This is the story about how I became a stock trader. It is a long read but it gives you an idea about how the learning curve could look like for someone in his late twenties without any prior background in finance.
STARTING FROM SCRATCH
I was born, raised and currently live in a country with a solid retirement system where nobody invests in anything except their homes, let alone the “evil” stock market. Over here in risk-averse Germany we don’t even talk about stocks, I have met two maybe three guys in my entire life with whom I was able to chat a little about my late-discovered passion. Most have a strong belief that you must find a good bank which provides you with a nice diversified fund run by one of those magicians hiding on the top floor of their ivory towers in New York, London or Frankfurt. But that misconception is part of another story. My dad once dropped out of a multiday monopoly match within the first two hours because he refused to loan any play money from the bank, go figure!
I didn’t had any background in finance or any interest in it either. As an US american this might sound far-fetched but over here in germany the 2009 collapse wasn’t a thing. I was in my mid twenties at that time and didn’t even fully
realized that there was a crisis until 2010 when I somehow got in touch with the markets. Even home owners over here couldn’t have cared less about lehmans and bear sterns going belly up. However we did notice the 2011 EU debt crisis
but it didn‘t hurt our bank accounts as much as money in the closet and under your pillow isn‘t really susceptile to stock market volatility and as long as inflation is kept in check everything is fine over here! German
enginee financial conservatism in the house!
I am not talking about german banks because they obviously know how to play and lose the game just as well as their US counterparts.
THE RIGHT TRADING BOOK
Back to how I came in touch with the markets. It was in 2009 and I was sitting in my office at the university doing some research late in the evening. I can’t remember how exactly it happend but I must have clicked some clickbait ad or news and suddenly found my self reading an article about stock trading where they mentioned the book ‘How to make money trading stocks‘ from William O’Neil’ (Yes, of course it was that one). I recall searching for a pdf without success and instead downloaded another book ( ‘The Battle For Investment Survival’ by Gerald M. Loeb) onto my cluttered windows desktop. Don’t worry as I regularly bought it later on. I briefly browsed through and forgot about it after going back to my original task at hand. My research back then demanded my full attention.
Fast forward a year when I finally had to clean up my desktop. I rediscovered the book that day, decided to print it and read the whole thing that night in my bed. I never looked back and in the ensuing months and years I spend roughly 4000€ on trading book on amazon. I was hooked by the idea that you can make money by ‚buying into‘ companies like AMZN, GOOGL, MSFT or IBM.
TRADING AS A SCIENCE, A FALLACY!
I am a visual guy, I was drawing a lot as a kid and always excelled at visual puzzles and riddles and somehow I ended up with an engineering degree. So I was lucky that I found a book which focused on visuals, (read: stock charts) to begin with. It all made sense and sounded simple and straight forward to me. Pick a growth stocks according to some given metrics and with some luck (read: probability) it will turn into a monster stock. Rinse and repeat and you’ll make a fortune in no time.
The rational me figured that all I had to do was writing down every little piece of information in a notebook. You have to see it to believe it and that insanity was only topped by my excel spreadsheet where I manually filled over 60 columns every morning from 6 to 7 AM with data from eIBD, MarketSmith screens and other online sources. I even tried to reverse engineer Dr. K’s market timing model at that time because I truly believed that this must be the holy grail right there. In hinsight all this stuff was a colossal waste of time and certainly prolonged my learning curve for at least two more years.
When it comes to trading every minute which you don’t spend browsing charts trying to grasp how the markets really operates is a wasted minute. It just strikes me that the 80/20 rule might be suitable here. Spend 80% of the time watching the market and stocks move on a computer screen (doesn’t have to be intraday) and 20% of the time doing other ‚super important scientifically backed research in the depths of the internet in order to find or at least recreate the holy grail of trading‘. You guys got the irony right?
STOP LOSSES SAVED MY LIFE
After saving up my first stake and studying the markets for almost two years I finally opened my frist broker account in august 2011. It didn’t start well and my account balance slowly but steadily sloped downward from day one. The fact that the EU crisis hit at the exact same time didn’t help either.
