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How I Became Profitable in the Stock Market
The truth about what it takes to be able to trade for a living
By Frederic Saffore
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© Copyright 2017, Philvestor, Ltd.
All rights reserved. No part of this publication may be reproduced,
distributed, or transmitted in any form or by any means, without the prior
written permission of the publisher, except in the case of brief quotations
embodied in critical reviews and certain other noncommercial users
permitted by copyright law
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About This Book
This book is not about a specific trading strategy. This book will not
explain to you which stocks to buy and when to sell.
This book is a short story. A story about what it takes to become
profitable trading stocks and make a living from it.
Most new traders are desperately looking for the Holy Grail, a strategy
that will make them rich. The truth is that the strategy doesn’t matter
much. There are literally thousands of good strategies out there you can
pick from. What separates the successful traders from the rest is not
their strategy. This book will show you through my story how to go from
being a consistent loser ‐ like 90% of all independent traders ‐ to a
consistently profitable trader.
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Introduction
Hello. I'm Frederic Saffore. I'm just a regular guy who really struggled for
many years as a trader, before finally becoming consistently profitable
and being able to live off my trading profits.
I'm not a professional writer. So please bear with my writing. I'm not here
to write a novel. I'm just here to tell you how I made it as a successful
independent trader, what it took, and what I went through.
Like probably everyone else, I got interested in the stock market because
I saw a way to make a lot of money. I was far from imagining what and
how long it would take me to finally start making money consistently. It
took me no less than 5 years, during which I lost money every single year.
Having scoured the Internet for answers during my struggling years, I
discovered that the vast majority of independent traders were in the
same situation. Several studies actually showed that on average, an
astounding 90% of retail traders lose money year in, year out, and many
end up quitting.
My hope is that my story will not only inspire you by showing that it is
possible, but also that it will allow you to tremendously reduce your
learning curve. Looking back, I've made all the mistakes in the book (and
many more), and I now have first‐hand experience on what works and
what doesn't. I also know exactly what I could have done to have become
profitable in much less time than 6 long years.
So through my personal story, I will explain to you how to beat the odds
and become a profitable trader.
Needless to say that this is not a get‐rich‐quick scheme and each step will
require you to do a lot of homework. But it is worth it.
As a profitable independent trader, I don't have a boss, no employees and
no customers. I can travel to all the countries I've ever dreamed of visiting
since I can work from anywhere, as long as there is a decent Internet
connection. I have more time to spend with my family, to take care of
myself, to exercise, read, invest, give to charity... basically do what I've
always wanted to.
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This newly found freedom had a cost and I paid for it many times over.
Let me tell you how I got where I am today.
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PART I – My Story
How it all started
It all started back in 2004, when I was an undergraduate student.
Searching for a 6‐month internship, a friend told me he had found a great
opportunity in a company operating a travel website... in Thailand.
At that time, I had never been to Asia before. I actually had almost never
been abroad before.
I had always thought that I'd just end up finding a hopefully not too
tiresome job here, get married, have children and enjoy retirement.
I told myself: "Thailand? Temples, elephants, beaches and Thai boxing?
Why not! It's only six months after all. Let's do this, it'll look good on my
CV".
4 years later, I was still in Thailand working for the same company (I did
come back for a couple of months for my internship presentation and
graduation).
And after working only 4 years, more than 90 hours per week, partying
like there was no tomorrow, the company was acquired by a large group
from the UK and I got a small share off the deal, a load of money that
would turn the heads of many people, especially in my age bracket at the
time.
There I was, not even 30 and I had a net worth of a million US dollars.
After a couple of issues with the new management, I got laid off.
Long story short, my money was "invested" in a large private bank and I
figured I didn't really need to work anymore based on the theoretical
dividends I would get.
So I started partying even more. There was no limit, no one to tell me
what I should or shouldn't do. I was on my own, with loads of money.
Until...
I woke up one morning feeling awful. I was dizzy. At first, thought it was
just a bad hangover. But a couple of days passed and still, the dizziness
wasn't going away. I was exhausted all the time. I had to sleep at least 2
hours in the afternoon in order to be able to survive until sundown. I
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couldn't go outside. Even when going to the 7‐eleven next door to buy
food, I would sometimes feel like I could pass out on the street. I spent
most of the following weeks in and out of hospitals, doing all the possible
tests only to be told that nothing was wrong... What was happening to
me? I was only 30 and almost wondering whether I would make it
another year...
The positive point is that I quit smoking right away. Smoking would
immediately make things even worse than they already were.
