Trading always fascinated me from the moment I heard of traders making thousands of dollars in a day through smart trading strategies.
To me, it seemed like the ultimate in leverage opportunities. When I say leverage I mean time leverage, not leverage on your trading account.
Is trading really this easy?
You can outlay $20,000 on a stock, and if it rises 5% in a day, then you just made $1,000.
Ok, so let me get this straight. You click a few buttons on your PC and hey presto you have made a quick fire $1,000.
Wow, that could work for me.
Many people get lured into trading having watched a friend, neighbour or significant other make what appears to be easy money in a short space of time.
During the tech boom, some traders were making 30% a month
When I first started trading, I was surrounded by people making large sums of money during the tech boom.
Clients at the company I worked for were making up to 30% a month. My eyes were popping out of my head. But the romance with high investment returns was short lived.
The tech bubble burst and I started watching people’s trading accounts drop rapidly. Even the stock market education guys running the share trading courses were fooled into believing the markets only go one way.
Quick wins followed by huge losses
Most lost a good 60-80% of their trading accounts back in April 2000.
Having watched the carnage from the sidelines (I wasn’t trading at this stage), I decided that a cautious approach was the way to go.
So I found some good mentors who spent countless hours teaching me the finer points of technical analysis and money management.
Living with my trading mentor
At one stage I even lived with Max Lewis, who was one of the original founders of the Society of Technical Analysts of New Zealand (STANZ), and keenly watched every trading move he made.
I decided to take the plunge and open up a share trading account with Etrade to find out if untold riches were a few mouse clicks away.
I was excited and nervous, and I spent hours doing research to look for ideal trading opportunities.
My sophisticated trading strategies
Initially, I learned discretionary pattern trading and had a very keen interest in ascending triangles.
I loved ascending triangles and looked for them everywhere, even behind the couch (isn’t that where all things end up?).
All of a sudden everything in my life was related to candlestick charting.
Driving my car I might get two red lights, solid red candle. The weather forecast is sunny, open green candle with no wick. I mean everything.
Encyclopaedia of Chart Patterns
I had figured that ascending triangles were the way to go and boy did I tell everyone. I couldn’t believe how fantastic ascending triangles were and I studied Thomas Bulkowski's book titled “Encyclopaedia of Chart Patterns” religiously.
Now was the time to put my money where my mouth was. Time to jump into the unknown. Time to jump into the markets.
A quick look at my first seven trades entered into:
|
Trade Number |
Result |
Profit/Loss |
|
1 |
Win |
$215.65 |
|
2 |
Win |
$116.70 |
|
3 |
Loss |
-$3.05 |
|
4 |
Loss |
-$252.50 |
|
5 |
Win |
$441.20 |
|
6 |
Win |
$758.60 |
|
7 |
Win |
$48.25 |
Total profits: $1,324.85and based on my $10,000 float represented a gain of 13%.
I distinctly remember calling my mum and dad back home on the Gold Coast (I was living in Sydney at the time) to say how easy it was to make money trading the markets.
I was excited.
‘Seems like you have a knack for this'
I told the director of the company I worked for and even he was impressed, “Seems like you have a knack for this”, he said.
Ascending triangles appeared to be pulling in the profits, albeit little ones. The main thing was my trading account was heading in the right direction.
After racking up a handful of winning trades for small profits, I noticed that the very first trade I got on went on to make over 40% in 2 weeks. Unfortunately, I only managed to lock in 7.4% of the move. So that got me thinking.
I need to give my stocks a bit more room to move. So I proceeded to let the next trade run up some spectacular profits, but they never came.
My first trading mistake
Having decided I need to give my stocks some room to move, I promptly let this stock slip below my stop loss line and into the dark depths below.
Ouch.
This was definitely the one that got away. I was left there with my fishing line, no hook, no sinker and no bait and did I mentioned I was losing?
At the time I put my thinking cap on and came to the conclusion you only take a loss if you sell.
So I did what any rational investor (I mean punter) would do and decided to wait until the stock got back to my entry point. I wasn’t going to sell. That’ll teach the stock!
Well, the stock continued on its path to destruction, and at the depths, I was down just over 60%. So I had some explaining to do to my wonderfully patient wife.
My first big trading lesson only took a year to learn
My stock decided it wasn’t happy all the way down there in the pits and promptly headed back up, climbing the insurmountable mountain called recovery.
As it turns out my stock was getting bought out by another company and started heading up fast. I originally bought in at $0.34. Then cried silently as it fell below $0.14 and then joyously watched the stock climb back to my entry price.
My second big trading lesson
The company split into 2, and I ended up with $725 worth of shares in the new company (for free) which I sold immediately and then sold my original holding for a tidy profit of 6% (not bad as I beat bank interest).
I then watched the stock double in value (without me on it of course) and then strike tragedy. The stock promptly fell from the highs over $0.70 to $0.02, and then delisted. Welcome to share trading.
Obviously, at this stage, I was over the moon that no leverage was involved. If leverage was involved, my big trading lesson would have included wiping out a trading account.
So I learned my lessons with little to no pain in the early days. I mean it wasn’t all smooth sailing, but I never suffered any significant losses that seemed to be part and parcel of the tech wreck aftermath. So all was good.
Combining my trading strategy with aggressive money management
After trading for 10 months, I decided I needed to find the holy grail of trading and ramp up my returns.
