- Joined
- 5 January 2009
- Posts
- 595
- Reactions
- 7
When I responded to the above comment I said I would reply in my blog, so that is what I am doing. I will try and keep it as detailed yet brief as possible. I enjoy all comments so please post more, obviously I like constructive criticism but understand without knowing the full picture that it is easy to classify me as naive or blind to the risk involved.
I will break down, my plan into various sections so it is a bit easier to read. I will detail my previous experience with shares, I am not a complete novice and detail my trading style, Risk Management and Money Management Strategies.
1. PREVIOUS EXPERIENCE
I began investing directly into shares approximately 8 years ago, over which time I have developed my long term portfolio.
A few years after my inital investments I moved into short to medium term trading of smaller cap stocks (mainly explorers) my main method for trading at this stage was identifying stocks with good prospects and enough cash to get through the inital stages. I used limited technical analysis to identify enter and exit points.
After trading smaller cap stocks, I began to understand that I prefer shorter time periods and more active involvement. I dabbled in short term trading shares, using technical analysis, but found that to trade in direct shares I would need a significantly larger trading position, which would involve selling some long term stocks which I was not interested in doing.
The next step in my trading experience involved options, I mainly traded Index Options but also dabbled in stock options as well. While I made profits in this area the main problem I had was the lack of liquidity and the market operating times which made it harder to trade on a continuous basis.
In the preceeding years I got tied up in runnning my own retail business but still kept an active interest in the stock market. About 6 months ago I started reading about CFDs (I had read about them previously but didnt give them to much fault), I liked the benefits that they offered such as more liquidity (with a market maker) and the leverage available on many stocks. To refresh and continually develop my trading skill I purchased a number of books and started browsing websites. Once the new year approached I began paper trading CFDs to become aware of how they operate and their technicalities. I have now began trading with real money and have had about 2 weeks of real money trading and have managed to increase my portfolio from $2500 to about $2900.
2. THE PLAN
The plan is to use my inital $2,500 to build my knowledge and ability to trade. This is money "I can afford to lose" (please see money management for more info on this). Once my I am happy with my level of experience (estimated to take 6 to 12 months) I will add to my intial position to bring it up to $10,000. At this stage it would involve contributing another $7,100, however the plan obviously involves making some profits along the way and if I can trade to $4,000 then $6,000 will be contributed and so on and so forth.
Once I built the capital to $10,000 I will be able to trade larger positions and following the 2% rule closes (please see risk & money management for more info on this). The long term plan is obvious to become proficient enough to trade full time, how long that takes I dont know yet. Rough estimates indicate 10,000 hours trading to become proficient enough to trade full time which may equate to 3 to 5 years depending on how many hours I trade every night.
3. TRADING STYLE
My trading style involves intra day trade using CFDs to gain leverage. I limit the companies I trade to the top 100 to 200 in each index. Eg FTSE 100 and ASX 200. So far I have focused on trading the UK stocks, due to work commitments during the day. Due to my short time frames, I monitor trades from the moment I enter them until I exit them. To limit risk I never hold stocks overnight.
I trade using support/resistance and uptrends and downtrends. This forms the basis for identifying when to enter and exit stocks. I then apply momentum, MACD, RSI and moving averages to support the trading decision I make. I notice many "potential buys" that show the momentum and MACD crossing up over zero however I apply my own judgement as well and try to pick trades that have a higher probability of being profitable. Obviously the MACD and momentum shows lots of potential signals that down work out and I try to avoid these. In addition the ability to read these signals will increase with time and I have already blogged about the difference from reading about it in a book to watching it move in real life.
The time periods of charts are normally 1 minute as I feel this suits my trading style. To confim longer term (over a few hours, in my instance) I use longer time period ie 2, 3 and 5 minutes to help make trends clearer.
At the moment my trading style involves only being in one trade at a time so that it has my full attention and can be closely monitored.
To exit trades I use a combination of the indicators mentioned as well as general support and reistance. I also set progressive stop losses to ensure I lock in as much profit as possible.
4. RISK MANAGEMENT
As mentioned above one of my main risk management strategies is to never hold overnight, this ensures that news released after the market close or changes in general economic or market conditions will not result in large losses.
In addition to this I mainly trade well known stocks as more information is available on them (ie greater media coverage), they are easier to predict and some thinly traded stocks.
For general risk management In profitable trades I set progressive stop losses that progressively move upwards with the stocks movement, this helps to lock in any profits I make, my strategy involves locking it profits at the first signs of weakness (I would rather ensure a profit than hope that the weakness only lasts for a limited time).
For all trades I set stop losses set between $50 and $75 per trade (depending on the stocks volatility). This section will be covered in more depth in Money Management.
5. MONEY MANAGEMENT
The main point of the comment I am responding to is that I will "Blow my Capital". I understand the 2% risk rule and if applyed directly to my CFD account would result in stop losses of $50. Obviously this is low and therefore I set up stop losses between $50 and $75, once commission is included my losses would increase to $100 to $120 (or 4 or 5% of capital).
I understand that this would mean 10 consecutive bad trades would result in a 50% loss on my capital. I understand this risk and at this stage accept it, everyone has to start somewhere. It is important to note that my trading positions are $1,000 to overcome the impact of brokerage I could trade with my full account of $2500 but this goes against my overall strategy (covered above and below).
However to say that I am breaching the 2% rule and will therefore obliterate myself fails to take into account the value of my current portfolio. My long term portfolio consists of stocks with a market value of approximately $30k with an additional $5k cash. To lose $120 on CFD trading would be a loss of under 1% on my overall portfolio balance, so my long term security and ability is well covered at this stage.
Sure I could transfer the other $5k into my CFD account and trade that but the whole idea of putting only $2500 into the account is that it is money I can afford to lose. If I lose that while developing my trading skills, well that is the cost, of course I dont plan to lose the money though. The risking of $2,500 on CFDs is part of my money management strategy. Whatever my inital deposit the potential to blow it would be the same in my opinion, I have therefore started with an amount that is managable for me, but still provides enough capital to make profitable trades.
SUMMARY
I hope I have covered all the areas required and cleared up some details on my strategy. Basically I am saying I understand that $2,500 isnt a huge amount to trade but it is what I am comfortable with, in my view I can still make profitable trades and on an overall porftfolio rule I am not trading or risking a huge percentage of my capital.
I really want some comments on this article as it has taken me a while to write so please post something.
