The Part-Time Trader (17 page)

This is all they will care about and all that they will ask you about.

Early in my corporate career, I had over a dozen people coming into my office to ask about my trades. I felt like some kind of bookie running an illegal gambling ring (though, of course, I was not).

To say the least, I could not be the solid employee that I knew I had to be because I had all these people coming into my office asking for more trades and what they should do with the existing ones, and telling me how much money they hoped to make off of them. But these people could not contain themselves; they would, of course, have to tell these friends about this great new gig they had going on with Ryan down the hallway. So then, of course, I would have to come up with some creative approach to get rid of each and every one of these poor souls just hoping to make an extra buck.

It is a lose-lose situation to try and involve others in your trading. You are not running a charity here, and if ever there is a day where it all hits the fan, you will be thrown under the bus faster than you could imagine.

There were countless times in the office where a huge sell-off in the markets spurred on “Did you see the Dow Today?” discussions. This usually arose when the Dow was down 200 points or more. No one paid attention to the S&P or Nasdaq. The S&P 500 could be down 30 points and the Nasdaq down 50 points, and no one would notice if the Dow did not tank with them.

On one such occasion, I remember a woman stating that exact panic question about the Dow's sell-off. Of course, I saw it, but could I tell her that? No way! What would have been a real kicker is if I had told her, “Yeah, I saw that—good thing I liquidated my long positions and took on a 3× Ultra Bear Financial ETF (though I hate leveraged exchange-traded funds [ETFs]) and made a boatload of cash off of your misery for limiting yourself to the world of long-only IRAs.”

When everyone is losing their hide in their 401(k), the last thing you want to be doing is fist pumping with excitement over capitalizing on the new market downtrend. That will evoke jealousy and bitterness toward you, which will ultimately lead to a bounty being placed on your head.

I would play the fool. Completely oblivious to what the stock market was when asked. If questioned, “Did you see the Dow sell off?” I would reply with, “What store is running that sale?” I simply played oblivious to what they were saying. Sure, there were times when the markets were hitting extremes in their cycle that I would see these individuals sell at the bottom, or during periods of market exuberance, where they finally decided to jump back in at the top of a market, that I would have liked to help them out otherwise, but I simply could not do it. Like Clark Kent, I had to keep secret my true identity.

Let me tell you, though, coworkers make for some of the best market indicators. They represent a factor that moving average convergence/divergence (MACD), stochastics, and other indicators cannot capture, and that is fear and greed. Since having become a full-time trader, I really miss having access to that indicator. I was able to make a lot of profits off of my coworkers without their ever knowing it.

I even had a name for this unbelievable tool: The Larry Indicator. That's right, named after the namesake of the beleaguered Larry employee as well. You see, good ole' Larry was a company man and would remain a company man his entire life. He had been there for 35 years and was nice as can be. He walked around with the pocket protector in his right breast pocket, and would bring in the local newspaper each and every day. He would read that newspaper from front to back. The man was practically untouchable at what he did.

I would go in there each day to read the sports section while he read the front page and business sections. While I enjoyed reading my sports on traditional print, I also enjoyed listening to his comments about the markets as the indices trended up and down and up again.

He knew what some AP writer wrote in generic terms about the previous day's market action. When conditions got bad, he wore it all over his face. He would make comments like “I have to retire, I cannot keep letting everything I worked for all these years get swallowed up by the market,” or sometimes I would yell across the hallway on a very bad day in the markets and after a more extended pullback, “Larry, that Dow thing you are always are talking about, its down like 225 points right now!” When his emotions reached DEFCON 1, he would reply with, “Do not tell me anything more about it; I have put it all back into a money market account!”

At that point, I knew I had my buy signal. I would start buying stocks and bullish ETFs very aggressively. I honestly do not think I ever lost off of that indicator. Not once! I would like to have him be a consultant to my own trading now, but if he understood why I wanted him around, I think his market magic would quickly disappear.

I had some others that I had marked for my bearish indicators. I had the “Dopey Darlene” Indicator, the Jovial Jolene Reversal, and many others. Their emotions of fear and greed could almost be plotted on a chart. They were unbelievable and timely.

While these might be humorous stories, the premises behind them are of utmost seriousness. You are at work to get your job done, and in such a way you can simultaneously pursue your career as a full-time trader through the purview of a part-time trader on the job.