The internet was dripping with ads suggesting 100%+ returns, and my account certainly wasn't seeing any of that action.
I searched high and low on the internet trying to find what it truly takes to make excellent returns. I stumbled across an American site making 300%+ returns in a crappy market.
So I downloaded every trade he made and analysed the results in an excel spreadsheet.
Incredible returns – one answer
It turns out the 300%+ returns came down to aggressive money management strategies.
He would literally place 50% of his total capital on every trade and hold it for one day maximum and bank a series of small gains or small losses.
So it got me thinking, how can I use this aggressive money management with my trading and make say 100% in a year?
Here is what I uncovered:
Ascending triangles and breakouts delivered a gain of 1-10% within 1-5 days of trading.
In order to make 100% per year requires making 6% per month compounded. That means after every successful month you need to invest the total profits.
My plan to make 100% in a year:
- Make two trades per month netting 3% each (great way to reduce brokerage)
- Place 100% of my trading capital on each trade (test capital base of $10,000)
- Compound every dollar I make into the next trade. Ie if my first trade makes $300 nett then my next trade will have $10,300 and so on.
My spreadsheet had to be telling the truth. This was my plan to make 100% returns a year.
An aggressive bull system (long only) in a raging bear market
Here are the results of my actual trades during the first few months
|
Month |
Trade |
My Result |
My Cumulative % |
Aussie 200 Index Month Return |
Aussie 200 Index Cumulative |
|
March |
1 |
$223.10 |
3.98% |
-2.37% |
-2.37% |
|
April |
1 |
-$226.26 |
1.06% |
-1.87% |
-4.20% |
|
May |
1 |
$575.72 |
7.42% |
0.69% |
-3.55% |
|
June |
1 |
-$65.90 |
17.5% |
-4.65% |
-8.04% |
|
July |
1 |
-$65.90 |
19.18% |
-4.04% |
-11.75% |
After five months of trading, I was outperforming the Aussie Index by a whopping 30.93%
Note: Figures include brokerage and GST. Back then, a round-turn trade with Etade was $65.90. So it is easy to see the trades where I broke even minus brokerage. Annoying, but part of trading.
Trading statistics for the first 5 months
|
Total Trades |
11 |
|
Wins |
6 |
|
Losses |
5 |
|
Win % |
54.5% |
|
Loss % |
45.5% |
|
Average Win |
$408.11 |
|
Average Loss |
-$108.19 |
|
Risk:Reward |
1 : 3.7 |
While people were losing their shirts I was steadily banking profits, minimising brokerage and wondering what all the fuss was about.
In June I had to fly to Adelaide to do a seminar for the company I worked for (Metashare International).
The marketing team asked if I had any ideas on the copy to write for the ads to place in the paper, so I gave them this headline.
“Come and learn from someone who has made over 17% while the market has fallen over 8%”
My mentor Max Lewis found out and said words to the effect “No-one can be making returns like that in this market. If they are making over 17% in a couple of months then they're not trading the Aussie market or they are lying”.
I felt chuffed and over-the-moon with his comments.
My mentor with over 30 years experience, the very guy I learned off, was in disbelief I had made these returns.
Needless to say, I showed my broker statements to prove it and he was amazed.
It was a stellar effort and keep in mind I only started trading 13 months ago.
Words of warning on this aggressive money management strategy
I want to include a massive disclaimer here as the strategy I employed was extremely aggressive and is not recommended for those just starting out.
You have to keep in mind that while I had only just begun trading, I had been involved with the markets for over 18 months and surrounded by traders every single day.
At that stage I had given over 250 trading strategy seminars and coached hundreds of traders.
Had I not been disciplined at hitting my stop losses on any of these trades then the results would have been devastating to my trading account.
It wouldn't be uncommon for a stock to move 5-7% in a day the wrong way which would have wiped 5-7% off my trading capital.
Whilst I put 100% of my capital in every trade, I was only ever risking a small portion in any one trade.
So for every position, I was never risking more than 3 percent before my stop kicked in.
Fortunately for me, I never had any larger than expected losses.
Lessons learnt from my foray into share trading
As you can see I never had an incredible strategy.
In fact, I only won 54% of the time. The real ‘secret' came down to using an aggressive money management plan in order to boost my returns.
You might want to consider identifying your edge in the markets like I had and then matching a less aggressive money management plan.
Your number 1 goal in trading is always capital preservation.
Pros to this share trading strategy
- When you are winning your overall yearly gains are potentially quite high
- Brokerage is kept to a minimum
- I only ever traded on high probability ascending triangle trades
- Not overly time consuming
Cons to this share trading strategy
- Money management plan is too aggressive for inexperienced traders
- At the time I had access to WebIress and watched the live quotes all day and had alerts constantly triggering on my PC
- If I had several losing trades in a row I would have lost a large portion of my account
- If I let a loss ride then 100% of my trading capital would be tied up losing money and I would have no opportunity to take other trades
- I had to be 100% disciplined when my stops were hit. Not hoping for stocks to turn around
Due to the aggressive nature of my portfolio management, some positions went on to make much bigger returns without me on it. Remember, my goal was to lock in profits quickly.
No doubt you would have formed your own thoughts about this type of trading. You might ask, “Why did I stop in July?”
The reason I stopped was I started trading CFDs in August 2002 and all of a sudden I had access to 20 times leverage.
Now the real fun was about to begin.
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