A few months later, as I had quit smoking, quit drinking alcohol, stopped
going out late at night, I started emerging little by little from that ordeal. I
started to be able to get out of my condo, seeing a few people. The
dizziness would sometimes come back, but the intensity was bearable.
From that point on, I started running again, going to the gym at least 3 or
4 times a week and eating properly.
I never really figured what happened to me, but my take is that my body
just told me that it was time for me to have a much healthier lifestyle,
that going out late, smoking and drinking really had a bad effect on me
and that if I wanted to get on with my life, I would have to stop. And so I
did.
After this bad experience, I knew I had to change my life, find something
to do, a real goal, which wouldn't include destroying my own body.
Beginner's luck
"It's called the principle of favourability. When you play cards the first
time, you are almost sure to win. Beginner's luck. [...] there is a force that
wants you to realise your destiny: it whets your appetite with a taste of
success" ‐ The Alchemist ‐ Paulo Coelho
It was the beginning of 2009 and my net worth had shrunk by half as you
can imagine during that bear market and I was no longer a millionaire.
Despite that, I figured that the stock market could be the way for me to
get back on track. So, through my very expensive broker, I started trading
a little, without knowledge whatsoever, just like the vast majority of retail
investors.
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As my broker was always talking about options, call options, puts and so
on, I decided to buy a book on options. What I discovered blew me away ‐
the leverage, the advanced techniques with fancy names like covered call,
straddle and iron condor... I felt like I had found the Holy Grail. No one
around me knew anything about it, nor understood any words when I
started talking about it.
I immediately jumped on the bandwagon and invested a lot of money in
out‐of‐the‐money long term Citigroup call options. I didn't even know
how to read a chart, but as Citigroup's stock value had fallen an
astonishing 97% in just a couple of months, I told myself this stock could
just not fall any further.
My timing was completely involuntary impeccable. I remember vividly
that on the 2nd of June 2009 as I called my broker from the Venetian
hotel in Macau and told him to sell to close my call options. I not only had
recouped all my losses but I even made some money on top.
Needless to say, that I felt like the greatest investor on earth.
The spiral
I then spent the next couple of months selling naked puts. It worked like a
charm and I was getting rewarded without even having to get any money
out of my pocket, just by collecting premiums.
Always wanting more and more, I stumbled upon a great Chinese biotech
stock (uh oh...), China Biotics ‐ ticker CHBT. What I loved about that stock
was that the option premiums were huge and I figured I could really make
a killing on that stock, selling naked puts. I didn't even try to find out why
the premiums were that high...
I sold right away for $100,000 worth of puts. Then the stock started its
descent.
As my puts were in the money and I wasn’t interested in buying that
stock, I asked the advice of my broker who just told me to close the
position and open a new one at a lower strike price, a bigger one of
course in order to cover my potential loss. So I did. Then the stock
dropped again. I rinsed and repeated the process several times.
I reached the point where I would almost have to spend all the money I
had in order to buy the stock should it keep on dropping. I recall that I
didn't sleep much during that month.
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Finally, at last, there was only 1 day left before the options I sold would
expire worthless as the stock was trading above my strike price. I was
finally going to get off the hook. But I wouldn't have learned my lesson...
The stock got delisted on Friday, just 1 day before expiration.
I called my broker right away I asked him what was happening. He
actually didn't really know either. I was in shock. This guy whom I
regarded as someone who knew everything on the stock market didn't
even know what would happen as my stock got delisted.
Before the end of the trading day, my broker called me back and told me
the “great news”: the holders had exercised their puts in spite of the
stock latest price being higher than the strike price. So I now had no
choice but to buy a huge number of shares of that terrible stock of a
company that was a complete fraud.
The weeks that followed that day were torture. I had no idea whether the
stock would start trading again, and if it did, at what price and when. I
just knew that I was the not so happy owner of many shares of the
crappiest stock on earth.
My Biggest Loss Ever
I checked every single day to see whether the stock had finally been re‐
listed.
A couple of weeks later as I was in transit in Abu Dhabi, I checked again
and finally found out that the stock had been re‐listed on the Pink
Sheets... and that I had lost 75% of my net worth. In spite of that, I didn't
want to risk to lose any more money, so, as painful as it was, I decided to
sell the stock right away at market price and I took a HUGE several
hundreds of thousands of dollars loss... At that time, I swore to myself
that I would never ever put any more money in the stock market (yeah,
right...).
As you can imagine, I spent the rest of the month feeling utterly
miserable. I had no idea what to do next, whether I should apply for a job
and start from the bottom again or do something else. Actually, just the
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thought of having to apply for a regular job sent shivers down my spine. I
just had to find something else.
