Developing Discipline in the Small Time Trader

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dutchdanish

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Post Number: 19
Registered: 10-2005

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Saturday, January 20, 2007 - 10:32 am:

Greetings once again I.C. Forums,

It has been a while since I posted but be sure I have been around; reading and learning. I open up a new topic in hopes for deep discussion. With that being stated may I present a re-occuring problem that I am having. Not in hopes of solving the problem, but in hopes of discovering it's roots, and RESOLVING it there. I do hope there is much psychology discussed.

Working with a small and very limited capital (less than 5k USD) has limited my trading greatly. Commissions alone cripple each trade. Add to this diversifying the total capital invested...and I'm left with small holdings in a relatively small number of positions. For example...

[ Suppose I buy 250 shares of a $2.00 stock...which is 10% of my total capital. Now, to get in and out it costs me 20$. This equates to a ~4% move in that stock. So I begin -4% on each and every trade.

Now suppose the stock soars 10% in a week. I have now made just enough to cover my next trade's commissions with very little profit. ]

The example above has led me into some difficult waters. I am sure you have heard the colloquialism "swinging for the fence." That is what my trading had become. I find myself going for the "big one" more and more these days. I have become weary in collecting such small profits from each trade, in miniscule profits and such tiny compounded profits.

I have noticed a similar pattern in my life regarding poker. I play online as an alternate means of income and have relatively disciplined bankroll management (i.e. capital management). However, again only having a relatively small bankroll has led me to play games bigger than bankroll should afford me.

If you have gotten through the entire mess of this post, I thank you. With the background set I now present you a couple questions. Why am I disinterested in small gains over long periods of time? How can I properly assess this problem? Where can I find a cure?

I am sure many of you have experienced this, even those of you with large capital. Perhaps it was buying a penny stock, or a OTCBB, micro-cap, IPO, etc.

Thanks in advance for the responses, I do hope to dig deep into the human psyche and examine the subconscious motives behind this behavior.

-dutch

"...yet with how many things are we upon the brink of becoming acquainted, if cowardice or carelessness did not restrain our inquiries."
--M. Shelley

http://www.dutchdanish.com

lafee

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Saturday, January 20, 2007 - 11:21 am:

Dutch,

I don't think you should be trading stocks with your current cost structure. A -4% start is such a disadvantage (especially in the short term) when your competition is probably paying less than 0.02%. As you are American, and cannot trade CFD's, you should probably look at learning about options (if you want to trade stocks).

If you want to take your 5K and turn it into something meaningful quickly you will always have to take on large risk. There is no way around it. You have to be prepared to lose your entire 5k. You can do everything right and still lose it all but you have a chance of building an account that will allow you to manage risk more appropriately and still make decent money. The good thing is that it is only 5k.

If I were you I would focus on 1-2 day trades in the forex market and start by risking 10% of your account on each trade.

Cheers
Lafee

If nobody can be certain of anything, how can I be certain of that?

Ayn Rand

When I was young people called me a gambler. As the scale of my operations increased, I became known as a speculator. Now I am called a banker. But I have been doing the same thing all the time.

Ernest Cassel

"My major hobby is teasing people who take themselves & the quality of their knowledge too seriously & those who don’t have the guts to sometimes say: I don’t know...." (You may not be able to change the world but can at least get some entertainment & make a living out of the epistemic arrogance of the human race).

Nassim Nicholas Taleb

dug

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Saturday, January 20, 2007 - 01:47 pm:

Hi dutch,
If I were you[and I have been]then I'd think about these points-
Ditch all you've read about the Market.Most of it has been written and devised for application by Bigger Players than 5grander$.
So you can't afford Diversity for example and $5,000 means practically you can only take 2 maybe 3 positions.
I suggest taking positions of a size that one or two ticks cover your $20 costs ie if the tick is One[1] cent then you have to buy 2000 at least for your 2/3 grand position.
Do you follow?Basically it[your pick] goes up 1 Tick and you're at Break Even.
In Oz we have .01 cents;.5 cent and 1 cent as our ticks based on under 10 cents,under $2,over $2 share prices.Don't know the Yank system but perhaps you can vary the Maths?The objective is any positive move as small as possible makes you Break Even.

Secondly you will have to dump the 2% Money Management Rule and probably take a 10% loss in your say two positions.It is extremely difficult to take positions using 2% of your Capital $5k as a basis.I reckon it is anyway.You just get whipsawed by the $20 brokerage/commission being 20% of your 2%=100.

