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.

Today’s sell off just confirmed my concerns regarding the market and possible addition to AFAM. This post is to finish my view at this stock. On some other web sites investors can read analysis about certain stock with possible future outlook, but then none of the web site comes back to the stock to revise their view based on the new market action. At least I couldn’t find any such web site. Even IBD which is providing very good reports and analysis gives you a view at a certain stock but next day the situation may become very different from what the report said. Once I read a stock report on FSLR which at that time was supposed to finish a cup of handle pattern, but market had changed and FSLR went down. I know that every investor shall perform his own research and all such reports shall be considered at maximum as recommendation. However sometimes further look at the stock by an experienced investor, trader or professional providing reports would be very helpful to any beginning investor. Such continuation can help to see more behind the stock movement.

This is why I am finishing this miniseries about AFAM because as per today I have made already my decision on this stock. If the market would be in a rally it would be easy to add more shares to the existing positions. The stock reacted well and as expected for a short correction. However today the stock was driven further down by the entire market sentiment, so adding new positions would be very risky. The positive thing is that the volume was low. It was still higher than average, but it is slowing down. The volume with the stock’s movement makes me wait for further development without taking any action. If the stock will touch my stop loss, I will sell. If it will go down, side ways or slowly up, I will sit tight waiting for it and buy new position when the price touches my first target price for pyramiding.

The entire portfolio will suffer small losses during this sell off period. Nobody knows when this will end. We may expect some improvement after the presidential election in November or later next year. Since then, no new trades shall be opened. For the upcoming period I will not take any action. I will contribute to the account with some cash making myself ready for future uptrend. It is difficult to be just waiting and looking at the portfolio showing red numbers, but there is no other way to do.

Last Friday AFAM has touched its 50 MA average on high volume. It started dropping as a rock and it was scary move. I mentioned that this move would be a correction only if the stock bounces back on high volume and it would be a good opportunity to add more shares to the existing positions. The stock did it today. It gapped up on huge volume. See the chart.

The question is however whether this move is enough to consider additional position in this stock. The market responded to crazy news about the Government bailing out Freddie Mac (FRE) and Fannie Mae (FNM). Was the entire market running up like a bull just to crash tomorrow? Since the market is in correction and today’s move cannot be considered as reasonable (almost all stocks jumped up just because of the above mentioned information) I would recommend further confirmation on AFAM’s move. If the price will continue up on rising volume tomorrow it would be a signal for adding another position.

A turbulent market with deep losses turned the trend back to correction. It is difficult to recognize whether this would be the time to give up positions and sell stocks. It requires some experience to find out that a particular stock in investor’s portfolio displays a red flag saying: “This is not correction, I am heading down.” What is the correct sell signal? William O’Neil describes two sell signals – climax run and retreat to 50 MA. However an investor needs to be trained enough to tell whether it is just a retreat and stock would potentially go back or it would never return. AFAM is the stock which gapped up at the beginning of May 2008 and since then it run up more than 100%. It doubled invested money. It grew up continuously without break and it topped last week. John Boik in his book Monster Stocks: How they set up, run up, top – and make you money describes this retreating signal and how to recognize it correctly. He says that if the stock runs south on high or huge volume and crosses 50 MA line on huge volume (or high) it is a sell signal. However if the stock runs down and crosses or touches 50 MA on low volume it probably will not continue in a downtrend and if the stock turns back up on huge volume and starts going back up on high volume, it is time to buy more shares.

Well and now let’s look at AFAM‘s chart:

This week the stock retreated from its highs. It is understandable move when considering  that the stock doubled in price within four months. It retreated about 15% – 20% down which still is within a range of a regular correction. However when I look at the volume it was falling down sharply on high volume and volume was growing the whole week. Yesterday the stock dropped deeper but by the end of the day it paired a half of its losses. Today it opened even lower, but by the end of the trading day it closed almost near of intraday high and what is the most important, the volume dropped significantly. Is this the sign of resilience to continue further down? Are there no more sellers? Is this the pattern saying that the stock touched 50 MA on low volume so no big deal it is just a short time correction and next week it will continue back up?

Let’s wait what AFAM will tell us next week. If the stock turns back up and starts growing on high volume, it would be a good opportunity to buy more shares and I will add another position to my existing one. If the stock will continue down on high volume, it will be the time to consider selling it.