New Business
A while later, I recalled that my expensive broker once told me he had
this client who was generating very large amounts of money thanks to his
online business, a penny auction website (yet another “great tip” from
my broker...). So I started digging around all the information I could find
about this business and discovered a concept that looked incredible ‐ on
paper.
I saw the potential for triple, quadruple digits profit margins.
With my previously acquired online business knowledge, I then spent
several months writing down the specifications of a new penny auction
site and a business plan. I figured I needed about $100K to launch this
business, or about 40% of all what I had left. Despite that, I decided to go
for it as I was sure the concept had the potential to make me a
millionaire, once again. That and the fact that I really, really didn’t want a
regular job.
The risk in this business was not having enough customers competing on
each item which could result in items being sold at a big loss. The nearest
country where this business model already existed ‐ many potential
customers already knew the concept and some potential competitors
actually seemed to be making money ‐ was Singapore.
So as the company which was developing my website was almost done, I
decided to move to Singapore, leaving my girlfriend behind but
maintaining a long distance relationship.
In Singapore, along with a partner and an employee, things started going
quite well for the first 6 months as our customer base was growing fast.
We even reached break‐even point during the 6th month of operations.
But the main problem with this business, as I realized a bit too late, was
the constant need for new customers. Indeed, in this type of auctions,
only one person wins and the rest lose money. For getting new
customers, I had no choice but to expand as fast as possible to new
countries so we opened new markets such as The Philippines, Thailand
and Australia. But I didn't take in account marketing costs in those
countries in my original business plan and as the number of customers
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started decreasing, I found myself in the tricky situation of needing more
money.
However, not only was it too late to find investors, but I also didn't have
the time to do so. We were only 3 to run the website and I was dealing
with the maintenance, marketing, managing the team, doing the
accounting... I was working more than 90 hours a week again and still, it
wasn’t enough.
After adding more of my own money, working like a dog, missing my
girlfriend and not seeing any silver lining, I finally decided to pull the plug
after one year of operations.
I now had less than $100K left to my name, a 90% loss from my first
million US dollars. Now that I look back, despite the money lost, it still
was a great experience for me, creating and launching from scratch a
start‐up business on my own in Singapore, getting out of my comfort
zone and pushing my limits.
As I went back to Thailand, I decided to marry my girlfriend, the only one
person who never stopped supporting me through some of the most
difficult times in my life so far. I'll forever be indebted to her.
So I was back to square one, not knowing what to do with my life, but
with even less money.
Not giving up
Despite my previous devastating experience with the stock market, after
narrowing down my options, I decided to give it one more shot. After all, I
did make some huge gains in the past and I still had some money left
though not enough to live off. Furthermore, as you may have understood
by now, once again, I really didn't want to find a regular job, I didn't want
to have to work for someone else anymore.
But this time around, instead of repeating the same mistake and going in
like many other retail traders, i.e. without any knowledge whatsoever, I
decided to read a couple of books beforehand.
"The stock market must be studied, not casually either, but deeply,
thoroughly. It's my conclusion that most people pay more care and
attention to the purchase of an appliance for their house, or when buying
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a car, that they do to the purchase of stocks. The stock market, with its
allure of easy money and fast action, induces people into foolishness and
the careless handling of their hard‐earned money, like no other entity. " ‐
Jesse Livermore
I started from the very beginning, with books like "Stock Investing For
Dummies" by Paul Mladjenovic and "The Neatest Little Guide to Stock
Market Investing" by Jason Kelly. I had never liked reading until when I
started reading about the stock market. But now, as I was reading more
and more books, I felt like I was gaining invaluable knowledge and that I
was building myself a great advantage over all the other "investors" and
"traders" who had not read any book about it.
I spent about 3 months reading every book I could find on
investing/trading, taking notes and elaborating my own strategy based on
many different styles such as value investing, growth investing, mutual
funds investing, technical setups, trend following, momentum,
candlesticks, overbought/oversold indicators, Fibonacci, moving averages
strategies, day‐trading,...
Although my knowledge on the subject was greatly expanding, I still
hadn't found a convincing way to grow my money other than investing
long term, which would be difficult as I also needed to live off what I had
left, or very short term like day‐trading which sounded very risky to me as
the odds of winning over the long run were heavily stacked against me. I
was only 32 and I'd resigned myself to the idea that I wouldn't be getting
any retirement pension from the government as I hadn't worked much
until now, that I wouldn’t have a regular job and that I was the only one
who would be responsible for my retirement.
