Understanding Fear, Hope, Greed and Despair in Stock Trading

From one of my favorite trading books, Way of the Turtle by Curtis Faith, I learnt about 4 most common emotions that traders experience during trading days. The key point here is to understand these emotions so that you will not be trapped in this trading psychology. I myself experience these emotions while trading, and in my early trading days, not having understand and knowing how to deal with it, I lost many trades.

The 4 emotions are well-written in the title of this post, but with some examples, here they are..

#1. Fear - I can’t take another loss; I’ll sit this one out.

#2. Hope - I sure hope this goes up right after I buy it. 

#3. Greed - I’m making so much money, I’m going to double my position.

#4. Despair - This trading system doesn’t work; I keep losing money.

"How many times have you felt these emotions while trading?"

So how do you avoid being trapped and finally losing your hard-earn money because of these emotions? My simple answer is to stay DISCIPLINED to stick to your trading rules and plan. Before trading stocks, you should spend some time crafting your business plan (trading system), read books on fundamental and technical analysis, create rules to enter and exit the market (keep testing your system).

Come up with a good system (good here means the system will give you positive return in the long run if you religiously following it) and be disciplined.

Some examples:

You see a stock that's cheap enough and your friends keep telling you how this stock will go up in a few days. You want to buy it because you HOPE it will go up. Instead, go to your system and ask yourself questions if the stock is worth buying. Does it satisfy your entry rules? Is your capital big enough to allow you to buy the minimum lot of the stocks? Have you done research on the stock personally (you are responsible on your own trades anyway)?

You are in the market having bought stock A which has gone down passing your cut-loss limit of 10%. Deep in your heart you know you should get out, because you write it in you system that you have to get out when it drops by 10% from your buying price (why 10%? you need to figure out what percentage works best for you). However, unknown voice in your brains says,"Hey, it will bounce back up tomorrow! Do not worry!". Again, this is HOPE! Once in a while the stock will go up, but dare not to predict market! You better get out before you lose more money.

"When HOPE is what's left, get out of the market"

Build Your Capital for Stock Trading

I love system. Whatever I do, I want to see it happening in a systematic way. When you have a system, a good system, what you need to do is to strictly follow it. I made my own trading system. Before buying stocks, it has to go through a series of requirement before I am allowed to buy a stock.

I would like to introduce a money system on how you can build you capital for your stock trading.

If you have read my post of position sizing, it is clear that you need a rather big capital (C) in order to stay alive in the market. As you limit your risk (R), you can only be allowed to trade limited amount of shares (again, it is a position sizing system). So how can you build your capital?

Here is my money system.

#1. I strictly believe you should spend your earning AFTER saving! I mean when you get your salary every month, quickly distribute it (automatically) to a series of saving buckets. Do this religiously. When I started working, I have 4 criteria of savings: short term savings (to be used within one year - vacations), long term investment (retirement, kids educations, practically anything I need to spend my money more than five years from now), emergency fund (you wont know when you are out of job, or when your loved ones fall sick), and investment savings (this is for your stock trading and any investment-related).

My shares: 5% - short term, 5% - long term, 5% emergency and 10% investment. And do not get surprised, I have different bank accounts for each of them.

#2. Short term savings will be used in near future, so I don't really monitor it. However, for the other three, I create an excel sheet to monitor it monthly. If my "ideal" amount doesn't match my real savings, I will do re-balancing, QUICKLY.

#3. If you do it religiously, your investment savings will increase in no time! (Okay, it took me 6 months to be able to buy 1 lot of stocks).

So ask yourself, do you have a system for your savings? If the answer is no, make one now and share with me :)

Plan Your Retirement

In my full business plan for stock trading, you need to start with MISSION of your trading activities. You can have any mission you like, from getting passive income or just to get new challenges. It is totally up to you. However, a more sensible mission for every trader to invest and trade in stocks is to have extra income for retirement.

So, how do you plan your retirement? Start with this online calculator. It is easy to use!

3 Questions to Ask Yourself Before You Trade Stocks

Yesterday, I found an interesting article from BigFatPurse's Alvin Chow. The article titled "3 questions to ask yourself before investing in stocks" discusses about the important 3 questions that you should answer well before you decide (or allowed!) to trade in stocks market. These three questions, to some may be debatable, are very relavant!

Question #1

Do I Own a House?

Question #2

Do I Need the Money?

Question #3

Do I Have the Personal Qualities It Takes to Succeed?

My points:

Question #1
House is really the first investment you should have. The reason being is that you need a house soon or later. I bought an apartment 2 years before my wedding, after accumulating savings from the years of working part time while studying in University (also borrow money from parents). I believe you must set your priority right in terms of personal finance. Make sure you have a steady source(s) of incomes. Make a plan for you saving and spending. Once you have enough to invest in a house, do it!

