A word on trading success rates
Can you be successful position trading while working a full-time job? I believe so, but many would argue that if you want to trade you should trade full-time. “They” say that 90% of traders fail, that the game is rigged, that markets are efficient, etc.
I have two points to make about these types of statements. First, always question the validity of a statement that begins with “they”. It’s a weird pet peeve of mine, but I have always wondered who these mythical all-knowing beings are that are simple known as “they”. I digress. My second point is that the statistics often cited, while quite possibly true, I believe are taken out of context a bit. It probably includes amateurs who have just a passing interest in the stock market, put little to no research into it, and only buy stocks whose products they are familiar with. If the statistics were narrowed down to those that take it seriously, then the success rate I believe would drastically improve.
I am not trying to make the claim that the success rate of this group is astronomically high either. It is my belief that much of the fear mongering that takes place is done so to scare people away from trading, and instead they are encouraged to give their money to an “expert”. I imagine these experts are possibly from the mysterious “they” group.
I do plan to take a deep dive into the statistics of trading success in a future blog post. One of my goals of this blog is to assuage some of the fears that are propagated towards new traders. I believe that the powers that be push this to ensure the ultra corrupt system continues on. I want to encourage people to make their own financial decisions versus giving their money to the greedy, corrupt wall street denizens. It is not easy, but it is also not nearly as hard as some would make you believe. The average return of a mutual fund is incredibly anemic, and beating those atrocious returns is not impossible. The vast majority of mutual funds under-perform the market.
Beating the market averages is also do-able for the average person. I am sure I will get some flack from some that I am trying to say trading is easy. It is most certainly not easy. But if you do take a look at the statistics, and again I plan to expand upon the data that is available at some point, you can see some things that we can use to our advantage. One, most of the studies done look at day trading success rates. The small amount of statistics available shows that longer term traders and investors do better on average. Another thing to consider is that the system we have set up pumps money into the system via people’s retirement accounts. Every pay period people dump a bit of their paycheck into the stock market. This creates an upward bias in the market that we can use to our advantage if we target longer time periods. The markets are almost always higher over long time intervals of 5-10-20 years. With this in mind, in theory it should be possible to be profitable as a position, or medium to long-term, trader. It does not mean that more than 50% of people will be. Many will not put in the time necessary to get there. You really do need to be diligent and put some serious effort into this to make it work.
On to the trading system
Opening the system..
All this being said, I would like to give a 30,000 foot view of my position trading method to start out with. I run one scan each day, the Stockbee Episodic Pivot Scan, and various scans on the weekends to look for stocks.
The primary type of stock I am looking for is the type of stock detailed in Jesse Stine’s book, Insider Buy Superstocks. While today’s market does not have many stocks that meet a majority of his criteria, when running the scan I do find some stocks that meet enough of the criteria to get put on the watch list. Superstocks/Episodic Pivots are my primary focus. 90% of what I trade is a stock meeting some or all of the SS/EP critieria.
I also look for stocks that are trending in the style of a Dave Landry stock. Where I differ from Landry, is I try to stick to themes. Most of the Landry stocks have terrible fundamentals and are only moving because of speculation. I try to gauge the strength of that speculation by analyzing the theme. These tend to be short term movers, but they can move extremely fast. Examples include stocks such that are “blockchain” based in 2017, or stocks that are 3D printing based when they were all making their huge runs. Biotechs is 2015-16 were the hot theme, but in general I do not trade biotechs.
I also trade some IPOs though it is rare that I trade them. I look for the hot, heavily talked about IPOs with potential that almost always give a decent pullback within the first few days/weeks. I only will trade the first pullback on IPOs after that risk/reward is not in my favor. I model my IPO trading very closely on how Dave Landry trades them.
I used to look for CANSLIM style stocks as well, but I no longer trade that methodology as I prefer Stine’s criteria. CANSLIM tends to be mega established large cap stocks with a high price and high float that do not move as well.
During the week I write down all the stocks that I am interested in and I further research them on the weekend. On very rare occasions a stock I find during the week will get added to my watch list during the week, but that is exceedingly rare. I generally will pare down my weekly list on the weekend and add the best stocks to one watch list. Some might prefer to have separate watch lists. Keep in mind, and I will go into detail on this, but very few stocks get added to my watch list from these scans. I can go weeks without finding a watch list candidate. At most a daily scan will find 2-3, but those are very rare days.
Most of the daily work is on scanning for watch list stocks. Every weekend, I go through some more scans as well as go through my watch list and look for the best setups that I am interested in trading for the week. I create a new watch list every week of stocks that I will be watching for buy points, and/or placing orders for in my broker. As for setups that I look for, I am a pullback trader. I have modeled my pullback set up on Dave Landry set ups, as well as Stockbee, and Stine set ups.
Once in the trade, I prefer to use a fairly wide stop. I know this is counter to much of trading literature out there, but I will explain it further later. I also prefer to use a somewhat complicated end of day stop(with an allowance for the stock to clear the stop the next day, I will expand on this later), and I also prefer to not actually enter them into my broker. The reason for this is intra day noise can often stop you out of a trade that many times would have been successful. There is a lot of weird noise that happens around mid day and definitely after hours when volume dries up. Since my stops are not hard stops entered into my trading software, I keep track of them on a google docs document and set alerts in Interactive Brokers. If a stock closes below my stop I most likely look to sell it the next day if it does move above the stop within the first hour. There are some exceptions, where I will sell before the end of the day, or sell in after hours, but I will get to that later.
I sometimes will plan a trade to have a set profit target. Some trades I operate with a profit target and just trail my stops or sell when various sell signals trigger. I try to have at least a 1:1 risk:reward ratio on every trade, though typically it is more than 2:1 or higher.
In my next post I will go into detail on the tools that I use for my position trading system, then the next post will go into my scans and other lists I get watch list candidates from. I hope to see you there.
Let me know in the comments below if you trade while working, or are considering it.
Working person’s trading method series:
Part 1: Why you should trade.
Part 2: Resources
Part 3: My Trading History and Introduction.
Part 4: An overview of my process.
Part 5: The characteristics of a stock that makes my watch list.
Part 6: Money Management: Finding Buy Points, Setting Stops and Targets, Position Sizing
Part 7: The Weekday Routine and Scans
Part 8: The Weekend Routine and Scans
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