The book that changed my life
One day, I stumbled upon a book that absolutely changed my life: "Insider
Buy Superstocks" written by Jesse Stine. This guy had found a way to
make millions in the stock market in less than 2 years using a
discretionary strategy he developed himself. And as I read his story, I saw
many similarities with my own. Needless to say that I finished the book in
a day and re‐read it again and again. This was an eye‐opening moment,
just like if I had been sleeping all my life and I finally woke up. This book
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challenged many conventional investing and trading wisdoms and many
of my core beliefs... and it now made total sense to me. After all, you
won't get abnormal returns by using standard methodologies. This book
also led me to read many other books with quite similar trading strategies
and rules. That's how I finally discovered Jesse Livermore, Nicolas Darvas,
William O'Neil, Bernard Baruch, Gerald Loeb, Stan Weinstein, Richard
Love, Chris Kacher & Gil Morales, Mark Minervini, David Ryan, Dan
Zanger, … I knew I had found gold. And it was about time!
Developing my own strategy
I went back to the drawing board, and based on my new found
knowledge, I formulated my own strategy which was a mix of several
strategies used by Jesse Stine, Mark Minervini, David Ryan, Dan Zanger,
and William O’Neil. I knew that my strategy would give me an edge since:
‐ it was based on the strategies used by 5 of the most successful stock
traders out there
‐ years of research on the stock market's biggest winners throughout
history had been put in developing those strategies
The continued struggle
Armed with my new strategy, I went back to the market with renewed
hope. I spent the next 2 years working every single day, watching the
markets, trading my strategy, doing some research and developing tools
that allowed me to speed up my process for finding, evaluating
and monitoring stocks that match the criteria of my strategy.
However, I have to say that with all the effort I put in trading, despite
some good trades, I was still losing money overall; slowly, but surely.
Frustrated would have been an understatement about how I felt during
that period.
How could this be? Could it be that my strategy was at fault? Was it
because of the general market?
I was on the verge of giving up once again, when I decided to take a break
again and re‐read books on the best traders out there, the ones who
actually made fortunes trading their own money, the ones I wanted to
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emulate. And this time, I finally figured the commonality, the tipping
point which transformed their trading careers.
They too, struggled for several years. But the thing that really turned their
trading around was when they decided to face the truth and review every
single trade they made in great detail, both the bad ones and the good
ones.
I was fortunate to have developed the good habit of writing down all my
trades in a trading journal (which was a simple excel spreadsheet) where I
wrote the date I entered a trade, the price, the number of shares, the
date I exited and at what price. I also had a column for the reason why I
opened a trade. But I lacked the column for why I closed my trades.
So inspired by Mark Minervini and David Ryan, 2 traders who won the
U.S. investment championship, I decided to face the music and review
every single trade I made in the last 2 years ‐ more than a thousand
trades.
I closed all my positions and spent the next 2 months going through all
my past trades. Something was wrong with my trading, and I finally
decided to find out what it was.
The revelation: the light at the end of the tunnel
"Insanity: doing the same thing over and over again and expecting
different results." ‐ Albert Einstein
The exercise literally blew my mind.
I discovered things I didn't know about myself. Patterns started to
emerge.
Before that, I had no clue whatsoever about why I was still losing money
in the markets. I thought for instance that one of the reasons for my poor
performance was that I didn't cut my losses soon enough.
Well, it wasn't the case.
As much as cutting losses short usually is an issue for a large number of
new traders, surprisingly, it wasn't a problem for me.
However, there were 2 mistakes I was repeating again and again: I often
didn't have the patience to wait for proper entries (as defined by my own
strategy), and I closed my positions too early without waiting for a proper
exit signal.
This discovery was the turning point of my 5 years of struggles.
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I fine‐tuned my strategy, changed a couple of rules and went back once
again through my last thousands of trades. But this time, for each trade, I
wrote what should have been my exact entry and my exact exit if I had
followed my new rules perfectly, regardless of whether I would have lost
more money or made fewer profits on some trades.
And this is when I really got my “epiphany”: by blindly following my rules,
I would have made an astonishing 40% and 75% return in the last 2 years.
So instead of losing money for 2 years in a row, by following the set of
rules I just fined‐tuned, I would have made a mind‐boggling 145%
return...
Paradigm Shift – The New Deal
The implications of that discovery were absolutely life‐changing to me.
The key was not anymore to try to make money. The key was simply to
strictly follow my rules, regardless of the outcome of any single trade. The
focus was not on the money anymore. The focus was on having the
utmost discipline to follow my rules.
