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By Adi, July 1, 2008

One thing I took away from several of the books I read is, don’t ever let emotions control your trading. Stick to the plan. If a stock goes below a limit, sell. If it goes above, invest more and adjust your stop loss. If a stock goes up and down within your stop loss limit, don’t worry, that’s perfectly normal.

And what is the best way to get unnecessary tension, worry and emotion? Stare at the ticker and your portfolio all day.

With the existence of STOP orders in most trading stations, there is absolutely no excuse for staring at the screen all day. We can’t really “will” the stocks to go up. And all that time can be spent more productively doing other stuff.

The reason I chose trading was because it doesn’t take up the time that a 9-5 job does. It takes me approximately 20 minutes a day to go through the stock list, adjust my portfolio and place any new orders. Spending any time apart from that watching the portfolio, especially if you aren’t a scalper who needs single point profits, is about as unproductive as watching bad TV but with a lot more tension. (I gave up watching TV about three years ago)

Of course, all the logical reasons in the world can’t cure you from watching the market, especially if you are doing well.

So how did I suddenly cure myself?

Stared all day long on a bad day and watched almost all my stocks fall into red (while staying above my stop loss). It was brutal. Each time my portfolio went down a dollar, it hurt. It hurt even more when it went up a dollar and then dropped down two. I kept watching and suffering, and the market kept doing it again and again and again until I finally gave up all hope that they would go up. When the day ended, almost all my stocks had dropped except for one magical stock which actually went up.

That day gave me two useful things. One, it cured all delusions I had about being able to help my portfolio by watching the stock market and proved without doubt the need to trust the system and stay emotionless.

The second, was it helped me discover an interesting stock that apparently defied the market. Days when the market goes down are a way to eliminate the average stocks that are merely following the market from the good stocks that are going up because they are good.

A stock which hits your stop loss is a clear message that you need to take that money and put it in a better stock. And once you find a stock that stands these tests of time, stick with it and go all in.

I haven’t yet checked the market today. I will check them once the market closes, take my losses or gains, place my orders and stop losses, and move on to the next day.No more staring at the ticker all day. I am way more relaxed and calm, and am actually getting things done in the day time.

Another day traded, another lesson learned.

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By Adi, February 21, 2008

A few weeks ago, I visited Vegas for the first time.

During the flight I listened to a program called “The Psychology of Investing” that had a pretty interesting concept.

The audience was given $100,000 of fake money each and asked to invest on 40 mock trades that the speaker called out. The speaker drew colored balls out of a bag to decide the payout 1x, 2x, 10x, -1x and -5x. The entire audience had the same 40 “trades”, and for each trade, decided how much of their capital they would risk. Less than 40% of the trades were winners.

At the end, some people walked out losing more than their investment while others made several millions. With the exact same 40 trades and being “right” less than half the time.

Thought provoking? Yep. A system of money management is more important than choosing trades. You don’t even have to be right all of the time as long as you are careful about how much you lose. Cut your losses and ride your gains.

I decided this was the magical answer and created my system for Vegas. I used a simple betting strategy, stick to Black on the roulette wheel. How much to bid was a little more complex though. I have a paper napkin from Vegas still saved with this magical formula.

Long story short, I converted $10 to $60 over the period of 2 hours – 500% returns. Of course I kept losing and winning, so it inched its way up. But the cool thing was, anytime I hit a winning streak I climbed up a lot. Anytime I hit a losing streak, I slid down a little.

Once I got back home, I decided to use the same system in the stock market. After Vegas where the odds are stacked against you, the stock market seems almost too easy. Winning streaks are easier to cash on and the odds (with a basic stock picking strategy) are higher than 50%.

I’ve been trading for 20 days so far, and am $600 ahead (in a range market with two losses already). Thats 5% returns in less than a month in spite of losses. Managed to find a couple of winners that crept up 20% in two weeks.