(Welcome to the debut article of our new blog area called "The Traders Journal" written by our new Educational Evangelist, Gatis Roze. Gatis has been trading his own account successfully for over 20 years and teaching sold-out investment classes in the Seattle area for over 10 years. Gatis' approach to trading relies heavily on maintaining a personal Trading Journal where he records all of his results and lessons learned. Via weekly articles in this blog, Gatis will share those important lessons and the stories behind them with the hope that thay will help you become a better investor. Enjoy! - Chip)
I doubled my money on the very first stock trade I ever made. With luck, this is something that everyone should do at least once in a lifetime. I was just sixteen and I took the recommendation of a family friend to allocate a disproportionate percentage of my then net worth to one single trade. I had no trading plan and no investment methodology, yet the market offered up a 100% return. At that point, I was certain God had blessed me with special powers. In hindsight, it was nothing more than a "bait and switch" pulled off by the markets. By fooling me into thinking I was a great investor, the market provided me with the worst possible outcome: wholly unwarranted self-confidence. Many decades later, I’ve managed to profitably turn this ‘teen trading’ episode inside out.
The bad news I’ve discovered over time is that Wall Street can be an extremely sophisticated ‘disinformation machine’. The good news, however, is that I’ve also learned that my charts don't lie. Richard Wyckoff came to these same conclusions in the 1920's and wrote about it extensively. He created a market metaphor called "The Composite Operator", a concept used to explain how the market orchestrates specific campaigns intended to move stocks from weak hands (individual investors) into strong hands (institutional investors).
Understanding how these campaigns are executed and how I myself have used this knowledge to trade the markets will be fodder for my future blogs. For now, I've distilled it down into a few essential foundational basics. In revisiting my trading journal and reviewing past trades, it is clear that the majority of winners had specific attributes distinctly opposite to my first 'teen trading’ model. To use a baseball metaphor, I touched all four bases in my winning trades:
- First Base: I bought when the market was trending up.
- Second Base: I bought into one of the top two performing sectors.
- Third Base: I bought into one of the top performing industries in those sectors.
- Home Plate: I bought the best stock in the industry group.
The bottom line is simple. Focusing simply on stock selection for buys may make for scintillating conversation at cocktails parties but it is unlikely to put real money into your pocket. It's like running the bases backwards. It’s good for a laugh but the scoreboard will ignore you. My interest is - and always has been - how to buy properly in order to increase the probability of taking money out of the market. I've had Nobel Prize winning professors lecture me on truly significant methodologies which are academically interesting but can’t help me make any real money. I'll pass on their theories. Please review the chart below showing how you, too, can touch all four bases. I have chosen a stock that should be familiar to you.
Trade well; trade with discipline!
-- Gatis Roze