This market is a very good example what it means to be impatient and have no discipline. For me it is a very good lesson which I need to repeat myself every time I try to make trades when the market is not ready.

What actually happened? In the beginning of August the market showed a follow through day and IBD later changed their market indicator to “confirmed rally”. However they warned the market is not ready yet. However I could see couple stocks doing well during the bear market. At that time it was AFAM, which rallied no matter what the entire market did. My screener showed some results and I thought it was the time to jump into those stocks because it was the time when they would rally and I had to be there not to miss it.

Today it is Life Partners Holding (LPHI) which shows similar resistance against today’s sell off. I was also tempted to buy it, but the lesson the market is giving me again and again tells me to resist.

The very first rule of Reverse Scale System is to buy new stocks only when the market is in confirmed rally, which means the 50 day MA is above 200 day MA and in uptrend.

It was not in August when I bought my quick-rich stocks, it is not today. Today I closed two positions, because they touched my stop loss. I am also eager to jump back to those stocks because tomorrow they will definitely rally back up. But I don’t know it. I do not have information saying it will happen and it will grow only and only up. This is not my system rule as well so by doing it I will brake the rule again.

The next stock picking rule says I should pick up only stocks which have growing momentum and none of those stocks which plummeted today are showing any growing momentum. Should I be fishing their bottom? Lose another money because nobody knows where the stock market stops its slump?

Well I need to learn from this lesson to wait for the market telling me that this is the rigth time for buying new stocks. Until then I will be saving more money for future trades and wait.

When I advocated for savings in my previous post, I did not say that investors should save their whole life and then die. The goal is to become financially independent, create enough passive income so an investor can stop working if he wishes and basically retire. However he needs to start somewhere first. It is my goal to buy enough assets, which will generate money for my mortgage, bills, vacation and savings. Jessie Livermore in Reminiscence of a Stock Operator says that it is a bad way wanting the stock market paying your bills. He says that his colleagues wanted the stock market to pay them for an expensive suit or whatever and they lost money instead. I see the point here, but I am talking about generating an income by trading stocks, stock options and commodities the same way as he did during his life.

Trading in the stock market is a business as many others. People do not see the market this way in many cases. They consider trading stocks very dangerous and risky. For about 80% of all investors it is a risky business.

The profit everyone can reach in trading stocks is equal to the risk the trader is willing to accept. The higher risk, the higher profit an investor can take. However every investor can get incredibly, awfully rich by trading stocks, he can get deep broke as well. Unfortunately all statistics show that the majority of investors belongs to the second group and they are responsible for it themselves. If any trader or an investor wants to make money in the stock market, get rich or trade for a living there is a chance on the market to make it. The first thing an investor should do is to consider the trading as a business. A business as many other businesses. An investor shall have his “company” (it can be imaginary one at the beginning) which trades stocks, stocks options and commodities, he would need a business plan and money management the same as other businesses. However unlike the conventional business an investor doesn’t care about overhead, employees, suppliers, clients, competitors, marketing and many other issues a conventional business does. Every investor can trade from his home or wherever she currently is – from a hotel on her leisure trip, from Europe, China, Brazil or wherever she can get an access to a computer and Internet. The only competitor and “enemy” in the stock market is the investor himself. He usually fights his lack of discipline and the way he treats the market.

Another advantage of this business is that unlike other businesses an investor doesn’t need a large starting capital. Today it is enough to start with $2000 or even smaller amount. It is better to start with larger one since a small account is riskier and it is earning smaller money. The ratio between the risk and the profit is too bad. For many new investors 2000 of dollars represent a large amount however. If an investor starts investing into mutual funds, and stocks which are less risky than commodities there is a great chance to become a successful trader. I do not recommend trading commodities at the beginning. Without proper experiences it is a sure way how to wipe off the portfolio. I did this mistake so do not repeat it. As a successful trader an investor doesn’t have to work 8 hours a day, it is enough to work couple minutes a day, however before an investor becomes successful in the stock market, she needs to work hard on her financial education, study a lot and practice a lot. Not everyone can make it however. Many new investors think that the stock market is easy money and they can get rich overnight without working.