The very meaning of “good” and “bad” trade had completely shifted. A
good trade was not a trade where I made money anymore, but a trade
were I followed my plan perfectly. A bad trade was now a trade where I
violated my rules.
The short‐term outcome of whether my last trade was profitable or not ‐
had no more importance anymore. I had complete confidence in my
strategy. I knew that by the end of the year, given the fact that the odds
were in my favor, I would have made money.
In the next 2 years that followed my “epiphany”, I was able to grow my
stake to the point where I’m now finally able to live off my trading profits.
Trading has now become quite easy and even boring. And that is exactly
what successful trading is about. I just follow my rules, focusing on not
deviating from my plan, taking trades and exiting when my strategy tells
me to. Money follows.
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PART II – Takeaways From My Story
I would now like to do a recap on what helped me turn my trading
around, and what hopefully will help you too.
Have realistic expectations about the learning curve
Most people get into trading for the profit potential. Trading is one of the
very few endeavors where you can make money out of sheer luck, along
with gambling. This allure of easy money can distort the reality and give
people a false sense of easiness. The truth is that trading, as any
profession, requires years of learning and experience. You can't expect to
become a doctor within a couple of weeks or months. And you can't
expect to become a successful trader in this time period either. Be
mentally prepared to be challenged and to fail a lot. It will probably take
you a couple of years before reaching the point where you become
consistently profitable, year in, year out.
As the saying goes: "It takes years to become an overnight success"
Have realistic expectations about the money
I learned rather quickly that you can’t expect to extract a normal, regular
monthly salary out of the market. The market will give you what you’re
worth, whenever it wants to. You don’t take from the market, the market
gives you. If you have a solid strategy and more importantly impeccable
discipline, then it is possible to make money year in year out. But forget
the “monthly” income. If you need a regular income, get a regular job.
Never Give Up
What separates the 10% of traders who are consistently profitable from
the rest is that they never give up. Despite failing many times and losing
money again and again, they swallow their pride and take failures as
teachings and stepping stones to success. They learn from each and every
one of their mistakes.
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As the saying goes, "I don't fail. I either win or I learn".
In order to find the grit not to give up, you have to develop a passion for
trading. Without passion, you'll probably quit as soon as it gets tough.
And if I can guarantee you one thing, it is that it will get tough at some
point.
You NEED a complete strategy
1‐ Why
“The boundless freedom the trader is faced with requires the utmost in
self‐discipline which very few people possess” – Jesse Stine
Since we were born, we've always been in structures that are well
defined with a more or less clear set of rules, in your family, at school, in
your company, in society.
With trading you find yourself in a structureless environment where you
have total freedom. And many people are lost because of that.
Trading requires you to create your own structure, your own rules. And
you and only you are accountable for following or not following your own
set of rules.
2‐ How
In order to find a strategy and create your own rules, the very first step is
to get as much knowledge as you can on the stock market and trading.
The amount of information can seem overwhelming at first and you may
have no clue as to where to start.
Well, a journey of a thousand miles starts with a single step. If you don't
take that first step, you'll never get started. That first step can be to grab
a copy of "trading for dummies" or find resources on the Internet for new
traders.
This step will not only require quite a bit of time at the beginning but it
also should become a never ending process. Again, you’ll need to develop
a passion for trading, a thirst for knowledge on anything that is related to
trading.
3‐ What
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My advice is to read as much as you can on as many different styles and
strategies as possible.
Although you will eventually have to focus on only one strategy, the only
way to choose wisely and find out which one fits you best is by having a
lot of options to choose from.
“The highest form of ignorance is when you reject something you don’t
know anything about” – Dr. Wayne Dyer
So learn from all the different styles of trading and investing, from value
investing, to momentum trading, growth investing, day trading setups...
I also highly encourage you to read the Market Wizards series from Jack
Schwager. This series of books contain interviews with the best investors
and traders out there, people who have proven records of many
consecutive years of incredible returns in the markets.
You will be surprised to discover that all those traders and investors have
totally different strategies. You can almost find the full spectrum of
investing and trading styles and strategies. Some focus only on
fundamentals, some on technicals, some on long term holdings and some
on intraday trades. And ALL of them have had incredible returns in the
markets. So there is NO one strategy that is better than another one.
You'll see most traders (especially the unsuccessful ones) wasting
valuable time trying to defend their own strategy, while the truth is that
you can succeed with ANY strategy, as long as it gives you an edge, that
the odds are on your side.
So the right strategy for you is not necessarily the strategy that made me
successful, nor your mentor's strategy, nor your friend's strategy. You will
discover the right strategy for you by learning about several of them with
an open mind. You'll find one that fits your beliefs, your personality, your
schedule and your time frame.
