Books

I was catching up on my blog reading and I found two links to some good reading material. I felt compare to share this great find. Jeff has compiled a list of books on his blog - Master of the Universe's Weblog. You can find it on the top right hand corner.

Monster Stocks

I started having interest in the market in 1999 and I put some money in QCOM and IDCC in late September. I remember how I made an 800% gain on my $4000 in just a few months. I had over $35000 in January 2000. Well to make the long story short, I lost all my gains and around $5000 more by the end of 2000.

I am currently reading the book Monster Stocks, (a recommendation by Stockbee) and that got me to do some thinking. I studied some past monster stocks and here are my observations.

• Monster stocks can gain an average of 500%-1000% in less than 3 years. Most of them gain that much in 1 year. There are some exceptions. QCOM gained 2000% in a year.

• After they make their parabolic move they crash pretty hard.
  

YHOO and QCOM the tech bubble


HOV, the housing bubble



Are these bubble stocks unfolding before our eyes?

RL, a retailer


DRYS, Dryshippers



GOOG, RIMM, AAPL, LFC, CMI




Look over the charts and see what you guys think. Will our current leaders suffer the same fate? Google was up 750% at the top, so compared to other monsters there might me some more juice left. Maybe GOOG can go to $1000(1000%) or $2000(2000%).

Consistency

Trading should be easy, but sometimes traders make it too complicated. I have been thinking about one of the principles of trading consistency mentioned in Trading in the Zone.


I completely accept the risk or I am willing to let go of the trade.

I was doing well last Monday, and Tuesday but somehow lost my focus as the week progressed. When I was focused, I put on a trade with a stop and let it work. I knew and accepted my risk. During Wednesday I got stopped out frequently and fear crept in again. The same thing happened on Thursday. By Friday I was a bit discouraged and I lost my ability to see any setups. When I got good trades I often exited earlier and missed out on the gains I would have if I followed my exit criteria.

I think in order for me to really gain consistency I will have to let go of my fear of losing money and let my trades work.

Who is Tim Sykes?

Around two weeks ago while scanning through Elite Trader I saw two threads, one titled "Will you buy Timmay's Hedgefund book?" and the other "Hedge Fund Book." In the latter thread I saw a picture of a young guy sitting in his living room wearing a shirt with an imprint, Timmay. I read the first few pages of the thread and I was laughing at some of the jokes that some of the posters made about Tim. I was short on time so I never got to finish the thread. A day or two later I received a comment and it was from none other than Tim Sykes himself. At first I thought it was some kind of sales spam because he talked about his amazing annual returns of over 100%. Sometime later I saw a positive review on Tim's book, the American Hedgefund by Captain Kirk. That piqued my interest so I contacted Tim and he sent me an advance copy.

Tim started trading around 1998 with $12k of his bar mitzvah money. In his book he details how he was able to run up his little startup capital into well over a million bucks, how he started his hedge fund and how he garnered his current media attention. His path was not entirely smooth and there were a bunch of hurdles along the way. He shares the trading lessons and insights he gained from overcoming the setbacks.

I think one of the major theme's of the book is that the market is ever changing. One of the main factors of Tim's success is the ability to find a successful trading strategy or a number of strategies which gave him an edge over other traders. That holds true for all traders. That edge does not last forever because the market is constantly changing. In order to be able to survive a trader must be on a constant lookout for new strategies. During Tim's trading career he came up with a number of profitable strategies which helped him adapt to the changing market. He profited from the bull market rise and the subsequent crash because he was able to see a change and adapt from going long to going short. What I found interesting was his thought process and how he arrived at his strategies.

"Second, trading is a fast paced activity. Traders will pick up on any consistently successful strategy and jump on the band wagon sooner or later. Then it will change. Thanks to the entrance of newer and bigger players, consistently profitable strategies only work for so long. People continually make the same mistake of expecting someone else’s strategy to work for them. By the time they use it, it’s over and they lose. It’s just human nature to want to follow the pack. People will always shoot for greater profits when they think they have a system that seems to be working for everyone else. Stay nimble, focus on your own plan, and be willing to change. If you find a strategy that works, keep your mouth shut and your guard up."

I just finished the book and I feel inspired. I am glad to have found this book because I am at a low point in my trading. I can relate to Tim's experience easily because that is exactly what I am going through now. I did not make a million dollars but I did have some success in my trading. I used to have an edge trading NYSE stocks using tape reading but since the advent of the hybrid that edge is gone. My task now is to find new strategies that can give me an edge in this market. As long as there is volatility there will be opportunities. The book helped open my eyes to the possibilities that are out there.

Mental Practice

Today I did some mental picturing. I got an idea from reading Psycho-Cybernetics. I wrote down my day on a piece of paper and imagined myself experiencing a good trading day. I am going to start doing this daily practice before I start trading. I think it will help boost my discipline and confidence.

I also made a change in my chart layout. Instead of having 4 moving averages(5, 20, 50 and 200 SMA), I will be using 2 moving averages(5 and 34 EMA) only. This will simplify my decision making process. I am often reluctant to enter positions because the the stock is trading near one of the bigger moving averages or I would get out too soon. By eliminating those I should be able to decrease my chances of taking early profits as the stock trade near one of the moving averages. Let's see how my trading goes today.

Lost money even though I got the direction right

I had a losing trade even though I got the direction right. I came up with some reasons why I lost.

• Having a position too large for my comfort level in a choppy stock.

• Getting in to early instead of waiting for a confirm break down of the range.
  

Next time I could either pass on trades like these or practice with a hundred shares until I build confidence in these trades. This is a quote from Mark Douglas's The Disciplined Trader.

Identifying the amount of risk you are comfortable with -your "risk
comfort level"-and then learn how to expand it in a way that is
consistent with your ability to maintain an objective perspective of
market activity.

Torn between fear and greed

I am facing a dilemma right now. I have this strong hunch that if I trade I would end up making a lot less. Should I stop trading and keep my $290 in profits or keep trading for the prospect of more profits. This thought was in my mind when I was up $380. After I lost $90, the thought gets louder and interferes with my focus. Then there is another thought that tells me that there is a chance to make more cash today. If I stop now I might miss a lot of opportunities later on in the day.

Some days these thoughts just stand out and today is one of them. There are days when I disregard my hunch and I end up giving away most of my profits. I think my fear is winning out because $290 is an acceptable sum for me.

This is one of my weaknesses. I think a good trader who believes in his system will continue to trade because his system is profitable. I am a discretionary trader so I do get affected by emotions quite often. One of my future plans is to develop an automated system.

Since I am done early I will start reading The Disciplined Trader. It was recommended by Michelle B. over at Trader Mike's blog. Maybe it would shed some light into why I have these conflicting thoughts.