The first step every new investor should do is to invest in his financial education. He should know about money, money management, risk management, savings, investing vehicles, stocks, commodities, how the stock market works and many other issues. By studying everyone can reveal the secret of making a lot of money in the stock market. However an investor shall avoid all mistakes and myths she can find during her stock operator career. I followed the same path as many unsuccessful investors. I didn’t know about investing anything and I started immediately even in commodities. I also believed that making millions in the market is a piece of cake and I can make it without any education, just buy low sell high. I also was trying to find the easiest way how to get rich overnight using my magical short cut. I was looking for information everywhere, asking for tips and suggestions, let brokers do my business and much later I realized that it is only my own education and experiences, which can make me rich. I paid a tuition for these lessons. A new investor shall be ready to pay his tuition too.

If you know someone who is already trading for a living and you would have the chance following such experienced trader, this wold be your best school ever. If you do not have such opportunity, the best way is to study books, attend seminars and paper-practicing your strategies prior starting investing with real money. I am a kind of person who do not like fake trading much when trading stocks. With virtual trading an investor can not feel the fear of loosing money because he actually doesn’t risk them. This is why I opened this small account and I do my practicing on it. I could afford it because I already know all basics how the stock market works, how to submit trade orders, how they are executed and so on. However testing the strategy I adopted I wanted with real money so I could test my psychological responses, which I couldn’t get with paper trading. However if a new investor doesn’t know anything about trading stocks I strongly recommend paper trading to get familiar with all basic principles. For example I have never traded stock options and I have no clue how to trade it. I do not know how to read option chains, evaluate options, etc. I am a person who like learning by examples and a real practice than just reading or listening to someone explaining how it works. This is why I opened a virtual account at CBOE and I started practicing and figuring out how option trading works. If a new investor is as green as I am in options, she can open her virtual account and try it first without risking her own money. A good web site is Investopedia and their Stock Simulator.

Trading stocks in the stock market is technically very easy. The most important and the hardest part on trading is investor’s own psychology. The greatest enemy of every new investor ever. All of the new investors make a lot of crucial mistakes in this field. The lack of trading records, money management, risk management, discipline and many other aspects, which are missing in most investor’s armament are sure ways to losing money. Many new investors don’t even think, it is important to have such management. Nobody can make money in the stock market without knowing risk and managing monies to protect the portfolio. I learned this lesson recently. I understood I need something, which would organize my trading, some rules and a risk management which would work and protect my account by strict following it. I found what I was looking for.

When I started investing many years ago I had no plan, no strategy, no discipline and I was losing money. However I was reading books and trying to find some good strategy which would protect my capital and make me money in this stock investing business. There is a lot of books about investing. Many of them advocates for many kinds of strategies. Many recommends investors making business plans, loss control plans, money management plans, rules etc., but none of them actually tells you how to do it. Maybe there are some books out there, but I haven’t found them yet and I do not have enough money and time to buy all of them to find some.

However there is one book, which I found very valuable and which is probably the only one which tells you that. I am talking about Stock Market Stratagem by Braden Glett. I am not going to re-tell the story and rewrite the entire book here. It is the kind reader who should read it to grasp the idea of this strategy. If a reader doesn’t want to buy the book he can find information on the Five Minute Investing website or go to Useful Links.

However let me provide a short excerpt why I consider buying this book invaluable. It is the first book providing a beginning investor with a step by step guidance how to create a control loss plan, evaluate stocks and many other helpful advice on investing in the stock market. What many other books just vaguely say about investing, Mr. Glett is explaining step by step.

What are the basic rules of this strategy?

1) Buy a new stock position only when the market is in confirmed rally

I made this mistake all the time. I was buying no matter what the market did believing my stock would survive correction easily. Why not they were all fundamentally very strong. Obviously they didn’t and stop loss limits kicked me out and I ended up collecting one loss after another. Then i learned to follow the trend of the entire market, but with no further progress. I still was losing money. I was following IBD and their “market barometer” but it didn’t work either. It happened that IBD considered the market in confirmed rally but it was a short live rally. Even as of today IBD calls the market in confirmed rally. However look at the chart. Do you see any rally?