These are only practicalities though and dutch you were wanting to do Deep Psychology.
Well,what are you doing this for?Trying to make money without drudgery,like getting a Day Job?
Trying to be more Impressive with d'sheilas than by announcing at bars that ya're a Truck Driver?
"What do you do?"simpers a sweet young thing and you'll score more by saying "I trade d'Market and oh play poker on d'side,sweetheart!!"
Dutch,you have to get ya head around that you are just making money and the money you MAY make from ya crummy capital base is ONLY for turning crumbs into slices into chunks until ya got a Loaf to Do IT Right,like proper according to Hoyle, with diversity and management etc blah.

Good Luck with a willingness to Go In and Out on a Blink.
Happy Trading.

Dig for the sake of it.

kruupy

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Saturday, January 20, 2007 - 04:41 pm:

Hi dutchdanish,

I also have an approx $5000 trading capital so ill share my ideas that I have to trading such a low account. I am at the moment creating a system using CFDs (10% margin) so that I may in effect be able to have 4x10,000 1-2 week positions each risking $200 per trade. Part of my plan is to contribute to my account $200 per fortnight to provide additional funding for my $200 risk per trade. I believe that leverage and a very clear, well planned and tested system is the key for low capital trading.

I think that playing poker is a great idea (not sure about gambling though) . I too play free poker in my state and although im aware of the luck factor to it all im confident that it has helped me a lot in terms of being able to take a loss and in learning to control my emotions.

good luck in your trading!
From Kruupy

spider

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Post Number: 2545
Registered: 10-2002

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Saturday, January 20, 2007 - 05:24 pm:

Hi DD,
I get the feeling that you pretty much answered your own question in the title of the thread.

You were right to place this thread here, in the psychology section, because the answers (or should I say suggestions) are mostly to do with head stuff.

The amount of money you have to trade with is almost irrelevant, as at worst it will only slow your inevitable progress.

In many ways, having very little 'capital' can be a God send, as it forces us (but not you just yet) to focus on the effectiveness of our system, and not focus on the money (as you don't have a lot to focus on!).

I started with $800 dollars, so I know what I'm talking about.

First up, you need to get more money into your account, and find a way to get your expenses down. These things are incredibly obvious.

I might have started with $800 but I did not get from there to here by trading profits alone.
Over several years I added every cent I could lay my hands on, into my trading account, but I'll tell you right now that I didn't start to make real progress until I started to focus on PERCENTAGE gains, as opposed to dollars.

This might not sound like much, but I assure you that it is a quantum leap in thinking.

This may also sound obvious but, you are not going to be financially self sufficient tomorrow by trading a $5000 account. So face it and relax; you are going to be at this for quite a few years before you begin to reap the benefits.

Before we go any further you need to answer (for yourself) "Am I worthy of success"?

You mentioned that you like to play poker. Having said that, you need to understand the role that luck plays in gambling as opposed to trading.

For a trader swinging for the fence, as you put it, can be fatal. I know because I tried when I first stated out, and wiped out all of my meager capital.

If you are consistently making profits, small though they may be, you are doing better than the vast majority of traders world wide, so rejoice and be patient, and get some more capital and keep that impatient streak under control.

Good luck.

spider
.

Most people's trading systems need a few big winners to make them profitable. No one knows which trades will be 'big', and trying to 'swing for the fence' on every trade will lead us to disaster.

rockon

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Saturday, January 20, 2007 - 07:13 pm:

Yo Ma Man Dutch... Sorry, thats all the American I know...

Four replies to your post so far and four different angles with Spider rolling them all into one as usual.

I'll tell you how I started with only $6000 and maybee after a few more posts you can pick the eyes out of all of these posts and move onwards and upwards.

I'm not saying my way was right for everybody and I expect some to cringe a little when they read how I started on my journey (and believe me.. it is a journey) but here it is anyway.

I kept $1k aside to pay for brokerage and losses with the option to throw the odd $10 or $20 into the kitty if there was any to spare.(I'd previously spent about $200 on books etc. and scoured the internet for freebies.)

At that stage I didn't think that I was able to track more than 1 stock at a time so I started with the much talked about... Strong Sector.. Strong Stock.. stradegy and with huuuuge risk,pumped $5k into one stock.

My "edge" at the time was... if it went down x 5% then I'd sell it or if it went up x 10% then I'd sell it.Any down day after it hit 8% was a sell the next morning.

So now I would either loose $250 or make $500 per trade. I figured that if I had 3 loosers in a row then this stock market game wasn't all it was cracked up to be and it was back to the drawing board or just give it up as a bad joke. $1000 was a lot of money to lose but most of my $$$ was still there.On the other hand, if I had 1 or more winners then I could start upping my $ size and still pocket 10%.

After more winning trades than loosing trades, I felt comfortable with $5000 at a time and that is how it stayed for about 2 years before the stradegy changed again.

Where the psychology dept. comes in is when you get to the stage where you can trade 10, 20 or 50,000 dollars and still maintain some sort of reasoning as to how much money that actually is and what you have to do to protect that... and believe me... you will get to that point...