Question #2
If you remember my post on position sizing, you need a rather big Capital (C), to even be able to buy minimum amount of shares. To keep your alive in trading, you need sizable amount of money. You have to be disciplined enough not to disturb your capital as it will affect your trading plan. So, make sure you do not need to use this capital. Make sure you have emergency savings to use in case of urgent matter. Leave your trading capital alone!

Question #3
This is important. Trading is not a game. It is a BUSINESS.  Make a business plan. Understand the method of stock screening, technical analysis, entry rules, cut loss. Understand the importance of position sizing as well as the psychology of trading. Allow yourself to make mistake and take all the blame yourself, and learn from the mistakes.

Trading System is ESSENTIAL

"Stock trading is a Business. It is a game or a play. Treat it as a business, and chances are you will perform better."

The written business plan or trading system is important really. Ask questions to yourself before you throw your money to market.



In my stock trading, I have mapped out my of trading plan (or you can call it business plan). To be disiplined to stick to your system is what matter the most. You can have a system that is in theory gives you positive return (you can backtest a system using stock trading software), but without disciplined execution, the system is nothing.

The picture above is another fabulous example of a trading plan. The source if the picture was taken from here. In the example, you have to keep asking yourself if the stocks you are buying fit your criteria. If it does not, do not trade. Period. There will be next time.

So, do you have a written trading plan? If you do not have yet, start writing it. It does not matter how you structure the plan, just start write it down and update it accordingly when you find new ideas to be included in your trading plan. AND the most important thing is to stick to your system!

Position Sizing - ATR Method

Average True Range (ATR) is a technical indicator to measure price volatility. This indicator is first indtroduced by Welles Wilder.

In simple words, when the market shows a trend (either up or downtrend), the ATR tends to be higher. The opposite works: when the market goes sideways, the ATR tends to be lower. It is indeed shows you price volatility.

So, how can you use it to calculate your position sizing or how many share you will buy?

Example:
Let assume:
Your initial capital (C) is $100,000.
Your risk (R) of losing in a single trade to your C is 0.5%.

Stock A has ATR of 75 cents over the last 20 days and that you are prepared to risk $500 on this particular trade (ie 0.5% of $100,000). By dividing 75 cents into $500, this would calculate the number of shares that you could buy, based on intrinsic volatility. Most traders using this method decide to use 2xATR ie 0.75 x 2 = $1.50 to position size. For example, $500/$1.50 = 333 shares can be purchased.

To read about another way to size you position.

What is Your Stock Trading Education Plan?

I am a believer of Continuous Improvement. Stock trading is not a guessing game, it is a profession and a business. You need to keep improving to be good at your profession. Businesses that invest in themselves and their employees tend to grow and prosper. So the question is as follow:

"How will you invest in yourself?"

Here are my routines activities to improve my skills.knowledge in stock trading. Think about those and follow them if you like it.

Daily

1. I would make sure I am up to date with market news. Occasionally I will read my RSS subscription on my phone using gReader and Pocket.
2. To monitor my watchlist, I use occasionally using the two android apps I have discussed previously.
   
3. Not really a day trader myself, I will only download a free EOD for markets I am trading in.
4. Upload the EOD into my software, Amibroker, and run my system to see if i have a good signal to buy/sell.
   

Weekly

1. Read many trading articles and maybe a trading book. I used to borrow a book from a library but now I either read free ebooks online or I bought them. Read about my recommended books.
2. Monitor my postion in Excel Spreadsheet. You should create your own if you do not yet have it.
3. Re-read and revise (if needed) my trading system

Monthly

1. Check all my positions and close by budget books to find out my net worth and the size in my investment baskets (commodity, stocks, mutual fund, property, etc)
2. Re-visit the performance of my stocks and my systems. See what is your R-Multiples and Expectancy.
3. Read more books :)

If you have not write down your education plan for your stock trading, you can take a pencil and a piece of paper now, and start writing..

Personal Responsibility in Stock Trading

To have the right mind for stock trading, to me, is very important. In my previous post on Trading Psychology, I discuss about the facts that you need to fully understand about stock trading.

Apart from that, there is another part of trading psychology that is equally essential: Personal Responsibility.

One of my trading rules is that YOU are responsible to every trade you make. YOU are the most important factor in your trades. Even though you have a superb METHOD, YOU are the one applying it. YOU are also the one exercising your positing sizing (MONEY).

So start telling your self this:

" YOU are RESPONSIBLE to every trade you make. No Regret." 