"I would advise novice traders not to assume any particular trading
strategy is right or better for them. I think it is a matter of personal
discovery. Because what works for one person is not going to work for
someone else. Some people will gravitate towards fundamentals, others
to technicals, and still others to both. Some people will prefer short‐term
positions over long‐term and vice versa. Some people will be more inclined
to trade multiple markets, others just one market." ‐ Jack Schwager
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Build up a large‐enough trades sample size
First off, let’s assume that you have a complete strategy with a complete
set of rules.
A complete strategy comprises of the following:
‐ Finding stocks that meet your criteria (note: getting your ideas
exclusively from newsletters, tips, CNBC, Facebook, Twitter or Stocktwits
is NOT part of a viable strategy)
‐ When to enter a trade
‐ How many shares to buy or sell
‐ When to exit a trade
If you miss any of those 4 points, you simply do NOT have a complete
strategy.
Now that you have a complete strategy, you can move on to the sample
building phase.
You'll have to build up your experience in finding trades that meet the
criteria defined by your strategy and execute them by trying your best to
trade by your rules.
As easy as it sounds, this can be a very frustrating phase.
The first reason why this might be a frustrating period, is that it will take
time to build a large‐enough sample of trades for you to start seeing
patterns emerging in your own behavior. Looking back at my results and
my strategy, I think I would have needed at least 200 trades to see
reliable patterns emerge. And depending on your strategy, it can take
from several weeks to several years.
As a side note, although it might seem obvious, it is VERY important that
you do NOT choose your strategy based on how quick you can build up a
sample of trades. Although I do believe there are a handful of successful
day traders, I'm convinced, just like the legendary trader Livermore
suggested, that the big money is made in the big move and a big move
takes time to develop.
The other reason is that the outcome of each trade is quite random.
Meaning that you might encounter (in fact you WILL encounter) some
periods when you'll get hit by several losing trades in a row. This may not
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sound that big a deal. But believe me when I say that most traders will
completely lose confidence in their strategy when they get hit by a couple
of losing trades in a row. And the biggest mistake is to change strategy
when you encounter this temporary string of losses.
You have to keep in mind the principle of the Law of Large Number which
is that the bigger the sample, the more likely it will reflect the true
probability of your strategy.
What does that mean for you? That means that you may have a strategy
that can return 50% on average per year. But just a couple of trades will
NOT reflect this percentage. However, the more trades you take, the
more likely you will hit this 50% return.
So even if you get 5 losing trades in a row, as painful as it can be, do NOT
deviate from your strategy just yet. Nothing has been proven or
disproven just yet. You need to be confident in your strategy. You need
those one or two hundred trades to get an idea about the real potential
of your strategy.
Discovering the truth about yourself and your strategy
Once you finally have a reasonable trade sample, then there are 3 steps
left:
1‐ Find out what are the main mistakes you make over and over again.
Go through each single trade you've made and check whether you've
followed your rules. If not, take notes of the mistakes you've made. After
several trades, you will surely discover what your mental strengths and
weaknesses are. I call these "mental" strengths and weaknesses, because
they're simply related to the fact that YOU can or cannot follow your own
rules. It’s just a matter of discipline. And discipline is psychological.
2‐ Review what your results would have looked like if you had applied
your rules perfectly
Go through each trade, check what would have been your exact returns
(if possible, after commissions) for each of those trades, had you perfectly
followed your rules.
3‐ Finding out the truth about your strategy
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By now, you should know exactly how much your strategy would have
returned after a certain number of trades.
If the hypothetical returns based on the last 200 trades are negative, your
strategy probably doesn’t work. In that case, you'll have to find another
one, and go through the process of establishing your rules and building a
sample of trades again.
I think this case is highly unlikely if you've "borrowed" most of your
strategy from a highly successful trader with a proven record. Note that
the words “proven record” are of utmost importance. There are tens of
thousands of self‐proclaimed gurus/bloggers who charge people a fee for
teaching their strategy, even though they themselves have had run of the
mill results or never made any serious money in the markets.
The very likely discovery you should have made by now, is that your
strategy works. And you would have gotten much better returns if you
had been able to just follow blindly.
Being in this case should give you an incredible faith in your strategy, faith
that is difficult to acquire at a subconscious level when you just follow a
strategy that is not your own and is just "supposed" to work.
Our human nature causes us to doubt things we can't see or experience
ourselves. If you've reached this point, you now know first‐hand that it
works and great returns are just around the corner.
