Backtesting the New Idea

Here's my very quick study of the top stocks on my watchlist, trying to apply a simple and mostly mechanical purchasing method using the 10 wk ma. I attempted to be very conservative and didn't really throw too much logic in - for the most part I just looked at the charts and bought within 3% of the 10 wk - there are however some noted exceptions that I found to be no-brainers (like STEC on crash day, obviously would not have purchased that one).

Leaders from around 8/21
Rules - Buy limit 3% above 10 wk ma
Sell Stop 5%, breakeven after 10% advance
1 week hiatus after stock stops out
EJ - could've been purchased around $18.60 on 8/25 and survived 5% stop loss (now breakeven) - current price $23.58
HMIN - could've been purchased around $28.75 on 10/2 and survived 5% stop loss (now breakeven) - current price $33.30
PWRD - could've been purchased around $36.69 on 9/2 and survived 5% stop loss (now breakeven), high of $50.49, current price $43.82
FUQI - could've been purchased around $24.35 on 9/2 and would've stopped out same day for 5% loss
FUQI - could've been purchased around $27.44 on 9/18 and would've stopped out for breakeven on 10/1
FUQI - could've been purchased around $28.20 on 10/8 and still holding with 5% stop loss - current price $28.00
STEC - did not come near the 10 week until it gapped down and crashed through - easily avoided
GMCR - was below 50 dma and to be avoided at this time, basing
BIDU - could've been purchased around $337.21 on 8/27 and stopped out on 9/1 for 5% loss
ARST - broke the 50 dma several times and therefore would be avoided
MED - could've been purchased around $18.27 on 10/2 and survived 5% stop loss (now breakeven) - current price $22.38
VIT - 5% loss, then avoided (too wide and loose)

Scorecard:
4 - 3 - 1

4 winners up 26%, 15%, 19%, and 22% - each stock has been up at least 20% at their high since purchase
1 stock still held down less than a percent
3 stocks stopped out for 5% loss
1 stock sold for breakeven

Adaptation

We've been having some interesting discussions on the Trade to Retire forums and I wrote a post there that I'd like to put here on my blog as well as it highlights my thoughts and approach to this currently rally.

Here's how I handle market analysis - it's one thing to have an opinion about the market (it's gone too far too fast, etc.) but it's another to act (trade or not trade) on that opinion. I try to separate the two. If the market is in an uptrend and I see a stock I like in a position I like then I will buy it - whether or not I think a rally is extended. This probably adds to my risk, but I'm just not good at picking market tops, so it's best for me to let the market posture and/or my three strikes rule handle that for me.

Now on the other hand, I do think it's important to adapt to the current environment. Standard CAN SLIM buy points have not worked for weeks. They just haven't. The stocks have closed below the buy point, shaken out holders, then turned and advanced. They advance 10 or 15% from traditional buy points and pull back to a moving average instead of the 20% one could historically count on. I saw this through the middle of the year (it was a very expensive lesson) and since I've adjusted my buying strategy I've managed to survive for a few weeks. I would NOT attempt any buys on breakouts/new highs at this time UNLESS the 50 dma/10 wk line were within about 8% of the buy point - that would allow me my standard stop order while giving me the cushion for the stock to pull back to support ((HMIN) did this).

Better yet, I'm looking to buy around the 10 wk line if I like a stock. I think (PWRD) is setting up perfectly for this, and I will look to purchase this if it dips under $42 (assuming nothing else changes). This position would allow for a tighter stop around 4 or 5% and let the stock work up the moving average or just stop out if it can't hold that area. This is how I bought (EJ) and it allowed me to ride out a lot of volatility.

I've decided to conduct the following exercise. I will go back to August 21st on my watchlist and pick my favorite five stocks, then look at the charts from that day and see what would've happened if I'd picked them up around the 10 wk line (within a percent or two - I bet most or all of them touched off this line since August 21st) with about a 5% stop loss order. I'll bet about 75% of these trades would've yielded a 20% gain, possibly before the stock even made a new high. Furthermore, I'll be I could still own the stock today and be in good shape - in fact I do still own (EJ) from that type of purchase around that time.

Short version is this - I think in the current market, traditional CAN SLIM thinking has had me buying when I should be selling (around the new highs) and selling when I should be buying (stopping out around the moving averages). I don't think it's ALWAYS going to be like this and I firmly believe in CAN SLIM, but I also believe in reviewing past trades and adapting as necessary.

Stay the Course

I'm not posting to this blog much these days, and that's a pretty good thing.

In late August I drew a line in the sand and started over sticking to my rules. Since then I've gone 0-1-1, and I currently hold two positions. That's not tremendous results on the surface, but looking at it relatively shows some improvement.

Simply comparing my results over the last two months to the rest of the year shows progress. I've held one stock, (EJ) since 8/24, which embarrassingly is probably some kind of a record for me - my positions usually don't last that long! The stock is up close to 20% for me at this time, and is breaking out of a second stage cup with handle pattern today which allows me the opportunity to hold it for 20% more gain.

My other stock, (HMIN), is also beginning to work a bit.

What's really encouraging is that I've held these stocks through an extremely turbulent market. I've done so not through some great insight or market wisdom, but just from following my own rules. So far, these have worked. Buying close to the right time and giving these stocks the full 8% stop loss has kept me in the market through some violent shakeouts. Now, of course this could all turn tomorrow but for now it appears to be working.

Most importantly, I've had next to no stress about the market. I enjoying talking about it on the forums associated with this blog, but I don't have any emotional baggage directing my actions with regard to my positions. I buy them and I leave them alone. Sure, I have some fear that I'll fail again - but not nearly like I have in the past, and I'm quite certain I don't act on this feeling.

So I guess all this can be summed up as 'no news is good news.'

Uptrend Resumes - What does that mean?

IBD has changed the Market Outlook to Uptrend Resumes based on Friday's follow-through action.

It's important to take a moment and evaluate the past couple of weeks and the current market health.

The leading stocks that I follow are, for the most part, extremely extended. Many have more than doubled since their initial breakout, and are even further past their 200 day moving average. Most are trading at prices four times or greater their 52 week lows. The market could use a break to consolidate these gains.

However, I won't carry over this opinion to some speculation about the future action of the market. The current situation is factual - the market still has five distribution days but after last Monday's selloff the indices responded in nothing but strength.

Still, the quick turnaround has not presented many quality buying opportunities. On the contrary I'm left to consider some leaders that have found support at the 50dma - not the ideal setup but one can have some profitable trades here.