When you accept that you are responsible to all you trades, you can fix your mistakes and problems that causes you loss money in trading. No more excuses like "My system sucks" or "The loss is because of the market", etc. When you come up with this excuses, you do not fix the problem and you will repeat the problem in the future.

When you start accepting the mistakes are caused by you, you will try harder to look at the problem and solve it.

Think about it.

Reward and Risk in Stock Trading: R-Multiple and Expectancy

In this article I am going to introduce 2 terms in my stock trading routines that I use a lot: R-Multiple and Expectancy. These theory was introduced by van Tharp in many of his books.

Most traders, be it the professionals or novices ones, have some sort of exit criteria that they like. Some use a fixed percentage drop from the initial buying price, some prefer to use chart and graph to tell them to get out of the market. I am personally using the fixed percentage stop loss. In different markets, I will use different stop loss percentage as the volatility levels are different. When profit taking, I trust my system (I use algorithm to give me sell signal when the indicators indicating the market has reached the top) to tell me when is right time to get out.

So what is R-Multiples and Expectancy?

1R defines your initial risk. For example, for a $40 stock, my initial risk (my stop loss percentage) is 10% or 4 dollars. This means that I will need to get out of the market if it drops to $36. This also means that your initial risk of $4 is 1R. So if you have lost $2, your R-multiple is -0.5R. Easy?

So, the first two steps you need to ask yourself:

1. Define your 1R - initial risk. For me, I use 8-10% depending on the market I am trading in.
2. For every trade you do, write it in a journal (Excel template is sufficient), and include a column titled "R-Multiples". The formula to calculate it is Profit(Loss) divided by Initial Risk.

So, what is the big deal about this R-Multiples? 

"When you have a complete R-multiple distribution for you trading system (remember, you need to have a system first, and all your trades are strictly following your system), there are a lot of things you can do with it." - van Tharp

One benefit is that the MEAN of R-Multiple, called EXPECTANCY, tells you what you can expect from your system on the average over many trades in terms of R.

Consider the following tables:

Here the expectancy tells you that the average you will make is 0.2R per trade. Therefore, over many trades, say 100 trades, you will make about 20R. 

The standard deviation tells you how much variability you can expect from your system performance. In the sample above, the standard deviation was 0.97R. Typically you can determine the quality of your system by ration of expectancy to the standard deviation. In this example the ration is 0.2, which according to van Tharp, is not good enough. If the ratio remains above 0.25 over many trades, the system can be taken as acceptable.

If you are interested to get the excel file for the above table, get it here.

Two Android Apps for your Stock Trading

Monitor your stock watchlist on the go!

I am a big fan of Android phone, and I have tried so many apps to help monitoring my stock watchlist. What I want to share with you here are the two best apps you should download and try.

#1. Ministock

Even though this app doesn't have more-than-four stars it deserves, this has been my favorite stock app. I just love it. The widget is so useful to monitor my watchlist. Below screenshot is what I have on my Nexus 4 phone. As I am now focusing in emerging market, like Indonesia market (I stay in South East Asia anyway), most of my watchlist are Indonesian stocks.

Download the app thru Play Store.

#2. Calendar App - aCalendar

If you remember in my previous post on Stock Tracking Spreadsheet Template, I mentioned about the importance of tracking your trading history. I do this by writing all my trades done in a calendar. I made a separate calendar in Google apart from my personal calendar. This new calendar is strictly for my trading history. And I need a widget that can show me all my trading history distinctly.

Luckily, I find this app - aCalendar. The calendar widget allows you to have monthly view with every entry of the day. Also, it allows you to use different colors for different types of trading activities. I use yellow for BUY, GREEN for SELL at profit and RED for SELL at loss. I update my mutual funds top-up here too. Simple and really useful. This this!

Get aCalendar via Google Play Store

What android apps do you use? Share in the comment below!

Types of Traders - Overview

The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread.

Momentum traders look for stocks moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit. For example, Netflix (Nasdaq:NFLX) surged over 260% to $330 from January to October in 2013, which was way above its valuation. Its P/E ratio was above 400, while its competitors' were below 20. The price went up so high primarily because many momentum traders were trying to profit from the uptrend, which drove the price even higher. Even Reed Hasting, CEO of Netflix, admitted that Netflix is a momentum stock during a conference call in October 2013.

Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.

Fundamentalists trade companies based on fundamental analysis, which examines corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions.

Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders, since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.

Novice traders might experiment with each of these techniques, but they should ultimately settle on a single niche, matching their investing knowledge and experience with a style to which they feel they can devote further research, education and practice.

Source: http://www.investopedia.com/articles/trading/02/090302.asp

Never Average Down in Stock Trading!

