So You Want To Be An Active Investor…

I have had the fortunate experience of associating myself with a fabulous investment education company called Investools. Over the last 3 1/2 years I have met thousands of students at various stages of their education. I have seen many quit with out realizing the success they had envisioned in the markets. I have also watch as many have completely transformed their lives, quiting their day-jobs and becoming full time investors.

Why are you here. What makes some successful and others not? The simple answer would most likely come down to commitment. I am constantly shocked at how many students are willing to pay thousands of dollars to “try” something out. Try = Fail As yoda says so wonderfully “Do or Do not, there is no try”. So consider why you choose to look in to Investing. This is a marathon not a sprint. You need a why that is going to drive you beyond the rough patches. Trading to try it out or without a plan is gambling. If you trade that way be prepared to lose money consistently. Some of the most common why’s I have heard are: Family [More time with, Help out financially, Teach kids, Pay for college, etc], Retire or stay retired, More Time to [Travel, Pursue hobbies/interests, Live dreams, Volunteer/help less fortunate, etc], Financial freedom/independence [I define this as the ability to maintain or exceed your current lifestyle if you were disabled and could not work another day]. What ever yours ends up being write it down as if its already happened and read it daily. In my first class my why’s were, Family [spend time with kids], Retirement [husband @ age 35], and Financial freedom [Debit free, Replace then exceed current income].

Choose a trading style. As this is a choice your can always change your mind. However you need a direction to start. I can almost guarantee that this will change as you grow as an Active Investor and your account grows in value.

• How frequently are you interested placing new trades? Hourly, Daily, Weekly, Monthly, Quarterly, Yearly?
• Are you able to check the market once a day, once a week or watch it during the day?
• How long are you interested in staying in a position? A few days, A few weeks, A few months, A few years? Decades?
• Are you starting with a couple Hundred/Thousand/hundred-thousand/Million?
• Are you looking for Account Preservation/Moderate Growth/Accelerated Growth/Monthly Income?
• What size draw-down can you stomach. If you can take a 50% loss in total account value you are more likely to trade aggressively, However if you are looking to preserve value you may only be able to stomach a single digit draw-down. I happen to fall somewhere in the middle, so my rules are a 20% draw-down limit.

Once you have chosen a strategy then stick with that until you can trade it with consistent success.

Paper Trade or practice with 1 lots [one share or one contract]. I personally find paper trading (virtual trading) very helpful. I Paper trade any strategy until I know how it works. How/when to get in. how/when to get out and how to roll (if options). Then use real money in 1 lots. (if you can not paper trade or you find that you trade completely differently with paper vs real, then start with 1 lots). Trade this until you are consistent. Gradually increase your position until you have reached the appropriate sizing for your account. For more on this read “position sizing- a free lunch” by mojo at insanemoney.com

Follow Your Rules. To be honest I’m one of those “rules are meant to be broken” people, EXCEPT when it comes to trading. I’ve learned the hard way that in trading/active investing breaking rules = losing money. For this reason one of my rules is to stop trading and go back to paper trading if my account loses more than 20%. Yes you will have draw-downs and losing trades. However if you’ve lost 20% of your account value then you might need to re-evaluate what you are doing.

Your Psychology. Examen your emotions upon entering a trade, during a trade, exiting a trade. This can help you determine if you are trading based on greed/ fear/ hope. I rate my trades on a 1-5 scale ( I used to use 1-10 however I realized 1-5 gave me a more accurate rating). 1 = Highly Emotional (Can’t sleep or take my eyes off of the monitor) 3 = Moderately Emotional 5 = ROBOT (Not Emotionally at all). If you are trading based on hopeium then you are trading emotionally. Once I determine I’m trading emotionally then my rules state I need to exit the trade.

Position Sizing. This can make or break a trader. Again read Position Sizing – a free lunch from Insane Money. I have watched more students blow up their accounts (Trade until your account value = $0), with improper position sizing (aka money management). What ever your rules are for position sizing stick to them. There are several great strategies such as the classic 2% of your account in sector & No more than 5% of total account at risk in any one trade, Pyramiding, Kelly Criterion, etc.
Discipline. This is two fold. If I could make this one flash and shout at you I would!

1) The Discipline to do what it takes to be a trader/active investor with out regard to life’s circumstances. Life got in the way is a common statement I hear from students. I am a bit heartless when it comes to this as I have been known as the QUEEN of EXCUSES. I’ve used them all very convincingly (lack of: Health, Wealth, Spousal Support, Time (I have 4 boys! everyone lets me get away with this one), Knowledge (specifically for me its mathematical / calculations), Desire, Action (I couldn’t decide what the best thing to do was so I did nothing). Where did that talent get me? No results and a whole lot of wasted time.

• Monitor your positions consistently (usually this is daily, however some long term strategies are weekly). Make the time no matter what you feel like, what size your account is, Paper or real trades.
• Discover what works for you and your family. If you are glued to the monitor 24/7, your demeanor is dictated by your profits/losses that day, and absent in the rest of your life, then I doubt that your family and friends are going to be too thrilled with your new addiction.
• Check the overall market trend.
• Take action when your plan calls for it. If you are starting with nothing yet still want to be an Active Investor Paper Trade like it is really your money. You are developing discipline and habits that will carry over into your real money.
• Continue to learn and grow as a trader/active investor/person. One of the things I love about this business is that you are only as finished as you want to be. There is always something new to learn.

2) The Discipline to stick to your Trading Plan. Having clear exit rules prior to entering in to the trade. Getting out when you said you would regardless of ‘feelings’, ‘thoughts’, ‘opinions’, ‘hopes’, ‘beliefs’, etc – yours or others (aka trading buddy, TV person, newsletter) . The market is only going to do 1 of 3 things at a given time. Its going to go Up, Down or Sideways. So you should have exit plans for at least those three circumstances.

Trading with the Trend. This is probably one of the quickest ways to lose money. Trading against the trend can stack probabilities in your favor or even against you. You can find the trend by looking at a chart (use the time frame you are trading – usually one year). Draw a line from the close price on the left to the close price on the right. If the line is sloping upwards (left to right) diagonally then you are in a bullish trend. If the line slopes downwards (left to right) diagonally then you are bearish. If the line is straight across with very little or no slope then you are in a neutral or sideways trend. The actions that have worked for me are

1. Overall Market Trend.
2. Market Sector Trend.
3. 1 Year Stock/ETF/Index Trend
4. Shorter term (weekly/monthly) Stock/ETF/Index trend.

The more of these that are in the same direction the stronger the trend. However one or more could be different (counter-trending). for instance the market, sector, 1 yr could all be bullish and the short term could be neutral to bearish in a consolidation or pull back. Or the over all market could be bullish and your sector, 1 yr and short term trends could be bearish.

Match your Actions to your Goals. So you want to be a full time investor/ replace your income/ retire or stay retired/ put your kids through college or have them put themselves through college/ etc. How do you get there? How do you stay there? What actions do you need to do on a daily / weekly/ monthly basis? I will post more on this in a separate page.