StockPunk answers your questions!?!

Welcome to the second official StockPunk question and answer post! I went back and read the first official StockPunk question and answer post and I was surprised by how much I've changed since then. In a question about technical analysis I responded that TA wasn't "my bag".

Thanks to all of you who asked questions!! Questions about what I do force me to reevaluate and think through some of my decisions and makes me a better man--or something like that. OK, that enough, on with the show:

Why have you abandoned your Zweig stock screening strategy?

I had a few good years of trading using stock screens and they really fit in well with my lifestyle. I still think they are a great way to learn how to trade with minimum effort. They also provide a good way to invest without having to be too active in the market. I am employed full time and can't be close to a computer all the time so stock screens are perfect for me.

But as my passion for the stock market flourished, and I saw stock bloggers who were successfully trading for a living, I began to wonder if I would be able to do it myself. Even though it seemed like an obtainable dream I got a few titters and eye-rolling from family and friends. There’s quite a stigma out there that stock trading is dangerous and foolish.

I thought that I might be able to accomplish a trading lifestyle through stock screening. I felt I could consistently make 20 to 40% a year which would eventually cover all my expenses. When I got kicked in the teeth after the downturn in August 2007, I started wondering if there was a better way to limit my downside risk while still keeping my gains.

I knew that the Zweig screen outperformed marvelously over the long term, but I needed to put some reliability in my system to avoid the big drawdowns. I stumbled upon the Pitbull Investor website which specializes in mechanical investing through screening but also heavily emphasizes chart analysis. The site’s founder, Henry Ford, had just started offering personal mentoring over the phone, so I decided to invest in some trader education. My understanding of the markets and of technical analysis grew in leaps and bounds during our 6 hours of one-on-one instruction and I grew much more comfortable looking at a chart and understanding patterns in stock behavior. Henry also introduced me to the world of options, and I began to trade them as proxies for the stocks I liked.

But, the first six months of 2008 were brutal to my account. I was combining stock screening techniques with the technical analysis that I learned from Henry Ford without success. I had weeks of big gains followed by weeks of big losses. Nothing I did seemed to work, and my dreams of trading for a living were starting to look pretty silly.

Finally, in May things were finally starting to click. I clawed my way out of a 20% deficit to break even. My account was ready to take off, and I thought I was trading a system that was capable of 10% - 20% months and 100% years. My dream of trading for a living was alive and well.

Then the bottom dropped out on me again. In four days I lost nearly all of my gains for the month. I kept thinking each day that it couldn’t drop any further but it did. I was holding several options that were getting hammered and I couldn’t sell them because nobody wanted to buy them. Plus, I thought that the market “had to recover”. I ended up the month with a slight gain, but I wanted to figure out a way to trade where it didn’t matter what happened in the broader market—where I could care less whether the market was up or down.

My ongoing conversations and mentoring with Corey at Afraid to Trade also convinced me that if I was going to do this without the benefit of another job, I was going to have to increase the frequency of my trading and probably look at shorter hold times for my trades. Corey is a futures trader, and he doesn’t care at all about whether the market is up or down, he just wants to see a “trend” either way.

I went back and read some older posts that Ugly and TraderMike had written back when they first started day trading. Their journey toward day trading really seemed similar to mine and how they were trading really started making sense.

Another thing that I had read about on Uglychart.com but didn’t understand was position sizing, expectancy, and risk or “R”. Both Ugly and TraderMike used those terms to measure their success. I read Van K. Tharp’s book, Trade Your Way to Financial Freedom in 2007, but I really didn’t understand the concepts even though I tried to implement them in my stock screening. As my portfolio disintegrated during January and February of this year, I went back to the drawing board and re-read many of the books that I read in the past. I knew that there were some “gems” of wisdom in Van Tharp’s book, and with my wife’s help I began to dissect them to gain a deeper understanding. The concepts are really quite simple, and I’m a bit embarrassed to admit that they were over my head last year.

So that brings us to this summer when I decided that I needed a more dependable system that would allow me to limit my risk on a daily basis and create more frequent trading. I really think this is the best way for me to work toward trading full time. I enjoy the “clean slate” each day. Waking up with no worries about the direction of the market is extremely fulfilling. The money seems to flow much more readily.

I'm going to put all my effort into this, and if it doesn't work, no big deal. If it does work, I'm one step closer to my dreams.

What is does your trading office look like?

Here is my monitor setup.

Just kidding. I trade with a laptop at my dining room table.

What does your trading day look like?

I really don’t start anything until the market opens (9:30 am EST). I print out my watch lists before the open. I don’t make any trades until about 10:30am (market time) and I quit trading at 12:30pm (market time).

I see you scuba dive. What has been your best dive site?

Without a doubt, Fiji was the most amazing place I’ve ever scuba dived.

I’ve never seen anything like it . Incidentally, the dive master that took us diving in Fiji disappeared on a routine dive a year after we went with him—spooky.

What has been your worst day as a trader?

Back in 2006, I noticed that the highest relative strength stock in the Zweig screen always outperformed the rest of the screen (by more than 900%). So I brilliantly deduced that I could just put all of my money in that one stock and laugh all the way to the bank. I lost 9% of my portfolio in one day and decided that my strategy sucked. I was lucky that I didn’t lose more. I’ve learned a lot about risk management and position sizing since then.

Would you recommend any books on technical analysis?

I’ve tried to read books on the subject, but they cause my eyes to glaze over. It’s hard for me to look at charts that are already weeks to years old and that are printed in black and white. I have learned nearly everything about TA (and I assure you—it isn’t much) through stock blogs like the ones I list as my favorites on the side of StockPunk. I would also suggest having a mentor who understands TA take you through a few charts. It has been invaluable to me to have somebody walk me through chart patterns and TA concepts.

What did you get your Masters degree in?

I got a Masters in Human and Family Services. It’s basically a counseling/social work kind of degree. Two years ago, when I began the masters program, my goal was to stay in the counseling field. Now my goal is to trade for a living in the next few years. So I’m not sure what I’ll do with my degree right now.

My bachelors degree is in marketing which was never a good fit for me. I was completely miserable at a few marketing jobs that I had. I literally cried before I went to my first marketing job—I hated it that much. I haven’t used my marketing degree for the past 13 years, so we’ll see if I ever use my masters. If anything, I’m able to use a lot of what I learned in my current job as a counselor of teenagers.

What would be your advice to someone who is just starting out as a trader?

Don’t believe the hype. Trading is hard work. It takes a lot of time to learn. It can be financially dangerous. It probably won’t make you rich.

But if you love to do it, none of those things will matter and the money will eventually come.

Can you explain your “narrow candle” system a little better?

Many readers have asked about the “narrow candle” system that I’ve been using recently. It’s a daytrading system developed and shared by Maoxian back in early 2000. He called the posts “trading for dummies” and Ugly from Uglychart.com went on to term them “Dummy Trades”.

I first became interested when Ugly took it on as a personal trading system for himself in 2006. I was really into stock screening and mechanical investing during that time, and I considered technical analysis a sort of “voodoo” way of analyzing stocks. I preferred the “hard science” of stock screens with all their cool formulas (most of which I didn’t understand).

Ugly has a ton of examples of what the narrow candle trades are all about. Basically, I look at overall market direction first. Then I look for stocks that are trending with the overall market. I look for gaps in the direction of the overall market along with higher than average volume.

I use several watch lists to determine what stocks I plan to follow that day. I use a couple of stock screens (I just can’t give them up), along with high alpha stocks from Barchart.com. I also use real time scans from TradeIdeas.