"Everyone loves to buy stocks; no one loves to sell them. As long as you hold a stock, you can still hope it might come back up enough to at least get you out even. Once you sell, you abandon all hope and accept the cold reality of temporary defeat. Investors are always hoping rather than being realistic. Knowing and acting is better than hoping or guessing" (William O'neil)

In my earlier post about Business Plan for Trading, it was stated that one of my rules - never average down. For traders, the tactic to average down is rather popular. The simple definition of average down or dollar cost averaging is as follow:

"A strategy used by investors to reduce the average cost of shares, in which the investor purchases more shares with a fixed amount of capital as the price of the shares decrease. The investor receives more shares per dollar and decreases the average price per share." 

In the nutshell: when the stock you hold drops in price, you buy more because the price is at a discount.

If you believe in averaging down, and so far it works for you, by all means ignore this article. I am writing out of experience. In my early trading days, I kept buying a stock until I realized 45% of my capital is out there in ONE stock! And out of fear losing a lot of money, I needed to keep it for a long period of time!

Here are my arguments, based on sharing, reading books, and my own experience. Think about these points and ask yourself if they make any sense not to average down in you stock trading.

1. By averaging down in a stock, you are risking yourself because you would never know how long the downtrend will stop and reverse in you favor. Never predict market, let the market shows you the top and bottom. If many cases, the downtrend will carry on and takes so long (months!) to trend up. Do not risk you money in something uncertain.
2. By putting a good money after bad, you are actually incurring a huge opportunity loss. What I mean is that, instead of allocating you money into stocks that are downtrending, you could have utilize it for other stocks, that could have given you more profit than the stock you are averaging down within the same period.

So, again, think about this. My advise is simple, follow your system, apply a strict cut-loss policy, and do no average down.

Happy trading!

Stock Trading Rules

Rules are made to be followed. I am a systematic person and I love creating system. In my trading days, I stand by my trading plan at all times. It is not easy initially, but I believe I am getting used to this. If you recall my post on my business plan for my stock trading, one of the important aspects is to have your beliefs and rules to follow. I created a checklist which is online on my Evernote - so that I can check on it occasionally. My room wall is too decorated with my trading rules :)

How do I define my trading rules? I read many books on real and successful traders and started to jot down their traits, quotes and advice. If you find these advice make sense, go ahead and adopt them in your trading rules. To categorize it in a systematic way, I split my rules into three main classes: MIND, METHOD and MONEY!

Take note of my rules below. Some are very conservative and sometimes causes me to be extra cautious in making decision to trade. Adopt what your think make sense to you. If they are not, ignore them.

MIND
[ ]When in doubt, get out. Only trade when you feel confident about your trading strategies.
[ ]Never get into the market because you are anxious from waiting, and never get out of the market just because you have lost your patience.
[ ]Never change your position in the market without a good reason. If you execute a trade, base it on a fundamental reason or technical rule.  And then do not get out without a definite indication of a change in trend
[ ]Do not guess where the top and bottom of the market is, but let the market prove its top and bottom
[ ]Perception is not reality. Only trade on "quality" advice.
[ ]Use self-discipline as your guide when the market goes against your position. Take your loss and wait for another opportunity.
[ ]Avoid taking small profits and big losses
[ ]Ignore the minor price fluctuations and place positions with the basic trend of the market. Remember, the odds are on your side when you trade with the trend rather than try to pick trend reversal points.
[ ]Guessing key reversal points can be risky. Therefore, let the market tell you when it is over by a patterned reverse in direction.
[ ]Always remain true to your trading plan, and follow the trading style that works best for you.
[ ]Put your trust in the markets, and do not be afraid when they reach historic highs or lows
[ ]Never let greed or fear take control over your winning positions

METHOD
[ ]Use stop-loss orders and always protect a trade when you use a stop-loss order by using reasonable price limits
[ ]Never over-trade and adhere to your risk management rules.
[ ]Remember, "the trend is your friend," and never buy and sell if you are not sure of the trend according to the fundamentals and technicals.
[ ]Trade "at the market" whenever possible and try to avoid using orders with a fixed buying and selling price (except a stop-loss)
[ ]Never buy just because the price of the stock is "low", or sell just because the price is "high."
[ ]Never Average Down.
[ ]Never make a mistake without asking yourself why. Learn from your trading mistakes. If possible, keep a log of your trades - why you made them, what happened and why, etc
[ ]Remember, the key to any plan is how well it performs over time

MONEY
[ ]Only trade with genuine risk capital, and be aware of the risk of losing.
[ ]Do not treat all markets the same. Learn to adjust the size of your positions and the frequency of your trades for different markets.

One tips I find it useful is to run through all the list when you are about to buy or sell. If any of the rules is broken, simply do not trade.