I do not see any yet. Maybe there are some experienced investors out there who see it and are ready for trading. However the only thing I see in this chart is two short live rallies only. Mr. Braden Glett is adding one more rule to identify the market in rally. The 50 day MA should be above 200 day MA to consider the rally really confirmed. In his book, you can find why. As you can see, the first circle indicates that the rally in May 2008 almost made it (a brown line almost got above the red one). Then it failed however. The second larger circle indicates the confirmed rally as per IBD. I don’t see anything. This is why I kept my own market status in “Correction” on the top of this blog. When the market gets above its resistance line (thin blue straight line) I would change the status into a “rally attempt” and when 50 day MA gets above 200 day MA it would be a confirmed rally. I made the same mistake again when I implemented these rules into my trading in August 2008. I didn’t wait for this rule to happen and I started buying. Now I could have dreamful nights instead of having my portfolio in 6% loss.

2) Select only fundamentally strong stocks with a momentum

Easy said difficult to do. Many books advocates the same. Many books let you going thru balance sheets, do difficult research, study companies’ tables, etc. IBD provides such service for subscribers and select all fundamentally strong companies for them. However a subscriber has to pay about $160 a year to get those tables. There is one easier way to select such companies. One of the rules is to look for the stock making new 52 week high. There are many other rules in the book how to evaluate stocks.

At the beginning of this portfolio I broke this rule as well. I am a human and I fight with impatience and get-rich-quickly madness. When the screener stopped selecting new stocks I have bought pets. Another way how to get into a financial hell. However I passed those lessons and will not repeat this mistake again. This blog shall be my watch dog helping me to follow the rules by identifying my thoughts why I am buying, selling, etc.

I created a screener which I fed with all criteria Mr. Glett is naming in his book, however I modified them a bit. I added some other rules from CAN SLIM strategy (screening criteria William O’Neil is presenting in his book How to Make Money in Stocks), but I made the criteria stricter than both authors recommend, so the only very best stocks should pass through the screener. A good training for patience.

3) A Control Loss Plan

This is probably the most invaluable section of the book. For many years I have been struggling creating some sound investing plan which would work, protect me against losses, protect me against over-extending the risk, help identifying the risk at all, avoid over-investing my portfolio, etc. I usually invested all my money and was forced to sell upon a margin call. Or I set up a stop loss order about 7% below my purchase price as many other books recommend and ended up collecting one loss after another, so my portfolio ruined down by 60%. This control plan in the book shows the proper way how to protect the portfolio against extended draw down even with stop loss bigger than widely recommended 7% – 10%. Even with 50% stop loss an investor can lose only 3 to 5 per cent of his money when the monies are managed correctly. This stop loss may sound horrific, but believe or not I can sleep much better knowing that next day I wouldn’t be kicked off with another loss. Mainly in this volatile market we are experiencing these days.

Well, these are the main items I would consider the most important and for which I recommend buying this book. The book is of course full of many other advice such as pyramiding, trailing stop loss and many others. Read it and you would see what strategy this blog records for the future.

It is not true. Nobody is so broke that he or she cannot save. When I was a little boy I learned saving myself. I always wanted to be a rich man when I would grow up. My mom concerned about me that I was growing into a greedy person or so. At least she though so. She always said “You are like your uncle. He is also greedy for every penny.” For me it was a compliment.

Saving money would be the first step every new investor, young or old should do when she thinks she is broke. However the very first step it is not to save, but start working on changing our own mind about money. It really is in our own head. People want everything and they want it now. Even my sister says why saving money now, she wants to live her life now and starts saving later. Well, what is it later? In her 60s? Everybody who lives from paycheck to paycheck doesn’t realize that saving is a long term program and it doesn’t make anyone wealthy overnight. There are some advisers who honor making your own business over saving such as Robert Kiyosaki and I must admit that he has some good ideas in his books. However I remember his words in a TV show: “… work hard … save your money … retire … ” or similar (I am adding and die poor). He is advocating a personal business over working for somebody and saving money. In some point he is right, but even though an investor who starts his own business he should have his saving plan no matter what otherwise such investor may end up living from paycheck to paycheck even in his own business. And believe me I know couple examples.

