As I already indicated I am still looking for the trading style that fits me and my personality. One of the possible styles mentioned prior is trading penny stocks. Penny stocks are shares of small companies whose securities en general trade below $5 per share. In the past they have been regarded highly critical due to the fact that prices of penny stocks are more often than less manipulated. In fact the companies behind the shares often do not often value.
What these stocks do offer however is high volatility. Beneath we see a chart of MGT Capital Investments, Inc. a company investing in the online, mobile and casino gaming space. Looking at the chart we can see that the stock rose form around $0.5 to up to more than $5 in just over a week before crashing to $2.5 – a rise of more than 1000%!
This volatility of the stock offers both opportunities to ride the uptrend and short the downtrend if the stock is sufficiently liquid.
In any case this volatility not just offers opportunities but also poses the risk of blowing up once own account easily if losses are not cut fast. Trading is competitive and trading penny stocks just as trading any other kind of stock does not offer any free lunch – but it seems sooo interesting.
Jack Schwager did it again. In “Hedge Fund Market Wizards” he interviews the best of the business just as he did in the classics “Market Wizards”, “The New Market Wizards” and “Stock Market Wizards”. The interviewees all have incredible track records and a majority even earned profits in the 2007/2008 financial crisis.
Below are listed the lessons that I found most Important.
- Implementation is more important than the trade itself: Only a good trade implementation allows allows for the best return/risk. You want to implement trades in a way that allows for infinite gains but limited losses. Long call options are a possible option.
- Flexibility is essential: If price action is telling that you are wrong admit it and get out of the trade! Remember: Its not about being right but about making money.
- Participate on the long side in a market bubble: Even though you might recognize that a current market is a bubble you still can participate in the up move, limiting your risk in case of a burst though.
- Money management can be counterproductive: Cutting losses prematurely can be devastating. Many traders set a stop loss illogically. This leads to the fact that subconsciously they still think that their trade was right and they reenter the position later. Instead, first ask yourself which price level would invalidate your trade and tell you that you are wrong. From this point onward you should chose your position size and enter the trade.
- Diversification is the holy grail: By holding uncorrelated assets you can improve your return/risk ratio by a factor of five.
- Mistakes are valuable: Western society teaches us that you always should avoid making mistakes – bullshit. Mistakes can become the most important ingredient for continual improvement as a trader. You should write down the lessons the market taught you and learn from them.
- Don´t hope!: Hope is the worst thing a trader can rely on. If you staying in a trade is based on the hope that it might bounce back you are destined for failure.
- You are unique and must not copy!: You are not going to be successful in the market copying the approach of other market wizards. Unless your trading approach fits your own personality you never will be successful.
- The market is not efficient!: The question is not if the market efficient but rather how inefficient is the market. One of the traders interviewed only had experienced three loosing months out of 300 trading months. Statistically this would not be possible the markets were efficient.
- Vary betting size: Don´t always bet the same on different trades. Bet more on high probability trades and less on low probability trades.
- Learn: Do more of what works and less of what does not.
Let´s all try to incorporate what the masters teach us.
One of the first steps a beginning trader has to take is actually deciding what kind of trader he wants to be. What will I trade? Options, futures, stocks? Long term, short term? There is quite a variety of trading styles to choose from. Top traders say that you have to find an approach that resonates with you and your strengths. But what exactly are my strengths and what does resonate with me? Having read and listened a lot about trading in the last months I have detected a few trading styles I am interested in.
These three styles are:
- CANSLIM: I wrote about the CANSLIM approach of the legendary stock trader William J. O´Neil in one of my first posts. Still, this trading style trying to detect stocks worthwhile to invest in seems very interesting to me.
- Trend Following: As explained in my post about the turtles trend followers seek to detect trends and ride them. The investment horizon thus is long term.
- Trading Penny Stocks: Trading penny stocks allows to gain from high volatility.However, the volatility makes this strategy highly risky as well.
To further refine these options I will focus try to backtest and paper trade these appraoches in the time to come.
In the last post I already wrote about Berkshire Hathaway, Netflix and Apple. Recent price moves have made these stocks even more interesting and if my signals will be triggered I will enter these positions.
The stock continuously seems to trade between support and resistance. After resistance could not be broken through the price has retraced back close to support level. If support holds I will enter, setting my stop beneath support level.
Netflix & Apple
Both Netflix and Apple have continued there uptrend and the crossover system of the 50 and 10 days SMA could be triggered soon. In this case I will enter.
Let´s see whether my entries will be triggered.