Money Management in Trading: Position Sizing

The terms "Position Sizing" came across to my trading journey when I read van Tharp's book, Super Trader. In his book, he stresses the importance of knowing "how much stocks to buy" to stay alive in trading. This theory of position sizing really struck me hard! This is essentially the MONEY part of the famous 3M theory.

The theory is this: Assuming you have a very good EDGE (or strategy - be it an algorithm, some technical analysis or fundamental analysis, or any strategy) that will give you a positive return in the LONG run, you have to be careful with your money management. I mean, you are sure that your EDGE (METHOD - another M in the 3M) will give you WIN over time, BUT you do not know the SEQUENCE! For example, you can have a straight ten losses before getting a big win on the eleventh trade. You wont know when you win, you wont know when you lose. Moral of the story: you have to play SMALL to stay in the game for LONG!

Simple theory and very logical, eh?

So the question is how SMALL you should buy? In his book, van Tharp mentioned about several ways to position sizing, but in this article, I am going to tell you the formula I am using with a great discipline (well, I am still in the game!)

The elements you need to define first:

1. How much is you current base capital (C)? In my formula, this is my total capital including those open position in the market.
2. How many percent of this C you want to risk (R) in a single trade? It means that, if you R is 1% and you C is USD 10,000, your allowable loss in a single trade is USD 100.
3. How many percent is your cut-loss (L)? I use fix percentage as it is easier to compute. Depending on stock market I trade, I use between 8-10% cut loss.
4. What is your buying price (B)? 
5. The final piece of the equation is how many stocks - position sizing (P) - you are allowed to buy.

Hence, the full formula is as follow:

P = (C*R)/(B*L)

Example #1,

Stock XXX price is at USD 1.5, your capital in your broker account is USD 20,000. In you trading plan, your cut-loss is at a fixed percentage of 8% and you can only tolerate 1% loss of your capital in one trade.

P = (20,000*1)/(1.5*8) = 1,666 stocks (round it down, to the nearest lot)

Example #2,

Stock XXX is at SGD 1, your capital in broker account is SGD 5000, and your open position is SGD 200, your cut-loss is at 10% and you are very conservative and only willing to risk 0.5% of you total capital. You are in Singapore market where 1 lot is 1000 shares.

P = (5200*0.5)/(1*10) = 260 stocks (round it down, to the nearest lot). This does not meet 1000 share minimum to buy 1 lot, so stick to your trading plan, and DO NOT buy the stock.

Books Recommendation on Stock Trading

For the past year, I have reading so many books (I didn't like to read a few years back). Some books  I read are good, some aren't so good. Anyway the books that have gotten my attentions are listed below. Grab them in library or just buy them and keep them in your book shelf for your reference in the future.

#1. How I Made $2,000,000 in the Stock Market - Nicolas Darvas

"Hungarian by birth, Nicolas Darvas trained as an economist at the University of Budapest. Reluctant to remain in Hungary until either the Nazis or the Soviets took over, he fled at the age of 23 with a forged exit visa and fifty pounds sterling to stave off hunger in Istanbul, Turkey. During his off hours as a dancer, he read some 200 books on the market and the great speculators, spending as much as eight hours a day studying.Darvas invested his money into a couple of stocks that had been hitting their 52-week high. He was utterly surprised that the stocks continued to rise and subsequently sold them to make a large profit. His main source of stock selection was Barron's Magazine. At the age of 39, after accumulating his fortune, Darvas documented his techniques in the book, How I Made 2,000,000 in the Stock Market. The book describes his unique "Box System", which he used to buy and sell stocks. Darvas' book remains a classic stock market text to this day." (Amazon)

#2. Super Trader - van Tharp 

"Super Trader provides a time-tested strategy for creating the conditions that allow you to reach levels of trading success you never thought possible. Providing expert insight into both trading practices and psychology, Tharp teaches you how to steadily cut losses short and meet your investment goals through the use of position sizing strategies--the keys to steady profitability." (Amazon)

#3. The Complete Turtle Trader - Michael Covel 

"What happens when ordinary people are taught a system to make extraordinary money?Richard Dennis made a fortune on Wall Street by investing according to a few simple rules. Convinced that great trading was a skill that could be taught to anyone, he made a bet with his partner and ran a classified ad in the Wall Street Journal looking for novices to train. His recruits, later known as the Turtles, had anything but traditional Wall Street backgrounds; they included a professional blackjack player, a pianist, and a fantasy game designer. By the time the experiment ended, Dennis had made a hundred million dollars from his Turtles and created one killer Wall Street legend. In The Complete TurtleTrader, Michael W. Covel tells their riveting story with the first ever on-the-record interviews with individual Turtles. He shows how Dennis's rules worked—and can still work today—for any investor with the desire and commitment to learn from one of the greatest investing stories of all time" (Amazon)

#4. How to Make Money in Stocks - William O'Neil 

"Through every type of market, William J. O’Neil’s national bestseller, How to Make Money in Stocks, has shown over 2 million investors the secrets to building wealth. O’Neil’s powerful CAN SLIM® Investing System—a proven 7-step process for minimizing risk and maximizing gains—has influenced generations of investors.