Far too often when someone pursues a trading career, it is not about the simplistic reasons of providing a livelihood for themselves. Instead, there is this empty void in their lives that they feel the need to fill. Whether it is due to some problematic childhood, or through the need to pad a lack of self-esteem with a feel-like-a-winner mentality, or some other hidden motive, none of them will help you succeed and more times than not will lead to the implosion of your capital.

The main objective in trading is to trade in a manner that offers an acceptable probability to profit at an acceptable level of risk. If you are not running every trade you make through this lens, you are at risk to never make it into the world of full-time trading.

Most people in the workplace have never even heard of the concept of selling short a stock. Once you have a few winning trades under your belt or even more, a full year or two of successful trading, therein lies the need to boast, to brag, and to tell others about it. Most men who get into trading do so out of the desire to win. Of course, they want to make money and lots of it, but psychologically they want to win as well. That is a dangerous mindset to have because being good at losing is just as important as being good at winning.

If you cannot systematically lose, when the trade has shown you that it is a losing proposition, then you should not trade at all. Most traders have a hard time booking a losing trade.

It is not that I want to have losing trades, but it is the realization that there will be plenty of losing trades no matter how successful I am at trading. Far too often, though, traders will double-, triple-, and even quadruple-down losing trades out of desperation to be a winner. I have literally seen people unwilling to take a losing trade of 3 percent but will risk a whole year of gains just to save face in hopes of coming out a winner. It sounds like lunacy, I know, but there are plenty of traders who easily fall into this trap each and every day.

Winning is not your objective. Having a winning trade is not your objective, either. Profiting over the course of a period of time by which you judge your performance is your goal, your mantra, your purpose. Your ego, self-esteem, and desire to feel like a winner personally and in front of others cannot be a part of your game plan.

Too many professional athletes are “divas” within their profession. They are high-maintenance individuals who need the praise and applause of their fans and peers. As a young boy growing up, I had the privilege of watching Barry Sanders play each Sunday afternoon. What stuck out about him to me and what I learned from him in my trading was how to approach the game, and in my case, my profession. When Barry Sanders scored a touchdown, he did not do some self-celebratory end-zone dance. Instead, when he scored, he took the football and handed it to the ref and went back to the sidelines. He acted like he had been there before, like it was expected and routine.

Today, there are traders who spike the football on social media, on the financial news networks, and in interviews about how great a trader they are. They are metaphorically spiking the football and revealing the amateur state of their trading. When you trade and when you profit, act like you have done it before and move on to the next trade. Look for the next trade you can attempt to profit on. Do not relish the trade or tweet about it, and as a part-time trader in the corporate world, you must never gloat about it in the office. When you do not follow this advice, your objective in trading becomes more about your image, and you start trading in such a way that will preserve your image and nothing else.

Know your purpose in your trading and what you are setting out to achieve, and trade accordingly.

W
hen you are a part-time trader, by its very definition, it means that you have a better source of income available than what you are reaping from the markets. If that was not the case, then you would more than likely opt to be a full-time trader. When I left my job, it was because the opportunity that existed as an employee paled in comparison to the benefits of transitioning into a full-time trader. But up until that very moment I quit my job, the benefits suggested that I should remain with my current employer. Trust me, if I could have left one minute earlier, I would have.

The benefit of becoming a successful part-time trader is that you still get to do that and your day-job. If you are one of the few who actually enjoy their job environment, and long-term your employer is fine with your trading, then you have a scenario to be extremely envious of. Not only do you have your job that you really like, which makes me assume that they are paying you well, too, but you also get to supplant that paycheck with your trading activities. In essence, you can make a very nice and comfortable life for yourself.

For most of us, though, our trading and desire to ultimately become that full-time trader, far outweigh the long-term benefits of our Monday-through-Friday job. As a result it is easy to lose sight of the difference between the supplement income and the main course. The losses as a part-time trader do not seem as painful as they do when you are trading full-time. The main reason for it is that you know if you go through a string of bad trades, you are only affecting the capital that you are trading with. In fact, you can pay back those losses by dipping into your paycheck to recoup them, even though that is not the backdrop you should have to your trading.

Overall, the income that you make from your job still supports you and your family without a hiccup. Therefore, it is easy to not take losses seriously and that can be a huge problem. Feeling the pain of trading losses, seeing what you did wrong, and avoiding making the same types of mistakes again in the future is hard to notice when those losses can so easily be offset.