I'm going to do something I haven't done before and post here a quick evaluation of my watchlist:

• (STEC) - This stock has found support near the 10wk moving average and could be on the way to forming a three weeks tight pattern. It's hard for me to ignore the selloff a couple weeks ago on the highest weekly volume ever, but equally hard to ignore the way this stock has led the market. Will continue watching.
• (EJ) - In a position to purchase off the 50 dma - could be bought immediately as it's already had two high volume up days off this line. Lot's of overhead but the RS line looks great.
• (FUQI) - Held the $22 buy point in Monday's big selloff and closed in the upper portion of the day's range. Since then volume has been quiet on up days. This stock looks like it has work to do yet, and could probably use a trip to the 50dma.
• (PWRD) - Monday's selloff took it to the 10wma and since then the price has rebounded well, but no volume to confirm the move.
• (BIDU) - Coming straight off the 50dma, but volume is absent.
• (ARST) - Has formed a four weeks tight as volume dries up. This heartbreaker continues to tempt me. Earnings are 9/3 so I will watch but not buy.
• (VIT) - Living on the 50day line - maybe lacking institutional sponsorship?
• (UTA) - See (VIT)...
• (GMCR) - Removed from the watchlist for now.

So that's it. I'll see how the market opens tomorrow and may take a position in EJ while keeping an eye on the rest.

Been Some Time...

I've taken just about a month away from posting here while I've tried to regroup. I started writing this blog to improve my trading results, and at a certain point it was doing the opposite - the idea of writing about my failed trades day after day began to lead to more failed trades. Trade review is very useful to an extent, but in a case like mine where I basically derailed, I don't think there was any purpose to beat myself up several dozen times. Instead I stepped back to look at the bigger picture, see the forest rather than the trees, so to speak.

The first thing I recognized, again, is that I'm extremely successful identifying winning stocks. The following is a list of the stocks I have owned at some time this year (some I've owned more than once):

(SNDA)
(TNDM)
(ARST)
(LFT)
(FUQI)
(TSRA)
(PWRD)
(GMCR)
(STEC)
(VIT)
(UTA)

There is no question this is an outstanding list of stocks, representing most of the top leaders of this rally. I'm not bragging, on the contrary I managed to filter down to a list of the best stocks in the market and still lose money! As bad as this is, there's a positive side. I know my problem is WHEN I'm buying stocks, not WHICH stocks I'm buying. That actually gives me a great deal of hope that I can improve my results.

So this is what I focused my review one. I wanted to know in general where my timing was wrong.

1. I found that my success rate on breakouts from bases was fine. If I'd only bought breakouts from bases I would've made only a few trades and I believe all of them would've been profitable - two of them massively so. Which brings me to my second realization.
2. On base breakouts I need to observe the 20% in three weeks rule. This rule states that if a stock advances 20% in less than three weeks it has the potential to be a big winner, and you should attempt to hold it for eight weeks. If I'd done this, I would've doubled my money on (SNDA) and (FUQI). Which brings me to point three.
3. Stick with the 7-8% stop loss rule in most situations. Early in the rally the market gave a very negative sign by logging a distribution day. I moved my stop loss orders up and stopped out of (SNDA) and (TNDM), both of which went on to be winners. In my fear of suffering a loss, I cost myself the kind of gains that make a year for a trader. By not allowing these purchases to work I forced myself to allocate the money elsewhere, often in less successful trades. Which brings me to point four.
4. Money is made in the market by sitting and waiting. I will not be successful from making a lot of small winning trades, but from finding big winners and letting them work until they show signs they are not working anymore. This is closely related to point 2, different side of the same coin you could say. The point is that by leaving my capital in a winner, I don't have to risk it in another stock which is an unknown quantity.
5. Buys when a stock bounces from the 50 dma are TOUGH. Buying even the best stocks at a new high after they've found support at the 50 dma has just not worked for me in this rally. They've tended to advance around 10% and then retreat. I suspect this is because the support lines are so far below the stocks, which have made rapid advances, that they are 'tired' by the time they make a new high. Whatever the reason, based on my experience I've changed my approach in two ways I'll outline below.
6. Once a stock has advanced 10% from the proper buy point, I'll move my stop order to the proper buy point. If a stock advances 10% I don't want it to turn into a loss. Obviously I must buy as close to the proper buy point as possible for full effect here.
7. I will buy a stock that has found support at the 50 dma if and when it closes above the 21 dma on 150% average volume or greater. I will buy at the end of the day if the close above the 21 dma is certain, or I'll buy the stock the next morning. I will only look for a 20% gain on bounce buys.
8. I will buy a stock that has a breakaway gap up opening to a new high on earnings news with massive volume no matter if there is a pattern or buy point. This setup is highly effective from what I've seen, and is therefore worth buying into. The stop will be 8% or 50 cents below the low of the breakaway gap day - whichever is higher.

To the best I was able to determine reviewing my activity this year, the simple changes above would've produced four 50 dma bounces stopped out at break even, one 50 dma bounce for an 8% loss, two 50 dma bounces for a 20% gain, and two base buys for 90% and 120% gains respectively. Obviously the last two are the trades that would easily have made my year, but what else is important to note is that I would've only had one trade for an 8% loss.

I don't want to overstate the results of a review because it's impossible to revise history. I can apply all these rules to past trades but in the moment it's never that easy. Nonetheless, I must continue to work toward a more mechanical and repeatable method, and I think this is another step toward that end.

I've already applied this to my current portfolio. At this time I own:

(GMCR), (UTA), (PWRD), and (ARST). The first three were bought from bases. (UTA) has qualified as a potential big winner and I have the stop in at $12.70 and otherwise will try to hold the stock until 9/22. (GMCR) and (PWRD) must advance further on Monday to qualify as potential big winners - (PWRD) may do this as it releases earnings on Monday. Otherwise I will target both for a 20% profit. (ARST) was a purchase off the 50 dma and I already have my order in for my 20% profit target. I did own (VIT) which had advanced 10% and then stopped out, no loss as per my new system - nice not to have a 10% gain turn into a 5% loss!!!

Well, that's it for tonight. we'll see what the market has in store for us tomorrow.

Trade Review:(FUQI)

(FUQI) might be the most difficult trade review I have to do, and it was a winner.

What makes it difficult is that strictly following CAN SLIM the stock didn't have a base and should not have been purchased - however, it's been one of the top performing stocks of this rally.

When I bought (FUQI) at the end of may, the chart really did look pretty ugly. The stock had formed a long cup that was far too deep, and it had formed this pattern under $10 making it effectively 'not count.'

What I saw, however, was massive volume on the right side of the chart as the stock climbed out of this deep base. Along with this the RS line was rocketing. I simply couldn't overlook these factors and bought the stock as it cleared a prior high point at $11.75.

I've seen some ugly charts turn in the best performances of this rally - (FUQI), (STEC), and (PWRD) are good examples - and I'd be willing to buy an ugly chart again IF it has the obvious signs of MASSIVE accumulation that these stocks demonstrated.

Of note also on (FUQI) is that I sold early. The stock was behaving very well and showing great strength, and I cashed in for a 20% gain. This stock had acted well enough that I should've allowed it more time to work, at least to let it test the 10 or 21 dma before selling.

Trade Review:(LFT)

Looking at the chart of (LFT) today I can't find any reason why I shouldn't have bought it when I did. The stock found support at the 50 dma on 4/28 and bounced off of it immediately, closing at the upper end of the day's trading range on above average volume - pretty bullish behavior. The time leading up to the pullback showed (LFT) as a true leader under heavy accumulation. The relative strength line was leading. This was it's first pullback to the 50 dma which gave it good odds of succeeding, nonetheless the breakout failed.

Unless, of course, one bought the stock right at the 50 day line.

This is why I continue to examine this as a new strategy. LFT could've been purchased on 4/28 as low as $20.30 - the buy point above the prior high was around $26 - the stock had already advanced 30% before I purchased it! It went on to $28.74 before heading right back to the 50 dma and stopping me out for a loss.

The more I look at leading stocks the more it seems that I could do better trading the moving averages at the line rather than at the new high. Some stocks will certainly fail to hold and stop out, but the others should be good for a 30 to 40% gain rather than the standard 20%. In general 50 day bounces seem to be good for around 10% above the prior high before they run into trouble.

So to summarize this purchase I like the stock pick but think that I can improve my timing. I think I can trade more aggressively around the moving averages and get better results, though there will be a learning curve involved.

A reader made an interesting comment in my last post so I'd like to clarify - I don't intend to stop buying first and second stage breakouts of good stocks. I'm only looking to adjust the method I use to buy on the moving average support purchases.

Continuing Review:(ARST) and (TNDM)

The next stock on my list for review this year was my first purchase of (ARST) on 4/15, followed by addon buys on 4/20.

One interesting note about this trade is that I did not buy the stock on the actual day it cleared a new high on a bounce off the 10 wma - I purchased it several days later after it consolidated gains from the big move. In fact, the stock traded down to $14 for about a week until the 10 dma caught up to it and it made it's next move to $16. Within another two weeks, I had my 20% gain and took profits. In this case that was exactly the right move, as (ARST) pulled all the way back to the mid-thirteens over the following couple of weeks.

So, what can I learn from a winning trade?

Well, for one thing on a closer look the stock never really touched the 10 wma line, I really bought it coming off the 21 dma. Because I bought at a new high instead of near this moving average, I'll look back on this purchase as lucky. In the future I would rather locate my purchases right around the moving average line with a tight stop. I would, in fact, not mind taking several runs at a stock with these tight stops around a moving average line. Three to four sell stops at 2% still keeps me within my 8% maximum loss threshold - it's not ideal but it shouldn't happen often.

Additionally, buying around the moving average should provide a better return if the stock can go on to new highs. I've seen good evidence that leading stocks can be purchased at the 21 dma and held until the stock dips back below this line. This method of gauging support would've allowed for healthy gains in most of this rally's leaders. In fact, as I've said before, I'm starting to view the moving averages as a better target for purchases than the pivot points outlined in the CAN SLIM system - they certainly seem to offer better support. The same is true for a 52 week high or all time high - I love to see a stock break above all prior resistance - this does not always occur with a cup with handle and other patterns.

So while I might've gotten a better price for (ARST), nonetheless it was a sound buy of a strong stock and I took profits at the correct time. This was a successful trade.

My purchase of (TNDM) on 4/17, on the other hand, ended up a 6% loss three days later.

This was a purchase from a bounce off the 50 dma. The stock never quite got to the 50 dma so I most likely could've purchased it crossing the 21 dma at about $23.25. If I'd purchased the stock this way and had my sell stop at 2% below the 21 dma, I would've stopped out with a slight profit. Obviously, if I can change my system so that my losers are profitable that is ideal.

Otherwise, (TNDM) is what I'd classify as a good loser. I bought it at the right time from a true buy point and it was a strong leader. I don't regret the buy as it was within my system.

As I'm thinking through this new method I'm remembering my intense need to be right. I think I need to cut myself off from the possibility of swinging at a stock several times around a moving average (even though I just said above that this could be acceptable). I'm too likely to flail about at some stock I am positive is the next (DELL).

Instead, I'm going to add another rule. If I stop out on a stock, I must take off five days before I can purchase that stock again. I should be able to remove this rule when I have more experience, but for now I think it's a good safety valve.

I also think that I should avoid buying off of a moving average once a stock has closed below it. At that point I'd like to watch for a base to form or for the stock to make a new high before I'll believe it's ready to move again.

I think that's all for now, I need to translate these thoughts into a list of buy rules that I can reference at any time - as I've shown I need to work off of a checklist to keep myself honest with my trading.

Sell Stop:Everything

I've stopped out of everything, I'm 100% cash and I'm back in the penalty box for three weeks.

Might as well quote a friend here:

"you are talking the talk but not walking the walk..."

In short, I made two huge mistakes:

• Ignored my penalty box rule - thought that I knew better than the system and didn't want to miss a move - this rule would've saved me my last 4 failed trades
• Put far too much capital at risk. I've added a spreadsheet to make sure this number never exceeds 3%

Now the question is, will I keep developing a sound system and keep failing to follow it.

Sell Stop:(GMCR), Continued Review - Focus on Impulse and Risk Management

Happy Independence Day to any proud American citizens out there!

Thursday my addon buy for (GMCR) stopped out for a loss. Rather than address this trade specifically, I'll include it from a philosophical standpoint in my continued review of this year's trading. I believe I've been able to filter down to some key points that will further force me to manage my risk better.

First of all, I believe I need to better manage my impulses. This is more difficult and not as obvious as it sounds when it comes to trading. Part of good trading is recognizing when a good stock is making the right move and being willing to buy it at that moment - likewise on the sell side. However, this is a very fine line to walk. I can easily be whipsawed by fluctuations if I misinterpret them as signs of a trend.

Secondly, when I'm buying off a support level like a moving average, I would rather buy close to the moving average with a tight stop than to wait for the high volume move up off the line. Maybe I'll change my mind about this after more time, but from what I've seen this will put the odds more in my favor.

Most importantly of all, I need to manage my risk better. I put too much capital at risk in the market at any given time. When I take several new positions within days of each other, none of them has time to move in the right direction and give me a profit cushion, allowing me to raise my stop loss order. This means I have 5% at risk in several positions, effectively putting 5% of my total portfolio at risk at one time. With margin, this number can get even larger. From this point on, I will have no more than 3% of my capital at risk at any given time. I may eventually lower this number. I will not be able to take new positions until the positions I hold are working - this alone should help me tremendously.

As far as the trade review goes, the next one on the list for me to discuss is just downright embarrassing. This was my attempt to short the S&P 500. Three times.

Once I saw the distribution day early in the new March rally and realized this meant there was a good chance the rally would fail, I stupidly attempted to short the S&P 500. There's not much worth discussing here, I've been investing for only two years and I have absolutely no business shorting the market. This group of trades comprises half of the money I'm negative on the year.

With my next post I'll begin to investigate some trades I might be able to learn more from than this simple and obvious mistake.

New Buy:(STEC), Addon Buy:(GMCR), Mid-Year Review

It looks a bit like I'm trying to trade my way out of a slump. I'm caught a bit between a rock and a hard place. On the one hand, I've over traded, made poor decisions, and lost some money. These factors indicate I should slow down. On the other hand, the rally is working, and leading stocks are acting well and breaking out. This is an excellent opportunity to pick up some stocks that I've been watching for an entry point for weeks. Never bashful, the latter is the approach I adopted. I'm not going to let past failures keep me from buying good stocks at the right time.

My first position in (GMCR) came close to stopping out on Russell Rebalancing day last Friday, but quickly recovered this week. I still haven't seen the volume come in they way I'd like, but the stock seems to be acting well around key support levels. I've been watching it bump up against $60 for about a week, so when it passed through that level I added to my holding. I would like to see the stock make a new high next week when the traders return from vacation.

Additionally, I've been patiently watching (STEC) to see if it would form a high tight flag pattern. It got impatient and broke out today after correcting only a week, and I bought it just above the previous high at $25.33. This stock has as good a technical and fundamental pedigree as anything I've seen. Now it just remains to be seen if that translates into 'monster stock' status.

That's my trading activity today, but I've been giving a great deal of thought to my trading activity this year. I started out quite well, and at this point I'm doing as poorly as the last two years. That is a wakeup call and an indication it's time for me to seriously evaluate what's worked and what hasn't. For the first time I feel I've progressed enough to gain some real value from reviewing the charts of my purchases. In the past that was nearly pointless, because most of the time I was buying crap. This year I've traded fantastic stocks, but more often than not I've timed my buys poorly. It's my goal to further quantify my purchase process in a way that is flexible but successful and repeatable.

At this point, my record on purchases is 2-11-2. With my goal being to hit .500 on my stock picks, I'm a long, long way off. That's fine though - the important thing is to get it right from here, I can't undo history.

Tonight I'll look at my first two purchases, (SNDA) and (TNDM), which I purchased on 3/12 and 3/13 respectively just as the market followed through on this rally.

(SNDA) had broken out from a double bottom pattern prior to the start of the rally on week volume. It reversed the following week all the way back to the 40 wma, where it found support. It rode this line and then the 10 wma right up until the follow through day where it broke out in above average volume, and this is where I bought it. The chart does not show the obvious accumulation that I tend to look for now (think the bars in the ATT wireless adds), but adding up the weeks in the chart the ratio was more toward accumulation than distribution.

(TNDM), on the other hand, did sport obvious accumulation in the chart. The volume soared in the weekly chart as the stock climbed the right side of a well shaped cup base. Like (SNDA), (TNDM) broke out ahead of the follow through day, then consolidated further, and exploded to new highs from the 10 wma on the follow through day.

Both stocks were in strong industry groups at the time of their breakouts, and both proceeded to notch gains of 20% or more before correcting. So why did I sell them for no gain?

Just two days after the follow through day, the market logged a distribution day across all the indices. Historically, this has spelled doom for a new rally 90% of the time. Still gun shy from my prior failures, I played it safe, moved my stop loss orders up, and stopped out of both positions in a couple of days.

Lessons Learned:

• Watching the market is important, but listen to the stock too. Both of these stocks were acting well and probably deserved some room to work.
• Trust the 5% stop loss. If I'm buying the right stocks at the right time in the right market, the 5% stop loss should protect me. I have to be careful moving stops, although I will do so to put it near key support levels when the situation calls for it.
• Don't be afraid to lose money. I should feel fear before buying a stock, not after. I should imagine how I will feel if the position doesn't work out, and if I will regret the purchase. Once I determine it is a sound buy, I should leave the stock alone and let it work (within reason).

All in all these positions were listed as a 'Push' - neither a win or a loss. They went on to be winners, but there was a strong argument for selling at the time that I did. I bought good stocks at the right time and sold for a sound reason, so I consider these fair trades that I do not regret.

I'll get into some trades that I do regret in my next post...

Sell Stop:(LFT), (ARST) Earnings, Analysis

(LFT) flashed a warning sign on Thursday when it came within a penny of the 52 week high intraday only to reverse and close down on the day. On Friday I stopped out of the stock for the second time.

It does not bother me to lose money on the same stock more than once. If a stock looks strong and stages strong breakouts, I'm willing to purchase it on a new breakout, even if I lost money on the last breakout. Why? The stock has no memory of me. I should have no memory of it. Some stocks may fail to breakout two or three times and then go on to huge gains, I saw one do this my first year investing, I'm afraid I can't remember the stock at this time.

Bottom line is I evaluate the fundamentals and technicals and if everything looks like it's in order, I purchase the stock. This was the case with (LFT), and looking back on it I don't regret the purchase. There may be an issue with the stock or it may be the market getting a little 'toppy,' either way I bought within my system and not all buys will go on to be winners.

(ARST) earnings came out after the close Thursday and they beat estimates by 38%, yet the stock dove 13% in after hours trading. That's a nerve wracking thing to watch, since it would've turned my 11% gain in the position into a 5% loss. Nonetheless, the approach I took was to leave my stop in place - I don't trust extended hours trading, institutions don't trade after hours and therefore it is often not a true representation of the supply and demand for a stock.

This said, it still was a difficult position to be in Friday morning, and I wasn't sure quite what to do - I never am in these cases, a problem which I will correct in my analysis below. For one thing, I don't like to leave stop orders in place at the market open when I know there is going to be this kind of volatility - the first 15 minutes can shake me out of a position only to see the stock move higher once it settles down. Obviously, the problem with this approach is that I have no protection from catastrophic losses.

The second issue I had was with my add on buy. As I've said, I want to have a 10% profit cushion heading into earnings day, for exactly this kind situation. With the size of my account, I've been setting my stops based on my cost basis - I'm a small enough trader that I don't want to have multiple commission charges where I can help. What this meant in this case was that my secondary buy was exposed to a greater percentage loss than I would normally accept.

In the end, I decided to take the stop loss off for the first 15 minutes and look to get out of my second position for a 5% loss if possible. The stock opened down 11% and came up to a point where I was able to stop out on the second position. The problem was, the stock continued straight up from there and turned the loss at the open to a couple percent gain at the close. Needless to say, I felt a bit dumb for selling that second position, but I had no way to know the stock would continue to rise.

With the partial sell of (ARST) and the stop out of (LFT) I was feeling pretty dejected on Friday. I'm back in the red this year despite my recent winners, and that left me wondering if I can ever really get this right. Whenever I feel that way I choose to take a hard look at what is standing in the way of my ultimate success, and correct it when possible.

Evaluating this year's activity, several things became clear to me:

• If I had followed my own rules, I'd be 3-3-2 for my record investing this year, meeting my goal of a 50% success rate and have more capital. It's the dumb stuff like shorting and buying (SNDA) nowhere near a buy point that is killing me
• If I have a potential big winner, I should at least let it test the 10 dma before bailing. I might've gotten an extra buck a share or more out of (FUQI) - I could still be holding it today
• With the small size of my portfolio, it makes more sense to set my stops once for the whole position off of the cost basis and then NOT MESS with it. As I said, it seems like I burn myself every time I try to meddle with my stops.

So once again it's good news bad news. I have a lot of stocks that I was close to profits on and bungled, and half the time I lost money it was simply because I didn't follow my own rules.

Unfortunately, it may be some time before I'm able to demonstrate I'm learning my lessons. It looks to me like this rally is topping and it may be some time before we rally again.

Sell Stop:(SNDA), (FUQI) Sold too soon

Thankfully, (SNDA) stopped out for a 5% loss today. I'm glad I lost money on this trade, because as I said I never should've made it. Not going to say anymore about it, because there's nothing more to say.

After further review, it's obvious I sold (FUQI) too soon. Hindsight is 20/20 but one thing that really bothers me is that the stock hadn't come near it's 10 dma or 21 dma at the time I sold it. I've had my botched handling of (SOL) in my mind for a year and that clouded my judgement on this trade. The problem is that I didn't recognize some key differences:

• (SOL) was a laggard in it's group, (FUQI) is a leader
• (SOL) had several violent shakeouts, (FUQI) had never traded down more than 5% intraday from the prior day's close in the time I owned it
• (SOL) failed to find support at the 10 dma and 21 dma, (FUQI) never touched the 10 dma in the week that I owned it
• (SOL) was purchased at the end of a bull market, (FUQI) may be at the beginning of a new bull market

I still have much progress to make on recognizing the environment as well as the health of the stock I own. I'm not ready to strictly follow the 'hold for 8 weeks rule' for potential big winners, but in the future I'll at least let them test the 21 dma and see how they act. If I'd done that with (FUQI) I'd be up another 20% on top of the 20% profits I took.

With that being said, I'm going to stop regretting this trade. This is a process of continuous improvement and if my mistakes are 20% profits I'm satisfied.

Year Two Review

Somehow I missed my two year anniversary of my re-dedication to trading. May 27th marked the end of my second year. In short, I'm very pleased with the progress made in my second year when compared with my first.

I should clarify my definition of progress. I'm not as concerned about percentages and dollars as I am with improving the way I trade and the system I trade with. As it turns out, when I improve the latter the former follows right along in place - as expected.

From a quantifiable standpoint I did meet my goal of beating the S&P 500 after taxes and cost of investing materials. Not by a lot, but I beat it. I will now update this goal and work to beat the return I get on my IRA mutual fund portfolio. This portfolio represents the best return I can get with a passive account, and therefore if I outperform that I am money ahead. I don't have a timetable on reaching this goal, and do not expect to do so by the end of year three. However, I should be well on my way and improving my system and results continuously.

I was thinking over the past week about some of the things I have learned during the past year or two:

• It's a marathon, not a sprint - most of my mistakes have been a result of attempts to get rich quickly
• It's easier not to lose capital than it is to make it back - my first year I created a deficit for myself, and it may take another year or two just to break even
• All the hours of study and research really do pay off over time - I didn't see immediate results from the time I put in, but eventually all the information I've accumulated has begun to converge
• Keep an open mind and be willing to listen - anyone can teach me something useful if I'm willing to listen
• It's the system that matters, not the stock picking - this is not an ego trip - If I succeed it will be from discipline, not because I'm a great stock picker

Where I've improved:

• Documentation - I'm getting better about maintaining my watchlist - this is very necessary for constant improvement, I should be able to determine which patterns have been most successful for me (and least) along with other details on stocks I've purchased or passed on
• Chart Reading - I don't follow strict CAN SLIM guidelines for chart reading, and that's fine - I've used what I've learned from CAN SLIM and other readings to consistently identify chart patterns that have worked for me so far this year
• System Building - I've begun carefully documenting my buy, sell, and position sizing rules
• Discipline - I've made an effort to stick to my rules

Where I need continued improvement:

• All of the above - I don't think I'll ever feel that I'm so expert on any aspect of investing that I cannot improve
• More that I don't know yet - A lot of the lessons I've learned have been in hindsight - who knows what else I'll realize I could be doing better

While this is by no means an exhaustive study of my past year trading, I enjoy marking the time passed and thinking about about where I've been and where I am now. Without question this blog has been instrumental in my progress, and I look forward to maintaining it for years to come.

Sell:(ARST)

I've been waiting a long time for the post I get to make tonight.

A long, long time.

Today, I sold (ARST) for a 20% gain.

The CAN SLIM system works on the premise that with the high quality of leading stocks you're purchasing, even if you are only right 40-50% of the time on your picks you will still be well off booking a 20% gain for every one or two 5% losses. Studies show that most stocks consolidate after an advance of 20-25% beyond a proper buy point, which is the reason for the 20% profit target.

The problem is that due to a variety of factors I haven't worked the system well at all. For one thing, I started investing at the tail end of a bull market. The odds were already against me. For another thing, I'm new to investing - again this stacks the odds against me.

I've made more than my fair share of mistakes, but tried always to learn from them. I've seen signs of progress along the way, and I know that I'm more effective today than I was when I began almost three years ago. Still, it was disheartening to look back and see that October of 2007 is the last time I sold a 20% winner. Between then and now I've lost a lot of my capital on losers. Some were legitimate trades - it's been a tough market and there's nothing wrong with nibbling at new rallys. However, many were just boneheaded plays like my recent attempt to short the S&P 500 - all that served to do was nullify today's profits!

Slowly but surely I'm getting it though. I needed to fail in order to succeed. I needed to feel the sting of losses to learn how valuable my capital is, and how skeptical I should be of any new purchase. Which is not to say that because of today's success I now see myself as having 'arrived.' I just recognize some progress.

Ok, so back to the reason for my reflection. I sold (ARST) at $16.74 today - 20% above the pivot point of $13.85 from several weeks ago. I believe this stock will go higher, and in fact it took off so quickly this morning I almost missed the opportunity to sell - I'll need to consider sell limit orders in the future, which is what I ended up using today. The important point is that I didn't rely on what I believe or think about this stock - I took the gain. I realize how difficult a 20% gain can be to come by, and I'm no longer looking for a 'home run.' I'm more than satisfied to make a 20% profit and consider that a successful trade, no matter what the stock does from now on. Of course I'll keep my eye on it for another buying opportunity. It will base sooner or later.

My previous sell rule was a 5% trailing stop when a position gets up 20% and I've scrapped that - if I'm going to sell I'll sell, there's no need to goof around and risk giving back some profits.

Setting Your Own Objectives - Part 3:Trading Ideas

I'm still working my way through 'Trade Your Way to Financial Freedom,' fortunately I'm getting to a more interesting part that deals with trading and not as much with if I cry at weddings...

What kind of markets do you want to trade? Is it appropriate to specialize? Do you want to trade only liquid markets, or are there some illiquid markets you'd like to trade?

• I want to trade common stocks listed on the NASDAQ or NYSE with a price greater than $10 and average shares traded daily greater than 300,000. I'm not interested in anything else.
• It's appropriate for me to specialize in this area because of my limited experience, the availability of resources, and there is just no need for me to try to get 'fancy.' There is plenty of opportunity for me in common stocks.

Do you want any conditions to set up before you enter the market? If so, what are those conditions?

• I will only buy stocks when the market is in a confirmed rally by the CAN SLIM system definition.
• I will not ALWAYS buy stocks when this is the case, I also look for strong, clear market leadership to emerge. I identify this by watching the number and quality of leading stocks breaking out, which is necessarily subjective.

What beliefs do you have about entering the markets? How important do you believe entry to be?

• I believe I will only succeed when I invest with the current market trend.
• I believe entry is critical, particularly in respect to the health of the overall market at the time of entry, the purchase of a stock as close to the proper buy point as possible, and correct position sizing to maintain the proper risk exposure.

Given your goals in terms of returns and draw downs, what kind of initial risk stop do you want? If it's close, will you be able to get right back into the market so that you will not miss a move?

• I think the second question is flawed, and a bit strange. Fear of missing a move is not a strong quality for a trader to have, in my opinion. I fear loss of capital.
• My experience with stops is that when I allow myself a range (this percent to that percent is acceptable) I almost always harm myself moving the stop around from the initial point I choose. CAN SLIM dictates you never lose more than 8% on a trade, and I've never violated this rule. However, I'm leaning toward a set 5% stop on every trade. If a stock drops much more than 5% below the buy point, I'm not sure I'm interested.
• Stops get more complicated as I average up into a position. This raises my cost basis, and I have to then reconsider the stop loss. If I make my initial purchase at the pivot point and my next purchase 3% above, my cost basis is now above the pivot point. If I set my 5% stop loss off of my cost basis, then I'm not giving the stock as much room to work - I can get shaken out by a healthy pullback. On the other hand, I don't want to risk additional capital on a trade from averaging up, that is contrary to the purpose.
• Considering all these factors, my decision is that I will never let my stop loss order exceed 5% of my cost basis in a stock. 5% is a loss that I can live with. If I see a number of successful stocks shake me out and move on to big gains, I will reconsider this decision.

How do you plan to take profits? Reversal stops? Trailing stops? Technical stops? Price objectives? Contrary to popular opinion, much of your emphasis should be in the area of stops and exits.

• Answer - all of the above! My rules follow below.
• Stop Loss order 5% below purchase price
• If the market tallys five Distribution Days in four weeks, sell stocks up less than 20% immediately, order a 5% trailing stop on those up over 20%
• Trailing 5% stop if the stock is up 20% in more than three weeks from the breakout
• If the stock price rises 20% in less than three weeks move the stop-loss order to break-even and try to hold the stock at least eight weeks. This may be the most subjective sell rule I have, and what I will look for is does the stock find support at the 21 day moving average.
• Sell on Climax Top action as defined in 'The Successful Investor'
• Sell if the stock loses 21 dma and fails to recover it within a day or two
• Penalty Box - No trading allowed for three weeks after three consecutive failed trades

What do you do in terms of position sizing?

• My initial purchase is as close to the buy point as possible, for 33% of my total capital.
• My secondary purchase is 2.5-3% above the buy point, for 16% of my capital.
• With the current amount of capital I have, I will not own more than two stocks at one time.
• As my capital grows, I will adjust my position sizing plan accordingly.

New Buy:(LFT)

Before addressing my latest trade, I want to spend a few moments on the past week, as it was quite a roller-coaster ride.

I made the mistake a couple of weeks ago buying (TNDM) within a week of it's earnings announcement. I was so enamored with the stock that I just wanted to own it, even with the additional risk involved. I'm not a lucky person, so I need to keep the odds on my side. I lost money on that trade.

I bring this up again because the next stock that really caught my attention was (BWLD). This stock had the ingredients I look for most - strong fundamentals, leading relative strength line, obvious signs of accumulation, and a price near an all-time high. The setup was almost perfect.

Almost.

(BWLD) broke out before earnings day. It did so explosively, advancing 10% past the buy point. It was difficult to sit on the sidelines when I had been targeting this stock, but every rule I have has a good reason behind it and is designed to help me succeed in the long run. As it turned out, (BWLD) disappointed the market with it's earnings report, and promptly gave back the earlier gains. The important thing is that I stuck to my plan.

My next prospective buy was (GMCR), which showed up on my new favorite screen Wednesday night. I want to digress for a moment and talk about this screen.

A few weeks ago my coworker and fellow CAN SLIMer (you can visit his blog here) brought up to me that he had been working with a new screen based on stocks with high relative strength. We had been noticing so many so-called 'leading stocks' lag the broad market that this was idea was brilliant in it's simplicity. This screen got right down to the real leaders, based on their price action (what else matters).

Within another day or two I saw on http://www.investors.com an old statistic that something like 85 to 90% of the greatest performing stocks of all time had an EPS rank of 90 or better and a Relative Strength rank of 95 or better at the time they began their run. At this point I got the message.

I threw together my own very simple screen, adding some basic criteria:

Earnings Per Share (EPS) Rating
From 90 to 99
Relative Price Strength (RS)
Rating
From 95 to 99
% Change in Latest Quarter's EPS vs. Same Quarter
Prior Year
Greater than or equal to: 25
% Change Latest Quarter's Sales
vs. Same Quarter Prior Year
Greater than or equal to: 25
Company's
Industry Group Rank
From 1 to 80
Current Price
Greater than or equal
to: 10.000
Current 50-Day Average Volume(1000)
Greater than or equal to:
300

Out of the thousands of publicly trade companies, this screen has not returned more than six in the few weeks I've been using it. The companies that do make it through this screen are performing very well, almost without exception. Some day I will try to base my mechanical trading system on this screen - but that is a post for another day.

So, I'm very positive on this screen and Wednesday (GMCR) made the cut after being adjusted for the earnings released that day. This setup was just as close to perfect as anything I'd ever seen. The stock was already rallying, earnings and sales were accelerating, the product is booming, the company beat estimates, raised guidance and announced a distribution deal with Walmart. If there ever was a no-brainer, this was it.

The stock had recently cleared a three weeks tight buy point and pulled back during normal trading on Wednesday. After hours it was up 20%, and there was no doubt it would gap up at the open. The buy rule on a break-away gap up open is that you can buy up to 10% beyond the pivot point (normally you don't buy more than 5% beyond this point). I set a buy limit order at $61.

The stock opened at $63 and never looked back. It traded as high as $79 on the day, a gain of 50% from the prior day's close. It was gut-wrenching. I felt as bad missing that buy as any time I can remember investing. I've had my fair share of struggles, I've made so many mistakes, and I've lost money - my family's money - that I intended to make returns on. I badly wanted a success, something positive to build on.

The only way I'm able to come to terms with it is to imagine a big league batter facing the best closer in the game - one he's had no success against. He takes the first pitch - a strike - and now the count is 0-1, he's behind. He flails at the second pitch - now 0-2 - he's further behind and in danger of pressing. Instead though, he calls time and steps out of the batter's box. He gathers himself and remembers his training. He calls upon the hours he's devoted to practicing his art. He shuts out the noise and steps back to the plate. He sees the pitch, and it's like the pitch he waited for his whole life. He connects and the sound and the feel are perfect - it is a home run, there is no question. As he rounds first base, he looks up to see the strong winds carry the ball just outside the foul pole. The home run never was - he heads back to the plate.

How does he respond?

There are going to be many ups and downs in my trading career. The best thing I can do is try to level these out. Bad is never as bad as it feels, and good isn't either. It's a business, and I won't be successful with every outing - that's why I'm building a business plan to make sure I'm successful more often than not.

Which brings me to today's purchase. Last night I scanned my High RS screen again and of the five stocks on the list one was within buy range - (LFT). The stock found support at the 50 dma Wednesday. I thought that I could catch it back near the 21 dma around $23, but it opened above $24 and never looked back. The pivot point was $26.09 and my buy stop was filled at $26.15. The stock made a run to $27 and pulled back to close above the pivot point, up 10% on the day on twice it's normal volume.

(LFT) is a Chinese ADR and could be volatile, but has a lot going for it. It's an IPO public less than two years. The fundamentals are strong, it's already had a 40% advance from an ugly cup pattern, and it shows plenty of signs of accumulation. The overall market is due for a pullback, which gave me pause, but until I can see the future I'll buy good stocks at proper buy points and take my chances with the overall market direction.

(ARST) had a low volume pullback this week. It was a very orderly move, but I'm a bit nervous as it's getting closer to my stop loss order. If it finds support at the 21 dma my position should be secure, but if it pulls back the the 50 dma again I will get stopped out for a loss of 1%.

This weekend I hope to find time to do some more work on my trading plan. The more homework I do the more confident I feel.

Getting Organized

In my last post I recognized that I've become a bit lazy in my approach to trading during the extended bear market. While I think my discipline has improved, my attention to detail has waned. The first action I took to address the issue was the documenting of my buy rules and position sizing plan. Today I'll take the next step and develop a plan for watchlist tracking.

I'll bet this is one of the most commonly ignored tasks by traders, and one that can materially improve results if it's done seriously. My coworker is a successful CAN SLIM investor and the first person to suggest to me some key items worth tracking on a watchlist.

What I think makes the watchlist so crucial is the insight it can offer in post trade analysis. Certainly I can always go back and look at a chart from the time I made a purchase, but with my watchlist I can track the some details like which screen identified the stock, what price I first noticed it, what the group relative strength was, etc. This allows me to later filter down the results of the stocks that make my watchlist and refine my process.

I'll learn if I'm more successful with stocks from a particular screen, or chart pattern, or industry group. I'll see if I avoided buying winning stocks and bought losers - and my notes (if kept properly) will tell me why I made these decisions. I also incorporated a link to the charts.

For anyone who loves free Internet resources like I do, google spreadsheets are great for this purpose. You can access them anywhere, share them with friends, and they have nifty functions built in which allow me to embed a live stock price and a link to the charts which I upload to my picasa account (picasa is a tool from google to manage images).

A quick note on the market - I'm starting to see more weakness than strength in the leading stocks. I don't know if the rally is over, but I'm in a bit of a wait and see mode now. (ARST) is holding up alright, and I see no need to pursue another purchase until a powerful looking stock comes along.

Buy Rules and Position Sizing

I think the extended bear market had some negative effects on my trading in addition to some of the positive effects. I was realizing today that I've gotten a bit sloppy, maybe even lazy, in the way I've been trading. I decided on the way home from work that in addition to the Sell Rules I have posted here I need to post my Buy Rules as a constant reminder the proper way to do things.

One mistake I made recently was the purchase of (TNDM) about ten days before the company is set to release earnings news. There is no 'official' CAN SLIM rule against this, but I've read about it and believe it's good practice to leave a three week buffer between the purchase of any stock and their earnings release. Would this mean I'll miss some winners? Certainly so. The buy stop I cancelled Sunday night was for a stock that went up over 10% today. Rules are not about individual situations - they are made to put the odds in my favor. If, over time I see this rule doing more harm than good I will adjust it or discard it, but for now I'm adding it to my system.

I guess I should mention the theory behind the rule. Buying a stock within three weeks of earnings news doesn't leave much time for the stock price to advance and provide some kind of cushion. Therefore, if the earning news is disliked and the stock tanks, I would be left vulnerable to a huge, even catastrophic loss. Better off to wait and if the stock is a real winner, another buying opportunity will present itself.

Another rule that I followed recently and want to document is 'buy strength, not weakness.' I'm proud that I did this on Monday when (TNDM) stopped out for a loss. Instead of getting attached to it and buying it back (trying to prove I was right about it), I channeled my capital into the stock that was working for me, (ARST). Buying strength doesn't just mean adding to stocks that are working, but also never adding onto a stock that is going against me. I must never make an addon buy at a lower price than my initial purchase - this will almost always end badly.

Next, on to position sizing. This was another lazy mistake I made recently, and a fine example how easily emotions can creep into trading without me even recognizing it. When I came off my three weeks in the penalty box, I purchase (ARST) and then a couple of days later (TNDM). I 'liked' (ARST) and I 'loved' (TNDM), so without giving it any thought, I had purchased a smaller initial position of (ARST) and a larger initial position of (TNDM). This is flawed for several reasons.

