Trader Mom @ Home

A simple answer is the more, the better. Under capitalization is one of the major problems that traders have.  First of all,  trading is one of the most difficult professions on the earth due to its very high earning potentials.  If you have a few grand trying to make a living at it, then what I can tell you is that it is impossible.  You need at least 100k to even stand a chance to make a modest living if (a big if) you have the skills.

For example, your objective is to make 50k per year consistently, which is 50% of your 100k. A 50% annual return year over year WITHOUT compounding is very hard to achieve even for the most experienced traders.   With compounding, not even Warren Buffet could .  I believe Warren Buffet’s track record is perhaps around 15%-20% minus management fees with compounding.  Madoff’s “track record” was around 10% compounding. You know why I mentioned “Madoff” here.  Stay away from anyone who claims something like that.

As I always mentioned in the past, a few lucky shots or even a couple of years of lucky shots mean nothing to me. A trader must prove herself through at least one major crash like the dot come bust or the financial crisis that we just had, and a major bull market.  If you have gone through these cycles and still made some decent money, you are all set for the rest of your life since trading will never change.  It is this way today and was like that 100 years ago because it is all about human psychology.

A consistent 50% annual return without compounding is hard. But I believe a 30% without compounding is doable.  But 30% of 100K is only 30k. 30K is around the poverty line in the developed world such as the US, Canada or Japan.  But 30K packs a lot of purchasing power in a developing country like China.  The purchasing power of 30k US dollars in China is equivalent to 150k in the US and you do not have to pay taxes on capital gains. The beauty of trading is that you can do it wherever there is an Internet connection. I believe the income tax is around 17% in Hong Kong and 15% in Singapore. We will explore this option in another post.

So obviously 30k is not good in the US.  If you need to make 60k per year, you would need 200k trading capital. I am every bit against using leverage/margin.  So let’s not even go there.  If you have 1 million, you could make 300k theoretically provided you trade liquid stocks. That is one of reasons why I never trade those thin penny stocks.  The more liquid, the harder they are to trade such as GS, APPL, RIMM or GOOG because there are too many professionals in them. But you have to go compete with them head on.

Now you see why it is “the more, the better”.  But this does not mean people who are temporarily under capitalized should not even try.  You should.  But you should not focus on how much you can make in the first couple of years. Instead, you need to focus on your trading plan/system because all it matters in the end is your percentage.   If you could trade a 10k account well, you should do well with a 100k account.

The market keeps moving up.  The most sensible move is to follow it even if you might think it is somewhat “over-valued”.  In trading, the intrinsic value of a stock is not important.  What is important is your timing.  Yes you already have risk control firmly implanted in your head like me.  But if you try to short a strong stock like BIDU, you might suffer a string of small losses which could quickly add up. Therefore, risk control alone is not enough; you need to improve your timing skills.

Here is BIDU’s daily Chart  Would you still like to short it because it has a very high PE? I bet there are many people out there who want to short it now.

Click on the images to have a better view

Here are 2 stocks that I think are interesting.

PCX have broken out of a multi week consolidation range.  I think the shorts should surrender now and the possible longs can start to pay attention to it.  The break-out was a strong and valid one as we can tell from its volume and the way it moved up.

So has CAT.  Take a look at the chart, which is similar to PCX’s. However, CAT is a large cap stock, which requires much more firepower to move up than PCX.  On the flip side, CAT should be less volatile than PCX.  If you do not have the stomach for volatility, add CAT to your watch list.

BIDU is a Chinese search engine that has captured over 70% of the Chinese search market.  It also has some operations in Japan. If you look at its PE, which currently stands around 70, you might think it is too high.  However, if PE were an accurate indictor of anything in the stock market, everyone would be rich.  So let’s leave it to the economists.  Is BIDU too high to get in now?  I do not know about you.  But I am a short term speculator who has no problem riding bubbles and follows the trend.   The first thing I know is that I will not short it just because it has a very high PE (aka garbage indictor). The trend says it might move up as we can see that it has been in a very clearly defined up trend in the mid term and has been consolidating in the past few weeks.  On last Friday (9/6), the stock moved up with some decent volume. It is a good sign.  Here is what I think

If you already have a profitable long position, hold onto it for a while.  There is nothing to worry for now.

If you want to establish a long position from here, that is fine but you need to be nimble to get in and out using clearly definef risk reward ratio. After all, BIDU has moved a lot in the past few months.  Once a strong stock reverses its direction, the subsequent crash seems substantial. This is because there are a lot of profitable people who want to close their positions.

Click on the image to have a better view

It was a flat market today. And it might go down a bit more from here. Of course, it does not really mean anything to a day trader like me.  If you have been with me for a while, you know I am comfortable with either direction.

I went long on GG (A gold related stock) today.  It was not because I thought it was undervalued. I was merely following the stronger side.  The value of a stock is set by other traders/investors. Therefore, I never say anything like “I think this stock is over valued or under valued.”  I have uttermost respect for how other traders/investors see the market.

In a flat market, it is very important to follow the strongest sector, which is what I do every day.   See the picture below. And you will have no difficulty finding which one was the strongest.  That is why I traded GG. The entry was impeccable.  But the exit was not that great. I think a good exit could be around 2.   My position was closed while it was still moving up. That was a shame.  This is a trader’s psychology at work.

Click on the images to have a better view

See can see the timestamp of this trade on StockTwits.  Good luck every one. Do not lose your underwear,  ^_^