#5. Way of Turtle - Curtis Faith

"So trading guru Richard Dennis reportedly said to his long-time friend William Eckhardt nearly 25 years ago. What started as a bet about whether great traders were born or made became a legendary trading experiment that, until now, has never been told in its entirety. Way of the Turtle reveals, for the first time, the reasons for the success of the secretive trading system used by the group known as the “Turtles.” Top-earning Turtle Curtis Faith lays bare the entire experiment, explaining how it was possible for Dennis and Eckhardt to recruit 23 ordinary people from all walks of life and train them to be extraordinary traders in just two weeks." 

#6. Trading in the Zone - Mark Douglas 

"Douglas uncovers the underlying reasons for lack of consistency and helps traders overcome the ingrained mental habits that cost them money.  He takes on the myths of the market and exposes them one by one teaching traders to look beyond random outcomes, to understand the true realities of risk, and to be comfortable with the "probabilities" of market movement that governs all market speculation."

Happy reading!

Stock Screener

How do you start in picking a stock to buy? get a watchlist!
How do you get a watchlist? use a stock screener?
How do you get a free, yet powerful stock screener? Try this website: http://markets.ft.com/screener/customscreen.asp

The it is quite easy to use..

Step 1: Choose the market you want to focus (regional - country)

 Step 2: Choose sectors and industries

Step 3: Choose the Equity Attributes. The site have quite a handful of attributes, and it is very helpful.

Step 4: View your results.

You can save your settings, so you can monitor you watch list on regular basis.

Once you get a watch list, then next step is to get a stock trading software, to make use of technical analysis to decide the TIME for entry. More on this in separate post.

About Me

Please feel free to get in touch with me personally at these social sites:

How to Buy Stocks on Twitter
How to Buy Stocks on Google+

If you would like to comment or just drop me an email, you can do so at the Contact page.

Disclaimers

"HowtoBuyStocks.blogspot.com is a mere personal blog for informational and educational purposes and does not provide any investment advice. All the contents of this blog, except for comments by readers, constitutes the opinion of the Author alone"

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What's on Your Mind?

The Psychology of Trading (1)

"Making ONE winning trade is easy, being a consistent winner is hard"

Emotion plays a big part in every traders' heart. With a wrong mindset, this game of trading can make one loses a  lot of money. Psychology of trading is one of the most important aspect in stock trading. Some experts refer this to one of the M in the famous 3M (Mind, Money, Method). Yes, I am talking about MIND. We need to have a good mindset before we are going to buy stocks in stock market.

In this article I am going to share the powerful quotes from Mark Douglas, the writer of a really good book, Trading in the Zone. When I read the book last year, my attention was caught by the "Five Fundamental Truths" of Trading Psychology. Read this carefully and decide if this makes sense to you. I fully absorb the ideas of these principles and this helps me to be a better trader.

1. Anything can happen - Simple translation: we have no control over the market. Accept this. So when the market is against you and you losses money, understand that you cannot blame the market. I repeat: we have no control over the market.
2. You don't need to know what's going to happen next in order to make money - I used to see people predicting whether tomorrow the market will be green or red. This is rubbish! The fact is, we cannot predict anything. Sure we can analyse and guess, but we have to realize that we cannot predict the market, so do not waste your time giving prediction or believe in people prediction. Focus on your edge, ignore any attempt to predict.
3. Wins and losses are random - This is about math lesson: probability and normal distribution. Understand that one day you win, the next day you can lose. What is important is you win in the LONG run. The sequence of winning and losing doesn't matter, what matters is you are winning over time.
4. Your EDGE is nothing more that a higher probability of one thing happening over another - The edge is defined as the system and strategies you used in buying stocks and selling stocks. The definition is very broad and you have to find out your own edge. And by testing it for a long period of time, your edge must have a positive return in the long run (that is you are winning in long haul). Remember this: Your edge is no guarantee of a winning trade, just of winning over time.
5. Every moment in the market is unique - Just because a similar trade/pattern won last time doesn't really mean that it will win this time. Treat every trade as unique occurrence you will see the truth of the trade without relating it to the what happened last time.