I made my own business and I got pretty rich, but this is not a matter of this post. What I want to show is that everybody can start from nothing. Same as I did. Once when I was a young man about 15 or so old, second after I divorced, left all my property to my ex-wife, moved and started over. After five years I can consider myself rich again. Of course not as rich as I was originally, but still well done than five years ago.

The very best book I can recommend to everyone who wants to change her life is Money Is My Friend by Phil Laut. It was my cook book when I was 15. This book taught me how to deal with money, how to make budget, follow the rules etc. Thanks this book I learned my savings sense. I opened my first bank account in my teens and people around me thought I was a freak. As a boy I was working in summer break for my neighbors for small pennies and every day I put the money to my bank account. When I got older I started working for a local post office during summer and I was saving any tips I got as a young delivery boy. Later I opened several other bank accounts and each had its own purpose. Exactly as the book says. Even today I follow the principles from the book. I have several checking and savings accounts, and I have several credit cards as well. Companies when dealing with my credit score mostly refuse me because I “have too many credit cards with balances.” It is because they completely do not understand my saving philosophy. I do not blame them, nobody told them about it. Each card has however its own purpose too. One is dedicated to car expenses only (such as repairs, gas, etc.) another for personal care, etc. This allows me to keep balances small and affordable to pay.

Every single day as a boy and a student even as a young man I was thinking and asking one question to myself: “How can I get rich?” This question helped me searching for opportunities and it helped me to change my mind regarding personal money management. After all I learned making budget first when dealing with my personal money and stick with it no matter what, no questions. Sometimes it was hard to do it. I saw new books in a local book store which I wanted and it was hard to convince myself that I had now funds available yet, because a dedicated account was empty. It was at the time when I was a student and my only income was my parents support and money I made during summer work. Even with such limited income I could save a bunch of money so why not a grown up with a regular salary?

I believe, everyone can do the same. Just start working on it. Put this goal to a paper and create your first small budget. It can be a simple one. Put down what is your income on one side of the paper, what are your expenses on the other side. Keep all your bills and checks so it would be easy to keep track of all expenses and easy to create and adjust the budget. Try find where you can save. For example I realized that I can save almost $200 a month by stop lunching out and have my lunch at home. After analyzing expenses and finding your money holes you can seal them by changing your mind. Then you would find that you can afford to put aside $100 a month for example. This is enough to make a fortune later. Every business needs a starting capital, even your own.

After realizing that it would be a piece of cake to put $100 aside, open a savings account, name it “Emergency-short term” and start transferring money. The best way to do it is to pay yourself first. Whenever you get a paycheck from your employer or whenever he transfers your salary to your regular checking, transfer your own salary of 100 of dollars to the new savings account the very first moment after receiving it. I made a goal to have a short reserves up to $2000, which will be for emergency payments, which may exceed my regular paycheck for example new tires or lawyer payments or accountant or whatever. My second savings account is called “Emergency long term” and this keeps money, which would be needed in case I lose my job until I find a new one. Typically it is recommended to have about three to six months of last salary to keep a living standard for three to six months after losing job. I plan to keep $30,000 on this account and I am still building this reserves. The rest of my money goes to my investing account and ROTH IRA. If you want to build your emergency savings along with an investing account so you can start investing soon, you can rotate contributions. One month send the money to the savings account, next month send it to the investing account.

As my sister said, why saving now and lose my life by refusing all its temptations since I am young. I still live my life satisfactory, spending money for whatever I want while building my financial independence. Everything is in our own head, start changing it first.

Trading stocks or commodities is a very good chance for everyone to make a good income every month. Unlike other businesses an investor doesn’t need selling any goods, having hated boss, get up early every morning, paying large overhead, have no employees, dealing with competitors and an investor doesn’t have to work 8 hours a day, 40 hours a week for a paycheck which hardly covers your household expenses. An investor has the only one competitor. It is himself.

It sounds too good to be true, right? I know some traders who trade stocks for a living. I read about legendary stock operators who started this business with only $3 in their pocket at their age of 14 (Jesse Livermore, How to trade in Stocks) and they made a fortune. Jessie Livermore became a millionaire at 29, Nicolas Darvas at 39 etc. All of them considered trading stocks as their businesses. Darvas, even tough a dancer made $2M trading stocks. Livermore made $3M in one day trading stocks and commodities. Dan Zanger turned his $10,000 account into $42 M within 18 months. He currently holds a world record. There are many other successful traders around and they are the proof that it is possible for everyone to trade stocks or commodities for a living.