Right from day 1, I guess it all boils down to what we all keep seeing and reading.... IT'S NOT HOW MUCH MONEY WE MAKE BUT HOW MUCH MONEY WE DON'T LOOSE....

I'm a bit like you where I write this stuff down then wonder wether it sounds stupid or not.But how else are people to learn.

Regards R.

P.S I'll try to learn some more American before we talk again, goddammit.

tryhay

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Saturday, January 20, 2007 - 09:32 pm:

FWIW this is almost a direct copy from another forum (posted 19/1/07) to answer the question of how to start from $2,000 base. The concepts talked about are not ones likely to be familiar to novice - so paper trading and lots of study is really the first step. Yes paper trading takes time and dont make money for real but it just might increase your skills/knowledge so that you have some capital preserved...I am no expert but this might express the idea in a user friendly way for you....IMO there is some truth in the contents of this post. .
Some contexualization in ILALICS has been added to make the post relevant to australia (almost)
Quote starts here:
"Have had a few questions on how I trade. I'll do a run through to the best of my ability on what I do, and how I do it. This may benefit some of the newer traders. Sorry, no visuals on this one!

First off, my most profitable stocks are swing trades. I guess this makes me a swing trader. This means that I mainly trade in 1 - 5 day patterns. I suggest the novice will need practice to discern the swings in share price movement (hence paper trading)

Why swing trade?

(i) Holding a stock long is a good way to make profits, however it doesn't maximize your profits. By following the trend, you can capitalize on all market movement.
(ii) Daytrading only works if you have the capital to move a stock, or are quick enough to lock in small profits during movement. Unless you have honed your trading skills, daytrading is often a quick way to relieve yourself of your savings. IMO Day trading is too hard for novice, swing trading with limited number of shares is achievable once you get the hang of SP movements)

Stock Selection

Here are the things I look for when picking a stock:

1) Volume. Is there enough volume that you can get in and out if you need to? Make sure that the daily volume is at least 20x that of your position.
2) Charts. If you want to trade successfully, you HAVE to understand charts. (incrediblecharts.com.au )has tutorials on understanding trading patterns and indicators. You really can't make money unless you understand the tools that make you money. If you need help with the charts, ask some of the pros on (this) site..
3) I am never rushed into buying a stock. Usually when you hear about a stock in the chat room, it is too late. Research using the points above ... there are plenty of trains leaving the station and lots of opportunity to make money.
4) Every stock on the otcbb/pink sheets that is under 0.05c is junk (stocks trading less than 100,000 ~ 200,000 volume per day). Traders call this part of the market the 'wild west' - it is full of pumpers, scammers, manipulators, and daytraders. It is a good place to get eaten alive, because there are so many variables working against you. Market makers naked short sell these stocks, they are often on the verge of bankruptcy, shells are created to funnel monies, etc etc.
5) If you are new to the game, stay away from otcbb/pink sheet stocks with headquarters or owners in Canada, Las Vegas, San Diego, New Orleans, Florida, or Mexico. An oil company headquarted in Las Vegas? Yeah, right. These stocks are junk, imho. you need to translate to auzzie stocks here but the sentiment is valid
6) ...These did not translate....
7) ...These did not translate....
8) ...These did not translate....

Don't diversify

If you only have $2000.00 to trade with, don't diversify it. Buy 2 stocks with good potential and keep a close eye on them. Become an expert on your stocks and dump them if they do not perform. In your $5,000 case I suggest keeping track of say three shares will be enough trouble

Don't fool yourself

Plan an entry and exit strategy before you trade (this is why paper trading will put you ahead of the game). Pick your entry and stick with it, don't let your emotions take over because that is when you make a mistake. Let the stock come to you, if it doesn't ... forget about it. Rushed money is lost money.

Stick with your exit strategy. When the stock gets to your exit strategy, sell. Don't fool yourself into thinking that "it's going to a buck". Because it isn't. You have to sell to make money - or protect your capital

Don't go against the market. You can't change the direction of the indicators, so just go with the flow. Otherwise, it is like trying to bail out a sinking ship with a teacup.

Don't hold a dog. Every 50% loss started as a 5% loss.

Don't try and make up the previous loss on the next trade.

Mantra: "Bulls and Bears make money, pigs get slaughtered." aka. Don't be too greedy.

My entrance and exit strategy

I buy a stock just above the support levels. If the stock is not performing, I can dump it into the support. I do not let my losses exceed 10%

I sell a stock after gaining 11%. This allows for 30% gains every week, which really is pretty good. The only time I break this rule is if a stock is moving with a lot of momentum and strength. This being the case, sell when you see momentum slowing. Often, this will come as a "pop". A pop comes when a stock runs itself into a big bid/ask gap. You have to be on top of the action to see this, but this is a big sell sign. The top comes at the pop.