Business Plan Template for Your Stock Trading

Before you jump directly to stock market and start buying stocks, you need to have a proper business plan. Stock investing/trading is just like any other business, you can't expect yourself to right away buy stocks and earn profit. Plan properly!

"If you fail to plan, you plan to fail."

This business plan template is what I used after adapting to so many books I read. I save this trading plan in my Evernote, so when there is time to spare while waiting for a bus or waiting for food, I would read this business plan just to refresh about what are the rules I set up when I started this business.

So, if you do not have a WRITTEN Business Plan, then this is a good time to get a paper and start jotting down. The following outline is a simple example and of course you can always tweak it. This list works for me and hopefully will also work for you.

1. MISSION
• What is you trading missing statement?
• What is your real motivation behind your trading?
• Is it for your children education? or for passive income for you retirement?
2. GOALS and OBJECTIVES
• What are your trading goals and objectives?
3. RULES
• What are your trading rules you need to stick on. This may be difficult to define, but with more experience, you will get it. Read more books about real, successful traders.
4. STRATEGY (METHOD)
• What are trading tools do you use?
• What are trading software do you used?
• How you screen stocks in stock market?
• How do you use fundamental analysis to pick stocks?
• How do you enter/exit market?
• What Technical analysis (indicators) do you use?
5. POSITION SIZING (MONEY)
• How many lot you SHOULD buy per trade?
• This is important aspect of trading
6. PSYCHOLOGY (MIND)
• What are your physiological environment in trading?
• What are emotional challenges do you have?
7. TRADING ROUTINES
• What are you daily/weekly/monthly routines?
• Do you keep trading journal?
8. MISTAKES
• What are your mistakes?
• How does it affect your overall trading?
• Do you record down every mistake?
• How to prevent it from happening again?

Ok, I am very sure you want to see an example, so here you go. Please note that this is just an example. This is not (fully) my trading plan, I adapted this example to better illustrate the business plan template.

1. MISSION
• To trade well and right!
• To be able to have different source of income
• To act as passive income for my retirement!
2. GOALS and OBJECTIVES
• To improve my EDGE
• To make ZERO mistakes
• To improve my automation of trading journal 
3. RULES
• I am not a value investor
• I do not apply Dollar Cost Averaging
• I must follow my system, not following means a mistake
• I do not hold stocks more that 3 months
• ... (the list goes on)
4. STRATEGY (METHOD)
• I use Yahoo Finance to get a stock quote
• I use Amibroker/Metatrader/NexusChart for my technical analysis
• I use Microsoft Excel for my trading performance monitoring
• ... (list down all you stock trading software)
• Stock screener is done by ... (my Online Stock Screener)
• The screening is based fundamental analysis (earnings, ROE, P/E, etc)
• My watchlist consist of (stock A, stock B, etc)
• My entry strategy is based on (Support resistance, Fibo, EMA, etc)
• My exit strategy is based on (Support resistance, Fibo, EMA, etc)
• My cut loss is at 8%
5. POSITION SIZING (MONEY)
• Every time I buy stocks, maximum I can buy is xxx shares.
• Many different way to calculate (learn Position Sizing here)
6. PSYCHOLOGY (MIND)
• I buy stocks with random expectation 
• Everything happens in stock market is RANDOM
• I believe in "Five Fundamental Truth" about trading
• ... etc
7. TRADING ROUTINES
• Download EOD everyday
• Update my trading journal (start creating Stock Tracking Spreadsheet)
• Read financial reports
• Read news
8. MISTAKES
• Write down all my mistakes (not following the above business plan)

Try to come up with your own business plan based on this simple business plan template and share it with me!

Stock Tracking Spreadsheet Template

"Show me a trader with a good trading records, and I'll show you a good trader" (dr Alexander Elder)

Earlier this year I read up quite a number of trading books. I came across Alexander Elder's Sell and Sell Short which in my opinion is a really good trading book. Like most well-known trading book, Sell and Sell Short elaborates the importance of the 3M (Mind, Method, Money). However, dr Elder went on to emphasize the essence of Trading Diary, or I call it Trading Journal. Some people refer it as Investment Tracker Spreadsheet, Tracking Spreadsheet or Stock Tracking Spreadsheet Template. They all mean the same.

The idea of having this is clear. You will have to monitor you progress in stock trading. Have you been making money or wasting time and money? So if you are trading stocks now and do not have any tools to track the performance (papers, excel templates, online service portfolio, etc), you better make one! Most stock trading software or even your broker account will have this sort of monitoring platforms. However, these may not meet your needs.

Here I am sharing my simple template which is fairly sufficient for my daily monitoring of my stocks. Please note that this template is only for educational purpose, so please use it for your own (do not sell it!). I do not protect the file with password and you are free to tweak it as you wish. What you need could be more than what the template can provide.