On the flip side, for the full-time trader, the capital you enter full-time trading with is the capital you will be stuck with. You will have to provide yourself with a stream of income from it to support you and your family, as well as steadily grow the portfolio year after year. To say the least, trying to pull that off can be very difficult and is often the reason for why most traders simply do not make it in this profession. That is why trading part-time while having the full-time job to take care of all the bills and day-to-day activities is an incredible asset to have, because then with your portfolio you can grow as a trader without all the pressures of trying to do it on your own full-time and support yourself and family with the income or lack of income generated from your trading.

In general, people tend to make their trading far too complicated and difficult, which along with many other reasons that I've already discussed leads to hard-to-grasp success that most traders are desperate for. Trading needs to feel natural and systematic. You need to understand what you trade and why trade for a reason.

In my own trading, I do not take trades for simply taking them. I do not trade stocks out of boredom, out of need, or out of desire for some type of excitement. I trade stocks to extract a consistent stream of profit out of the market. I trade stocks within a defined price range; there are certain stocks that I simply know up front I will not trade. For instance, I am not trading real estate investment trusts (REITs). I also shy away from insurance companies. Penny stocks—no way! If the stock is trading below $3, the company better have an incredible reward-to-risk ratio, and a price pattern that leaves little to the imagination.

I am obsessed in trading and life in general with “keeping the main thing the main thing.” And the
main thing
in my trading revolves around this one all-encompassing statement to my trading: does this trade represent an acceptable probability to profit at an acceptable risk?

All my trades must go through this litmus test. If the stock has a great price pattern but a level of risk that I cannot afford to take, then forget about it. I will not place the trade, no matter how promising the odds are of profiting are. Likewise, if I find a trade with an ideal level of risk, and for me that is usually in the range of 2 to 4 percent of my overall position value, but a trade setup that has less than the desirable level of possible success attached to it, I will simply move on to the next potential trade. That means if the price pattern looks good, but if there is a heavy level of resistance, where historically the price has struggled to break through, I am going to assume that if tested again, the odds are the price action will fail to break through, and I will ultimately lose on the trade.

I am primarily a swing trader who only dabbles in day trading, or when a solid opportunity presents itself. Here are some other facts about my trading that I have defined and do not leave to interpretation one bit. How I trade is reflected in these statements and these statements in my trading.

As a trader, I focus on equities and try not to dabble in exchange-traded funds (ETFs) and other trading vehicles.

I trade primarily off of daily charts and secondarily off of five-minute and weekly charts. The daily charts are my source for spotting price patterns, defining risk, and ideal volume patterns. I use candles on all my charts for defining price movements within a period.

The five-minute charts help me for staging my entry into a stock. If the price is overly extended on the intraday chart, I am going to hold off on trading the stock, until it has come back down to earth some. Nine times out of ten, I reap the benefits of not trading on an overextended chart in the five-minute time frame. Weekly charts help me for spotting long-term support and resistance levels that might not have been seen looking at eight months of daily price action on the daily chart. Also, weekly charts tend to be a little bit smoother, and lacking the crazy gap ups and downs and candle shadows, that tend to dirty up a daily chart.

While I willingly trade both to the long side and short side, and often at the same time among different stocks, I will ultimately allow for my trading direction to be dictated by the market's bullishness or lack thereof. I do not try to front-run market reversals, or allow my opinion on economic fundamentals taint my view on the technical analysis of the charts, the S&P 500, and other indices that I follow. To say the least, I am not a contrarian in my trading. I take what the market is willing to give me. I leave my beliefs and opinions out of the equation, and simply trade what I see and not what I think. Because I do this, I am able to minimize those pesky emotions of greed and fear that try to overcome all of us in some form or another.

That means at times, I am taking trades that I really hate taking. That is what being systematic is all about. I have had some of my best gains come from stocks that set up perfectly and looked great in every time frame and from every angle. The problem was that I had a horrible bias against the company. I have been that way with a handful of industries in the past. Ironically, my best gains are usually from these types of trades (minus the REITs and insurance companies, of course), often because I am being dragged into the trade kicking and screaming because the trade setup is so perfect.

On the flip side, those stocks that I tend to have a positive predisposition toward are usually the ones I lose on, because my view of them is tainted, so when I am looking at stocks and a particular company pops up that I have warm and fuzzy feelings for, I am falling victim to confirmation bias, rather than rationally looking at a stock that might be worth trading on its own technical merits.