Buy low

Buy when things are looking most dismal ~ but not whilst they are still going down!. Natural gas and oil stocks getting pounded? Are the naysayers forecasting $30 oil? Huge oversupplies of nat. gas? Sounds like a time to buy.

Look at the charts

Take a look at weekly charts on incrediblecharts.com and get a feel for cycles that a stock may go through.

Okay, so I hope this helps a little. I will keep posting my picks for everyone. If you have any questions or concerns, about anything, ask them here! no question is too ridiculous. It is better to know, than trade blind

There are subsequent posts but that is more than enough to start with....

julles

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Sunday, January 21, 2007 - 06:55 am:

Hello dutch}

A very successful pro poker player told me only play at tables that your stack can afford.

ie: If you have $500 in chips are you going to sit at a $100 table? No probably not because the likely hood of you being wiped out before the flop or in the flop is extremely high.

So if you have $5000 cash money why trade anything in the market that has a stock value of more than 20 cents?

The point being consider your stack size.

I've managed to turn $5000 into quite a reasonably sum and yet I still trade stocks under 30 cents. Mainly I love anything under 20 cents.

With $5000 leverage is everything and to get leverage you have to take High risk positions. Positioning in pennies is all about how much per tick.

20000 in a 10 cent stock = $2000 each cent is worth $200 above 10 cents and $20 per TICK below.

So as in Poker the odds of being able to exit with a gain in this case outway loss. The stock can swing under 10 cents all the way to 9 before you consider having a $200 plus brokerage loss.

On the other hand if it breaks out and hit's fifteen before retreating you turned your $2000 into $3000.

This was probably no help at all but thats the way I've done it and my positions are much larger now adays. So I get to play at the bigger tables... lol

Heck I'll even buy a 30 cent stock ..!

Julles

dutchdanish

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Sunday, January 21, 2007 - 12:13 pm:

Excellent responses all. As always thanks for the help.

Lafee, many thanks for your advice and the pm...I am already finding it useful. I very much appreciate your help.

Dug, you hit the nail on the head. My reasons for trading are to hopefully build up a capital I can live on...without the drudgery of a 9-5 job. :-)

Interesting strategy kruupy, I have been trying something similar for the past couple months. It is definitly a strategy worth considering.

Ah, spider. As usual... par excellence. In your post you began to crack the surface conditions (capital, time, costs) and dug deeper into the realm of my true concerns (Psychology). Wonderful links...I found "Am I Worthy of Success" to be especially useful and more towards the heart of this topic. My meditation on those posts have only just begun.

Rockon, so many nuggets of wisdom in your post. I have already began applying some.

Tryhay, incredible... incredible post. So much useful information to be obtained there, thanks my friend.

Julles, Great analogy made...and understood. My bankroll management in poker is to have 20 times the buy in on any table (I play 50$NL). I obviously have not followed this rule in my trading. Interesting angle on things...

I have some "soul-searching" to do, this is quiet obvious. Many of these posts have pointed me toward the correct path(s) to take. Cheers,

-dutch

"...yet with how many things are we upon the brink of becoming acquainted, if cowardice or carelessness did not restrain our inquiries."
--M. Shelley

http://www.dutchdanish.com

davkell

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Sunday, January 21, 2007 - 08:17 pm:

Hey Spider; Can you clarify your 'percentage' comment? Are you talking percentage return on the stock movement, or percentage return to money invested (if margined), or percentage return based on total capital?

Hey Dutch;
I'm another in your position. I've never had more than $5k to trade with (3 kids, one income!!!) and yes, you might make the right calls most times, but brokerage/commission in/out really makes it difficult to make ends meet! I like to focus on the Rmultiple (R being the risk per trade). Obviously, it is ideal to risk 1-2% of your total capital, but with a low capital base that just doesn't work, so I allow a maximum of 5% risk, and if the numbers don't work on that I don't take the trade! Hence, my system has been developed around trading with a close initial stop (like 1pt below the signal bars low) which maximises the number of shares you purchase, but keeping the risk to 5% of your capital (including brokerage/commission charges). I then set up trailing stops (EMA 30) once they are higher than your initial stop. Stop profits are set either by an indicator signal or when your net profit based on the HIGH reaches 3xR. So, when the stock trades above 3 times your initial risk level, I move my stops to something like the current low, or the EMA 10. This allows for a little more upwards movement, but keeping your 3R profit if the stock falls. This will allow you to break even if you only have a 25% winning rate. So considering that a random entry system should have a winning rate close to 50%, you should be in a good position to make money, with a half decent system.

"Trade Your Way To Financial Freedom" - Van K Tharp

"Manage the downside; the upside will take care of itself" - Donald Trump

jimdene

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Sunday, January 21, 2007 - 11:49 pm: