Monday, 16 April 2012

Commandments for stock traders

John Mangun

WHILE we move further into the second quarter of 2012, it might be appropriate to write about: 1) the Philippine economy, and 2) all the good things that the government is doing to make the country richer.
As for number 1, I have a loyal white Labrador Retriever who gets a very sad expression on his face when I get depressed. As for number 2, the BusinessMirror would prefer that this column be longer than two sentences.

Brian Lund is someone that I have not talked about before but whose opinions I respect. Mr. Lund owns an online brokerage company and runs He and I share a minor common thought; we both think CNBC’s stock analyst Jim Cramer is somewhat of a buffoon. But that is probably because Lund and I are jealous that Cramer makes a ton of money being a stock-market buffoon and that he has 490,000 Twitter followers.

Mr. Lund fought back one time, setting up a Twitter account under the name of Hotporn Traderchick, picking up 200 followers in one day.

With the stock market in a potential short-term downtrend, it is good to visit some important ideas and concepts that investors need to hold close.

If you have been a stock-market investor for less than 10 years and invested a limited amount of funds, you probably have not made enough mistakes.

This advice from Mr. Lund must be taken seriously. “Find a mentor. I can’t emphasize how crucial this is because being able to interact with a seasoned trader on a regular basis will shorten your learning curve like nothing else.”

That is a problem with the PSE. Trading experience before 1998 really does not count. The peso now floats more in line with global market conditions. The amount of foreign money is so much greater than it used to be.

And mentoring does not mean asking, “What’s your hot tip?” What you need to learn from a mentor is the real-time, real-life trading decisions done in the heat of battle, and why the mentor is trading a particular way.

“Develop a methodology. Analyzing your trading success by outcome is a dangerous game. If you go to the casino, put your life saving on ‘red’ and win, it [would] still [be] a bad move. You have to develop a risk-based methodology that over time is successful and then evaluate your trading by how well you follow that methodology.”

A trader must clearly understand and follow a strict Risk/Reward model. Risking P10,000 to profit P5,000 does not work. You should be able to lose even on 60 percent of your trades and still make a lot of money if your Risk/Reward is 1 to 3.

“Remove your emotions. Understand that you will lose on more trades than you will win on; that is just part of the game. If you are the type that always has to be “right” you are going to have a hard time becoming a successful trader. The goal in trading is to make money, not to be a perfect trader.”

Any time I hear a person talk about all the successful stock trades they have made, I know I am talking to a gambler and not an investor. Even professional gamblers like poker players only talk about their net longer-term return, not individual card hands.

However, you should thoroughly examine every losing trade, like it was a bad relationship. What did I do wrong? What would I do different next time given the same circumstances?

Here are some sure ways to lose money.

“Buy every dip and every rally. All stock prices will eventually come back” …except for the ones that don’t. The saddest words I heard recently were from an investor that was so happy that a certain issue has been going up. His position is now breakeven from buying every rally on the way down since 2007.

“Don’t look at charts; that is like reading yesterdays newspaper.” Charts are the only way to know the price trend. You would not hire an employee without doing a background check. You do not trade a stock without knowing its price history.

And the best way to make sure you lose money, large amounts, is to remember and follow this thought “How much lower can it go?” A stock price can go low enough to wipe you out.

On a personal note, my “Your Money: Preservation and Profits” stock trading seminar will be on April 28th in Makati. I guarantee you will find it beneficial, new trader or experienced. Reservations are strictly limited. E-mail me at for details. In this kind of a market, you will be very glad you attended.

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