You now really have discovered that you have to shift your focus from the
outcome of each trade to simply applying your rules. You now know that
by doing so, money will follow.
4‐ Fine‐tuning your strategy
This is an optional step. After all, your strategy works. Why would you
modify it?
Well, you may want to fine‐tune it because that strategy may not be
100% suitable for you. For instance, you may have quite a busy daily
schedule and not have the amount of free time required by the strategy
you’re using. Or your strategy uses stop losses that are too wide for your
own risk tolerance. Or you just think your returns could have been better
if you had used a different position sizing.
In any case, it is possible to play around with some of your strategy’s
parameters such as the screening time, entries, exits, position sizing, time
frame,...
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For instance, in my own case, I found out that by using end of day stop
losses instead of hard stop losses, I would have had better results over
my last 1000 trades. I may have suffered bigger losses on some trades,
but overall, using end of day stop losses had a positive effect over the
long run. I also found that entering trades at the open instead of at the
close, as well as increasing my position sizing by using the Kelly Criterion
for position sizing would have increased my performance. Those findings
will vary tremendously depending on your own strategy.
All this fine‐tuning exercise is, once again, optional. And it will depend on
your personality, your schedule,... For instance, you may not be
comfortable with end of day stop losses because you usually don't have
the time to be in front of your computer when the market closes, or
because you can't stomach seeing your stock going through your stop loss
and have to wait for the close. Or you may not feel comfortable
increasing your position size even though your results show that you
could get much better results.
What is really important, is NOT to rely on your gut feeling when it comes
to your strategy. Always take the time to backtest and find out the truth
about what would have been your returns if you had changed something
to the strategy you’re using.
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PART III – A Couple of Pointers
Do NOT listen to tips
Never ever listen to tips. When I say tips, I mean any suggestion or advice
to buy (or short) a certain stock or any other security. Tips can come from
many different sources such as friends & family, newsletter, social media,
TV…
I’ve had my fair share of tips, especially from my broker. Well, my
experience has always been the same. I lost money in the end.
"I believe that the public wants to be led, to be instructed, to be told what
to do. They want reassurance. They will always move en masse, a mob, a
herd, a group, because people want the safety of human company. They
are afraid to stand alone" ‐ Jesse Livermore
We’re all tempted to listen to tips. A simple observation is that most
people try to get their trading ideas from someone else. This way, not
only do they not have to think for themselves, but they also feel much
better about themselves if the trade actually goes sour, since it wasn’t
their fault – it’s the tip that was bad.
By using someone else’s trading idea, you’ll be more prone to just blame
that person if the trade doesn’t work. By doing so, you’re just completely
shutting down any possibility of learning something, of actually improving
your ability to trade. Like in almost any endeavor, you need to take full
responsibility for your trading results in order to improve and ultimately
succeed. Finding your own trades will not only help you doing so, but will
put you on the path to becoming fully autonomous, to becoming a
professional independent trader.
“A man must believe in himself and his judgement if he expects to make a
living at this game. That is why I don’t believe in tips” – Jesse Livermore
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Do NOT paper trade
Paper trading may sound like a good way to test your strategy. But in my
humble opinion, it's a waste of time.
By paper trading, you're only testing the validity of a strategy, but you are
not testing the most important element of the equation, yourself.
Finding a strategy that works is not a real issue. There are literally
thousands of different strategies that give you an edge over the market.
So why is it that so few traders succeed?
It's because of your own behavior. Do not think for a minute that you
know yourself well, that you are different from the 90% of traders who
fail. The ONLY thing that will differentiate you from the 90%, is by doing
the few things the 90% do NOT do. And that’s finding out the reality of
how you behave when money is on the line, when your brain goes into
fight‐or‐flight mode.
Don't waste time paper trading. Experience trading with real money so
you can not only find out whether your strategy works, but also what
your psychological traits are that allow you or keep you from following
your rules in stressful situations.
Test your strategy for at least a year and be flexible
I can't stress enough that you need a large number of trades before being
to conclude whether your strategy works or not. Do NOT deviate when
you'll get hit by the unavoidable string of losses in a row.
It will take time, but so does any other endeavor or any other business.
Do NOT use money you can't afford to lose
As much as I strongly recommend against paper trading, I also think you
should not use money you really can't afford to lose, at least until you
reach consistency.
If you do so, be aware that there is a strong possibility that you'll lose
your entire stake during the learning process. Secondly, using money you
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can't afford to lose will accentuate the emotional roller coaster you'll
experience when trading, which can in turn lengthen the learning curve.