For one thing, if I'm not confident in the purchase of a stock, I shouldn't buy it in the first place. I don't think that I should have varying expectations for different purchases. I should either like the stock enough to buy it, or not. It can look like it has the right stuff, or not. There is no in between. Market conditions may dictate smaller pilot buys, but these should be equal for any stock purchased within a range of time.

Given that I believe a stock is worth buying, it makes absolutely no sense why I would purchase more of one than another. That would only be the right course if I knew which stock was going to succeed, which of course I don't and if I didn't, wouldn't buy the other at all! The math only works on a trading system if I treat all positions equally, and that requires a plan for position sizing. I'm going to add that to my blog tonight as well, and I'll detail it here.

Due to the small size of my portfolio, I will own a maximum of two stocks. As it grows (thinking optimistically) I will adjust this as necessary.

The first purchase in a stock will be with 33% of my capital as close to the pivot point as possible. I use buy stop orders with contingent stop loss orders at 5% below the purchase price. If the position is working, I can add on to it from 3-5% above the pivot point with 16% of my capital. Same numbers hold if I add a second stock to my portfolio.

If a stock and the market are working very well, I can consider purchasing at a secondary buy point (pullback to the 50 day moving average) on margin - but this would be evaluated very carefully and with a tight stop.

Setting Your Own Objectives - Part 2:Defining Your Objectives

Continuation of the 'Setting Your Objectives' work from 'Trade Your Way to Financial Freedom.'

What is your advantage or edge in trading? What is the particular concept that you are trading that gives you an advantage?

• My advantage is that I trade a proven methodology - the CAN SLIM method. This system has worked for countless investors, so I know that if I'm willing to put in the effort it can and will work for me. I've studied many of the traders whose ideas and methods built the foundation for the CAN SLIM system. I'm willing and able to adjust the system to mitigate my shortcomings and take advantage of my strengths. I will not blindly follow the method, but instead will practice it earnestly and adapt it to fit me where it's appropriate to do so.
• CAN SLIM could be generalized as trend following, as much as the author of the system would rather it's not. My adaption of the system is particularly so. I've seen poor fundamental stocks rise in price and solid fundamental stocks fall, so although I target 'high quality' stocks, I'm willing to forgive some 'CAN SLIM criteria' when I see a great chart on a stock. I don't mind an ROE of 10%, for example (CAN SLIM specifies 17% as the minimum), if most other fundamentals are solid and there is evidence in a stock chart that the company is under heavy accumulation. I believe the laws of supply and demand govern the direction of a stock price, nothing else.

How much money do you have personally? How much of that money could you afford to lose? How much risk can you afford to take on a given trade?

• I won't disclose publicly my personal financial matters, but my trading account is small enough to be considered insignificant. Of course, I hope to change that by trading successfully.
• I could lose my entire trading capital and it would not affect our day to day finances.
• On any given trade I attempt to limit my exposure to 2% or less of my total capital. As small as my account is now, sometimes my risk on a given trade is slightly greater. If my capital grows to a substantial sum, I would try to reduce my risk to 1% of total capital on any single trade. It should be noted that I limit risk not by the size of my purchase but with predefined sell stop orders.

How much money do you need to make each year? Do you need to live off that money?

• I'm years away from living off the proceeds of my trading, but that is my ultimate goal. If and when I near that point, I will need to revisit this question and my overall trading plan.

What if you don't make enough to live off it? Can you make more than you need to live off of so that your trading capital can grow? Can you stand regular withdrawals from your trading capital to pay your monthly bills?

• Recent market history should make anyone planning to live off the proceeds of investments seriously consider these questions. My plan is the same now as it was two years ago, but was reinforced by the recent stock market crash. I would need to follow one of two paths in order to live off of trading. I would either set aside enough cash to live off of for three years without making a penny and trade the remainder, or I would invest enough in some fixed income product that delivered enough income to live on and trade the remainder. Both are very conservative approaches, will take longer as they require a great deal of capital, but will afford me peace of mind.

Are you being realistic, or are you expecting to trade like the best trader in the world? For example, suppose you have a very good system that is right half the time and gives you profits that are twice as large as your losses. In that system, just by chance, you could still easily have ten losses in a row. Your system is still working as expected, but you could easily have ten losses in a row. Could you tolerate that?

• When I first began trading I had visions that I would be a prodigy. I was certain that it wouldn't take me nearly the time to become a success that it had take other great traders. As with many before me, the market has humbled me and I believe my aspirations are now indeed realistic. My current objective is to beat the market and finish with a profit each year, after fees and commissions.
• Because my system is not fully mechanical, and at it's very nature follows the trend, I would not tolerate ten losses in a row. After three losses in a row, I put myself in the 'penalty box' where I cannot trade for three weeks. If I came from that and had another three losing trades in a row, I would have to take a very serious look at what the problem was - myself, the market, or more likely both. I probably logged ten losses in a row early in my career, and that's the motivation for me to develop a formal system - to avoid future failures like that.

Do you have the time to trade short term?

• No, and I don't have the interest either.

How much social contact do you need?

• I enjoy spending time with friends in my free time, but I don't need to be around people during working hours. I'm a bit of a lone wolf, and appreciate time I have alone at home.

Can you work by yourself day after day? Do you need one or two other people around, or do you need a lot of other people around? How much do those other people influence you?

• As stated above, I can take or leave social contact during business hours. I'd prefer not to have anyone around when I'm trading so that I'm sure the decisions I make are not influenced by them.

In summary, what do you expect to make each year as a percentage of your trading capital?

• I expect my expectations to grow with my experience. At this point, I'd like to make a 50% gain the first year that we get a new bull market (I don't know when this will come).

What risk level are you willing to tolerate in order to achieve that?

• I've covered this above, I try to risk no more than two percent of my capital on any given trade. If the market is going well, I would not be opposed to trading on margin. Therefore just using rough numbers, I think if I ever went 'all in' and the market took a fantastic dive I could potentially lose 10% of my capital at one time - this is the worst case scenario as I see it.

What is the largest peak-to-trough drawdown you are willing to tolerate?

• I'm not sure I fully understand this question. On an individual stock basis, I will not lose more than 7% on any one stock purchase.

How will you know your plan is working, and how will you know when it's not working? What do you expect from your system in various kinds of markets? Trending? Consolidating? Highly volatile?

• When the plan is working I will be right (profitable) on 40-50% of my purchases with an average profit around 20%, and an average loss of about 5% on the incorrect trades. I'll know it's not working if I have three losses in a row, at which time I will take a three week break from trading.
• The system works in an uptrending market, and other market requires me to go to cash.