However about 80% of investors or traders loose their money. It is because of their own mistakes, lack of discipline, money management and rules which can protect them against losses.

A few years ago I did well. I had my own business (I still have it) and I made a lot of money annually. I felt very confident and amazed of trading stocks and commodities. At that time I traded stocks, not somewhat successfully (I always ended up even), but I was confident about my trading. Honestly I felt myself to be someone important, knowing more than others. I was proud. Instead of further studying I was looking for more opportunities for investing. I had a lot of money and I was looking for another vehicle to make even more. My poor results in stocks didn’t convince me to do something about it: study and improve and save the money prior I would learn how to get better.

One day I found a commercial in a newspaper. One local commodity broker was offering opening a trading account with a guidance (they called it somewhat money management). They presented how great results their clients could have when following their strategy how much money in a very short term I could make. Of course they told me all about risk in commodities, but all their charts looked way better and tempting. I agreed to open the account and start trading commodities even though I had no idea how to trade. Why bother! Their management was my security net which would protect me. The salesman assured me that it was their best interest always to help me making money. He said that he wouldn’t be working in such a company if it wasn’t their best effort to make money to their clients. I was convinced and opened an account.

The entire process of opening the account was usual. I had to submit a questionnaire and my income sheet and all other information to prove I am financially secured and in case of any loss I wouldn’t end up ruined. The “trader” or whatever he called himself explained me how the trading would look like. Their best analyst ever in the world would call me with his picks. He would explain me why he picked such commodity, where the buy point should be and where to place the stop loss. Then I listened a long explanation of using stop losses. I felt as a CEO of the Earth. I had a lot of money and I was treated as VIP and at that time I was going to trade commodities. Big bucks were supposed to roll into my pocket. I was going to become a big trader making millions and quitting my current job. What a bright future!

The spinning wheel started its spinning. I do not remember and do not have any records of my trading with me. I remember I was trading a crude oil, orange juice, wheat, gold, cocoa, and other commodities. Gosh what a big trader I was! Every day the analyst called me and dictated his picks. I made notes and I was proud of myself when others around me could see me talking with my broker and giving him orders what he should buy or sell. After the list was done the analyst switched me into their trading department where I dictated all trade orders back to a different guy who was executing them.

Day by day I was trading their recommendations. At first, the account showed a small loss. It was OK. I knew from the stocks trading that it is normal having a small loss. It would go back up. After a few months it really did. I was almost even and satisfied how well I was doing. Instead of continuing its growth the balance turned back down and it never recovered. I was watching my account slumping down. Within six months my $30,000 account had $1,000 balance.

I called to my “manager” what was going on. He told me that all $30,000 accounts were doing well and were showing gains. “How come that my doesn’t?” I asked. “It is because your account doesn’t have $30,000 balance and our analysis are balanced for these accounts.” I couldn’t believe my ears. “So you are saying me what?” I asked again. “Add more money to your account to rise the balance back up to $30,000 and you start making money, or change the strategy of your trading into something more secure.” was his answer. I was shocked. The bright future of the greatest trader ever was gone. I didn’t want to put more money into a black hole and I didn’t want to give it up. Back in my mind a voice was telling me to strive trading to get all my losses back. With $1,000 account it was impossible however. I decided to end up this madness and closed the account with a loss of 29,000 of dollars.

Later I was thinking about this lesson. What happened? What I did wrong? I couldn’t believe that the broker was willing to lose a good and wealthy client just for only commissions from trading. It must be every broker interest having a satisfied client trading with him for ever and generating him enough on commissions. None of this was true.

The conclusion of this story is what I realized later. Never, ever listen to tips, never, ever trade others recommendations. Do not let your broker trading your own money. They don’t care about you. They make money even when you are losing and this is their only interest. Whenever you feel you need help because you do not know how to trade, it is better to put the money aside and study first rather than lose them by repeating the same mistake. I know that I will return back to trading commodities one day. I also want to trade options, but I still do not know anything about it. Until then I will study how to trade options and commodities on paper and later I open a new account again.