The link to download the file is here. While the simple instruction is below. As I am now quite actively trading in emerging markets, I am using Indonesia stocks for examples (all numbers used are dummy numbers - not my trading performance).

First tab - Stock Tracking

Second Tab - Summary

1. There are two tabs: Stock Tracking and Summary. Stock Tracking is where you key in manually every trades (Buy, Sell, Dividend) you make. Summary is to see per-ticker performance. 
2. For those highlighted in YELLOW, you have to fill up manually, while those not highlighted are already containing formula.
3. Ok, first tab. First fill you what is you initial investment you make at the start of the year (eg. IDR 50,000,000 - see cell D5). Also, type what's the commission percentages for Buy and Sell (cells D6 and D7).
4. Then fill up the table (make use "TAB" to move the cursor the the right).
• Stocks - what stocks you buy/sell
• Position - are you buying or selling. Or are you getting dividend (if dividend, please fill up the rest manually)
• Date Buy/Sell - dates of transactions
• Price per share
• Quantity of shares 
5. Ok, second tab. Fill up what are the unique stocks you have from tab Stock Tracking. This tab is to summarize the stock performance. For "Current Price", please fill up today price (you can get it from Yahoo Finance).
6. Also, here, there is formula to see how much is the percentage of your profit over your initial investment.

This is a simple stock tracking spreadsheet using Microsoft Excel. This works for me and sufficient enough to meet my needs. Feel free to tweak this or even make a new one based on the concept and share with me.

Hope this investment tracking is beneficial for everyone.

6 Tips from Warren Buffet on Wealth Management

Who wouldn't know Warren Buffet, American businessman and investor who is also the CEO of Berkshire Hathway.

Known for his investing philosophy, many things can be learnt from Warren Buffet investment strategy and the way Mr Buffet manages his wealth. Below are money management advise from Warrent Buffet himself that I always remember whenever I am investing. So, like me, you can apply these 6 quotes on wealth management and apply to your daily investing experience.

#1 "Do not depend on a single income. Invest and create a second, third source of income"

I live by this quote on money management everyday. And you should too. While you are young (if you are!), start investing (or start with saving) now. 

There are many ways you can invest. I personally start with stock investing (of course, you have to learn the proper way on how to buy stocks). If you have extra cash, buy a house or property. Two years ago, my wife and I  bought a small apartment near our town, and it now sits in very nicely as the price have shots up and we are just waiting for acceptable valuation before selling it. I am also investing in mutual funds monthly for longer term plans. Other than that, you can always start your own business (be entrepreneur!). Gold investing may be an option too.

#2 "If you buy things you do not need, you may soon have to sell things you need"

Well, with limited assets (I mean money) coupled with unlimited "wants", life is always tough, isn't it? Well, manage you finance properly and start separate the "needs" and "wants", and be disciplined about it. This quote is one of the best of Warren Buffet saving tips.

#3 "Do not save what is left after spending, instead spend after you save/invest"

This is another favorite quote from Mr buffet I live by everyday (or rather every month after my payroll). I used to tell my wife, "Look, what I have by the end of this month is xxx because we spent xxx on this, this and that." It struck me hard that I have been all wrong. I should, instead, keep aside for savings/investment FIRST, then the rest are for my guilt-free spending. Now, I will always tell my wife,"I have allocated this, this, this and that for our savings/investments, this is what left and we can spend it, guilt-free!"

To give you better illustration, every time I got my salary banked in, I quickly get down to allocate some of my money for savings/investment (later you learn you can automate this)

• 5% - DREAMS - for short term savings (for holiday at the end of the year)
• 5% - RETIREMENT - for long term savings (will only use the fund one year or more later)
• 5% - EMERGENCY FUND (just in case my boss starts to dislike me and I am out of job!)
• 10% - INVESTMENT (added to my broker account, mutual funds top-up, etc)

This are EXACTLY what percentage I use every month. This is minimum! If I have more to save/invest, usually it will go to item #4 above
(I invest more often now, more capital the merrier!)

#4 "Never test the depth of the river with both you feet"

To start investing (mutual fund, buy a stock, gold, est), start small! Start with 10% of you income (see above, I still use 10%) and if are more confident and your profit from investing is better, you can improve the percentage.

#5 "Do not put all eggs in one basket"

Diversification. Make your investment portfolio vary. Also, match you portfolio with your risk level.

#6 "Honesty is expensive, do not expect it from cheap people"

Just remember, people you meet are not all honest, and frankly not all people have the intention to be honest. Good adviser is hard to get, especially when it comes to wealth and money. So be careful in getting advise from people.