When it comes to oscillators and indicators, I really do not have any that I religiously use on my charts. That does not mean I will not use them, because I have in the past. The problem is that I never found where using any of these stochastics, moving average convergence/divergence (MACD), relative strength indicators, or commodity channel index (CCI) indicators has provided me with any true edge in my trading that leads to increased profitability in the long term.

I do like to have some overlays, though, particularly simple moving averages in the form of the 10-day, 20-day, 50-day, and 200-day. I do not make much of them, though, and will consider them in my own technical analysis only when there is a legitimate reason to do so. Such a case would be when a stock repeatedly bounces time and time again when testing the 200-day moving average or any moving average for that matter. When I see that occur, it is usually a good indication that there is a hidden level of support that price and volume are not showing on their own. When that happens, I definitely give more weight to the moving average than I typically would. The point I am trying to make here is that I do not go out of my way looking for trading opportunities based off of the moving averages or any other indicators or oscillators for that matter.

Another overlay that frequents my charts are Bollinger bands. I am a big fan of these, but for reasons others might not use them for. I typically just use two standard deviations for the bands, and use them primarily for determining market direction and potential reversals that could occur. Using candles on my chart, if the S&P 500 has an entire candle body outside of the upper Bollinger band, I am going to dramatically tighten up my stops on all my existing long positions. In some cases I will even sell a large chunk of my existing positions in order to minimize risk exposure.

Typically, the S&P 500 doesn't rally that well when the price has escaped the confines of the upper Bollinger band. In more instances than not, the S&P 500 will retrace within two to three days after the initial candle (in its entirety) trades outside of the upper band.

When using Bollinger bands with a setting of three standard deviations, and an entire candle body goes above the upper band (that means the opening and closing price of a stock is on the outside of the upper band), it is an automatic sell signal for me. This rarely happens, but when it does, buyer beware! I will never buy a stock under these circumstances, as it is almost always a reversal signal. Most times I will liquidate all of my holdings that I am swing trading because I am so confident in this rare phenomenon and what it means.

On the flip side, I do not give much credence to the Bollinger bands if the price action happens to go below the lower band, as it is quite common for the market to sell off well beneath the lower band for many days on end, particularly when the price action is capturing a lot of fear among traders in its move. It goes along with the old adage that says the stock market tends to take the stairs up and the elevator down. If you don't believe me, then look no further than the market recession of 2008 and the European debt crisis during the summer of 2011. The market can live outside the lower Bollinger band should it choose, but the same cannot be said of price action to the upside.

When it comes to staging entries for buying a stock or shorting a stock using Bollinger bands, do not bother with it. A lot of traders have tried, and they sound convincing when they speak of staging a buy or shorting a stock based on the price action nearing one of the bands, but I have yet to find a trader that has employed them as the centerpiece to their trading strategy and as a result succeed from it.

I simply cannot find any clear edge that would allow for me to use Bollinger bands as the primary basis for my reasoning for entering into a new position. I use Bollinger bands for managing the trade and managing risk when the situation calls for it and that is it. For everything else, I simply follow price and volume alone.

By far one of the most important concepts in trading and it goes strictly back to the “main thing” of trading, and that is “does this trade represent an acceptable probability to profit at an acceptable risk?” My stop-losses are typically in the range of 2 to 4 percent from where I get in, not because there is something magical about that stop-loss range, but more so that it is easier to find setups with appealing reward-to-risk setups when you keep the stop-loss tight.

For me it is a minimum of a 2-to-1 reward-to-risk play that I look for. If my average stop-loss is 3 percent, then that means I need to look for opportunities that can yield 6 percent or more. On the flip side, if my stop-loss was wider, like it was early on in my trading (sometimes as much as 10 percent in those days), I would have to look for trading opportunities that yielded a 20 percent return potential. It is much easier to take what the market gives you, and if it wants to give me 20 percent, it is going to be because I took that trade on a tight stop, and as a result it would yield me seven times the reward that I took on the risk. With a wider stop of 10 percent, it was only twice the amount risked on the trade.

Now, I know what you are going to say: “Tighter stops mean more losing trades.” That is absolutely wrong! I have actually noticed my trading has improved dramatically from those early days as a result of using tighter stops. First of all, I find stops that are below key support levels for buys and above key resistance levels for shorting. That means in order to have a stop-loss within 2 to 4 percent of my entry, I have to be fairly choosy and wait for the stocks to come into that desired price range.