You don’t need a lot of money if you want to be able to trade for a living
No, you do not need a lot of money to get started. Actually, the learning
curve does not require much money, but just enough for you to feel the
pain when losing money.
Now once you’ve reached consistency, if you want to be able to become
a full‐time trader, you’ll of course need to generate enough money to
cover your yearly expenses. And it will depend on your strategy and your
own needs.
I found out that with my own strategy, I can generate an average return
of 50% a year. I would advise you to base your calculations on
conservative figures. For instance, in order to calculate how much you’d
need to be able to trade for a living, I would use half of your average
yearly returns, to keep a margin of safety and being able to re‐invest the
money you don’t need and profit from the magic of compounding. Once
you have that number you can easily know how much you’ll need to be
able to trade for a living.
E.g.: Let’s say that your strategy generates an average of 50% profit a
year. Half of that is 25%. If you need let’s say $3,000/month ($36K/year)
to live comfortably, a conservative amount of money you’d need to be
able to live off your trading profits would be ($36,000 / 25%) =>
$144,000.
Although this kind of numbers might seem high to certain people, if you
start with $10,000 and trade almost perfectly a strategy that returns an
average of 50% a year, you can turn your $10,000 into $170,000 in only 7
years.
If 7 years seem like a long time to you, think about how many years you
have left before retirement. Don’t forget that you need to have realistic
expectations. 90% of people who start trading dream of generating a
generous salary or even becoming millionaires in a year or so… Those
90% fail. There is no get‐rich‐quick scheme that actually works. There is
no secret. There is no Holy Grail. Learn all you can, work hard, be flexible,
be patient and you’ll get rewarded.
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Don’t get caught into the immediate gratification mindset that has taken
over the new generations. Everything that is worthwhile in life takes time.
Think like normal people, and you’ll get what normal people get. Would
you rather lose everything now or retire a millionaire?
Do NOT think you know it all
Never assume anything in the market. Given the fact that 90% of traders
fail, do NOT trust "conventional wisdom", do NOT trust the media, and do
NOT trust yourself or what you think you know. This is why you need to
test and backtest your strategy.
You must act in a scientific manner, act like a scientist. You first observe,
then formulate a hypothesis, and then do some tests in order to find the
empirical evidence about whether your hypothesis was correct.
Experiment before drawing any conclusion.
And always keep an open‐mind. You'll discover that MANY beliefs you
had about the markets and trading are completely wrong.
Do NOT focus on the money. Focus on being the best trader you can be
By now, you surely understand why focusing on the money is the wrong
way to go. Money will only be the result of good trading. Focus on being
the best trader you can and the money will follow.
Find your why and become passionate about trading
You need a good reason for wanting to become a profitable trader. This
reason, whatever it is, will help you getting back up when you hit the
unavoidable drawdowns you'll encounter along the way. This reason
might be the drive that will light up a passion for trading in you.
If you develop a passion for trading, the learning curve will shorten
significantly. You'll literally want to devour every book on trading. You'll
spend your weekends developing your strategy and going through your
past trades. You'll do whatever it takes in order to succeed.
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What is simple is not easy
What we know and seem simple is often times not easy. Everybody
knows how to be healthy but knowing and applying are two very different
steps.
Discipline is the key
"Mastering others is strength. Mastering yourself is true power" ‐ Lao Tzu
Many people know they should not eat junk food or drink alcohol, yet
they keep on doing it. People know they should not text while driving, yet
they still do it too.
Few people possess the level of discipline required for becoming
successful at trading. That's bad news, because discipline, is the true key
to successful trading.
The good news though, is that discipline can be learned. You can train
yourself to become more disciplined.
Read as much as you can on psychology, behavioral economics,
neuroscience and meditation. You'll find ways to discipline yourself and
to become a better trader.
Get inspired
As much as your reason should be your drive, it really helps
getting inspired by people who already accomplished what you're trying
to do. Most very successful people were not geniuses. They were normal
people. If they made it, so can you.
I strongly suggest you read the “Market Wizards” book series by Jack
Schwager, "How I Made $2,000,000 In The Stock Market" by Nicolas
Darvas, "Insider Buy Superstocks" by Jesse Stine, "Trade Like A Stock
Market Wizard" by Mark Minvervini, "Reminiscences of a Stock Operator"
by Edwin Lefevre" and "Jesse Livermore: World's Greatest Stock Trader"
by Richard Smitten.
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Where to find me:
Website: www.lonestocktrader.com
Twitter: @LoneStockTrader
Facebook: @LoneStockTrader
Instagram: @lonestocktrader
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