plan to keep dividing my money the more my profit grows so I have eggs in all kind of baskets =)
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Tags: 12 months, baskets, eggs, imput, minute delay, money, Money 98, Multiple Times, risk, trading stocks
<<<what do you think of my strategy>>>
To be candid, I think it is almost sure to lose money in the long run.
Most traders will tell you "Cut you losers short and let your winners run." You are doing the opposite. You are cutting your winners short and letting your losers run.
One thing you did not share with us was how you would chose the stocks you would buy. With a good selection method you have a good chance of making money for a while, but the big losers will hit you sometime. It is inevitable.
I also strongly disagree with the notion that "you don’t lose anything until you give it away (sell it) or the company goes bankrupt." When a stock trade takes place, money is exchanges for stock worth that amount of money. No money it made or lost when the trade takes place. You make or lose money when the price of the stock changes while you own it.
I firmly believe the price you paid for a stock should have nothing to do with your decision if it is time to sell it or not. Instead, you should look at the stock and, pretending you do not already own the stock, see if you would want to buy it today. If the answer is "no" it is time to sell the stock.
everyone’s strategy is differnet some people use charts. I hate charts btw.
But also the news is an important factor BCC, CNN MSNBC and so forth.
I love the news for next day actions to be honest.
Alot of people say the news does not tell you anything but that charts do. To be honest charts is just a way to do probability that i find to be pure luck at time. Yes there are charts that show a trend or history and those I can appreciate. But the whole 50 day moving avg to me i feel is up in the air double bottoms etc.
As far as your way with every week you might have been lucky so far because of the rally’s for 4 weeks.
I would keep trying out the simulation and get use to it and good luck
One way you are also losing money is on transaction fees. I’d try to cut those down as much as possible (don’t trade so often, or look at some ETFs that already have stocks you want, and buy a single ETF once).
Also, look for patterns between Friday and Monday. Often stocks repeatedly go up before the weekend, and drop on Monday morning, or vice versa. You may be able to avoid loss by selling Friday, or get an extra bump by selling Monday, depending on what you find out.
As a long-term strategy, though, this probably won’t work. People who make %3 or more in gains a week still end up losing enough in trade commissions that in the end they end up just tracking the market as a whole, or worse.
I think your strategy has its strengths and weaknesses. Planning a trading method, testing it and diversifying your trades are the strengths. I’ll go into more detail about the weaknesses to help you improve:
It’s not all about making money. Trading is also or more about winning psychology and risk management.
CHANGE YOUR PSYCOLOGY
Forget about feeling like you only deserve 3% on your trades. This isn’t a job where you get paid according to what you think you deserve. Do you think over 3% is wrong or greedy? It’s not. You’ll need some of those high returns as part of your risk management strategy to offset losses, trading costs, taxes and losing streaks later on.
Think of trading from a psychological point of view like you’re a professional athlete in a competitive sport. You win some trades and you lose some. The team that wins the trophy at the end of the season may not win all their games, but they win a larger number. In trading it’s the same or though in some cases a trader can still end up winning because a large profit offset a number of small losses.
RISK MANAGEMENT.
The mistake you’re about to make is very common with new investors and active traders in the stock market. You’re going to hang on in a downtrend and hope the stock comes back up to the price you bought it for. This is why charts are important. They tell you to get out when your view of a stock is wrong. I’ve never known a large loss that wasn’t once a small loss. It’s better to cut the loss early and put the remainder capital into a better trade.
You understand the importance of diversifying, but what you’re doing wrong is you’re diversifying the capital you allocate to each stock rather than diversifying your risks. That was one of my early mistakes. The first profit I made was on Coca Cola. I made $600 followed by $300 on an oil company. I was so happy, I drank lots of Coke to celebrate. The next 2 trades, I lost $1000 each. Even though I had 2 winners and 2 losers, I lost more then double because I didn’t calculate and evenly weight my risks.
So here’s my question to you:
How much money are you prepared to lose if any of your trades goes wrong? You need a figure. Otherwise, one loss could wipe out several profits.
Here’s an example of how I calculate risks:
Say I’m willing to risk $200 each time I trade. After looking at daily (or some other timeframe) charts and after doing some research, I decide Bank of America (BAC) might be good. The stock trades at $7.30 per share. If I were trading using daily charts:
First, I’d decide a stop loss. If a stock begins a downtrend after buying, I would sell out at a price decided when I made the trade to limit the loss. A good broker will let you set stop loss orders. Your stock(s) will automatically be sold if a position falls to the stop order price. I decide stop losses before I make every trade and set them straight after entering a trade.
So, I decide to set a stop loss at $5. Then I work out how many shares I’ll buy to lose (that’s right, lose!) $200 in the trade. Therefore:
Brokerage fee at $7/trade = Buy + Sell = $14
(Risk – Brokerage) / (Price – Stop) = ($200-$14)/($7.20 – $5) = 84 shares
Total value: $604.80
Now if I pick 3 others:
American Express (AXP): (Price: $15, Stop: $12, Shares: 62) = $930 Total Value
General Electric (GE): (Price: $11, Stop: $9, Shares: 100) = $1100 Total Value
Microsoft (MSFT): (Price: $19, Stop: $17, Shares: 100) = $1900 Total Value
While I believe all these stocks are worth buying, let’s say I buy them and AXP, BAC and GE all hit their stops and all I’m left with is MSFT. I have just lost $600. Now imagine if Microsoft creates new innovations I never knew about prior to the trade. MSFT shares starts to climb and climb and climb. Days turn into weeks and weeks turn into months, but still MSFT just keeps going up. Eventually near the end of 2010, I finally sell them at $100 per share. Yet in April 2009, I thought MSFT might have been a mistake and I should have bought more GE or BAC and less MSFT.
So 3 loses = $600
And 1 win = 100 MSFT * ($100-$19) - $14 = $8086
(The loser’s proceeds get put into other trades.)
Learning to use Excel spreadsheets will help you easily calculate risks).
Remember, emotions and the stock market don’t mix. I don’t like getting worried or excited. If you diversify evenly weighted risks and set stop losses, you’ll stay in the game.