Lessons Learned after 25 Years of Trading

We must understand that investing is NOT about winning and losing, it’s always about the bottom line or net result. Once an investor accepts this statement as truth, they will see their bottom line grow. It took me several years to finally believe this statement and train my emotions to also believe it. As humans, society trains us to win at everything and this cripples the potential success of most novice investors and seasoned investors alike.

I have an article to share that I read about 3 years ago.

Lessons Learned after 25 Years of Trading
By: Thomas N. Bulkowski

NOTE: Bulkowski refers to two charts in this article but I do not have the images to upload here. The original article was published in the September 2005 edition of SFO Magazine, a publication about Stocks, Futures & Options.

Profits lost can be lessons learned. Eight simple lessons taught by the greatest teacher of all – experience.
Trading stocks doesn’t require a college degree. A trader’s education may begin at a bookstore or be handed down from relatives. Even before I earned my driver’s license, I became interested in stocks. After college, I contacted two dozen investment firms and reviewed their prospectuses for my first investment: a money market fund. I paper traded stocks for four years before I bought my first one, mostly because I didn’t have the bucks to invest, but also because the riskiest investment my parents ever made was in a U.S. savings bond. The result was worth the wait as I made 88 percent on that first stock. Over the years, I learned a number of lessons worth sharing, and although simply reading them cannot prepare a trader for the profits and losses and the stress of placing trades, it’s certainly a start.

Half of All Trades Will Fail
This surprises most beginning traders. My lifetime win/loss record is 49 percent, and it falls in the 40-percent to 60-percent range that many professional traders are rumored to maintain. How often a trader wins or loses is less important than how much they win. If a trader makes a million dollars in one trade and loses $10,000 in each of ten trades, he still has $900,000 to play with despite a win/loss percentage of just nine percent.

Use Stops to Limit Losses
If half of all trades fail, then a trader needs to know how to limit losses and maximize gains. One easy way to do that is to use a stop-loss order. . I bought 400 shares of Linens ‘N Things at 31.75 after the earnings announcement caused the price to gap up, forming what I call an earnings flag – a generic term for a price pause after an earnings announcement. I sold at 35.20 when price pierced an up-sloping trendline drawn beneath the valleys, confirmed by other technical indicators I follow and a downward turn in the general market. I made $1,350 in a month – more than ten percent on the trade.

As price climbed, I raised my stop from 28 to 30.84, to 32.13 and finally to 33.23. Notice how the numbers are oddball ones, not 31, 32 or 33.25. I don’t use round numbers, as they are common support or resistance zones. I place my stops below the support zones, trying to give price every opportunity to move higher.

When price climbed above the prior peak and made a new high, I raised the stop to a few cents below the nearby valley. Peaks and valleys are places where price is likely to find support, so they make handy stop-loss locations.

Notice how price formed a second peak at 36 and change – a double top – before sliding down to 24. Holding onto this stock and riding price lower would have been a costly mistake. That’s why stops are so important.

Scenario Trading: Ignore News
I read the business press daily but don’t pay much attention to trends they see forming. I remember a columnist in a weekly news publication touting that gold was a buy. Once a month, he’d quote a different expert who said the price of gold had bottomed and now was the time to buy. Gold continued down. A full two years later, his prognostication finally came true. Gold bottomed. Anyone buying gold stocks during his bullish buy signals would be choking on the metal.

Scenario trading is believing the sound bites and trading on them. The times I have invested in a scenario, I find myself so confident of the analysis that I invariably lose big, taking losses that are 15 percent or higher instead of the usual five to ten percent. As price drops, I average down (buy more at a lower price), compounding the loss. Averaging down is a wonderful technique for buy-and-hold investors willing to wait years for a stock to recover, but it leads to large losses for traders. Don’t average down, and don’t believe the scenarios spun by the news outlets. The purchase may be near the peak, or from a portfolio manager who is dumping his shares.

Let Profits Run
Want to make a bundle in the stock market? Don’t trade. If a trader uses the weekly scale for signals, he will make more money per trade than if he uses the daily scale. If a trader uses the daily scale, he’ll make more money per trade than if he trades intraday. As the trading frequency increases, the per-trade profit decreases. This makes intuitive sense. A stock can double in a year, but a trader would be hard pressed to double his money in one intraday trade.

Day trading allows a trader to make small amounts of money numerous times in one day. Position trading allows a trader to make a larger amount of money, but it may take days, weeks or even months to achieve the results.

I’m not knocking day trading. What I am suggesting is that a trader should let profits run. Don’t be so quick to sell. Whether day trading, position trading or buying and holding, there will come a time when it will be wise to sell. Wait for it. Follow a few stocks, and get a feel for how they move. Learn to predict significant price turns.

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