In hinsight that was the single best thing that could have happended to me early on. I was forced to adhere to my stops from day one just to survive and that safety net is deeply ingrained ever since. I recall having over 10 stop loss hits in a row during my first months in the market. What a nice and warm welcome by Mr. Market. I was humbled but learned my lesson and as a result, never ever let a stock trade through my stops without excecuting them in 8 years of trading real money.
I got once caught in a nasty overnight gap down in $LITB and closed the trade within the first minute of the next trading day without a second guess.
A major lesson in risk management early on. $LITB gapped down 40% overnight after reporting weak earnings. I entered late and ignored three red flags. I cut my huge loss quickly and learned for good that you never ever hold a stock through earnings with a full position size.
It was already like a reflex or an instinct by that time and in hinsight I am surprised that I didn’t hold it a little longer intraday to get out at a better price. This incident really shows how I approached my stops and losses from day one and it is probably the number one reason why I am here today without an account crash under my belt (It got close only once). It goes without saying that this was also the last time that I gambled on earnings.
Today I rarely hold a position through an earning announcement at all. And if I do, I make sure to scale out beforhand so that even a 30% gap down wouldn’t make me blink. Besides my strict adherence to stop losses and the avoidance of earnings, another big part of my story is surely the fact that I never ever switched trading systems. Today I am looking at the same type of charts and similar entries compared to 10 years ago. I have a small universe of stocks including recent IPOs, more mature growth stocks and a couple disruptive names. I never touched a penny stock or futures in my life and only dabbled in options for half a year before abondoning it again. I like to keep things simple and believe that the stock market is all about specialization. I have yet to find an all-rounder who manages to juggle all the different markets and trading approaches with any noteworthy success.
THE CHEESY GOLDEN RULES OF TRADING
In my opinion the discipline to stick to one system and the ability to cut your losses quickly is the perfect combination of traits you want to aquire as a trader early on. And it shouldn‘t surprise anyone that those two rules are commonly referred to as the golden rules of trading.
If you don’t cut your losses you won’t survive long enough to make it through the learning curve. And if you hop systems all the time your learning curve will be prolonged into eternity.
As you can see both rules are extremely synergetic on a very basic level and together they build the foundation on which you can raise just any imaginable trading endeavour. If you already read a couple books about trading you probably didn’t pay much attention to the last couple sentences because you are so fed up with the so called “golden rules”. But if I would sit next to you right now I wouldn’t allow you to continue reading until you at least reread this paragraph at least five more times.
So just imagine me sitting right there next to you and politely asking you to reread it again at least one more time. Could you deny me that request? Without adhering to the golden rules you will not stand any chance, period!
As a novice starting from scratch you might argue that you need to find a working system in the first place to begin with. As a matter of fact there is no such thing as a working trading system in the beginning and there are certainly no secrets which you could possibly discover beforehand. Do some research to get a good overview of the different trading approaches and then decide wether you want to focus on charts or on fundamentals or something else depending on what you enjoy most. The next step is to simply pick an entry method. That could be a simple moving average crossover, a known candlestick pattern, break of resistance or even an earnings announcement, It doesn’t really matter.
The magic ingredient which will turn almost any system into a working one is your skill and you won’t have much of it in the beginning. You might have talent but you better not confuse talent with skill at this point. Please be aware that my story is about trading charts and I only use fundamentals to filter for ‚quality‘ by whatever means.
AN UNEXPECTED WINGMAN
In late 2011 I came back in touch with a close friend of mine. We lost contact for a couple years and as we have met again we quickly realized that we both suddenly had a common interest in the financial markets. And we never ever talked about that kind of stuff since we first met in 5th grade.
With quantuum mechanic’s entangling, black holes, and stuff like the holographic theory of our universe you really have to wonder from a science point of view if everything is somehow connected and if a thing like ‚coincidence‘ even exists.
Anyway, we had an awesome conversation that night and I recall citing plain market widsom like a fool. But we both enjoyed it. Little did I know that I was still in the first quater of the learning curve. I felt like a market wizard already and now there was suddenly someone with whom I could talk about the stuff I am so passionate about, it felt just great. My friend is into forex and with his background in coding he was naturally leaning torwards the automated side of the trading game. He is rather risk-averse and he will be the first one to tell you that he can’t take too much heat. So keeping a certain distance to the action, as it is the case with automated trading, was a smart thing to do for him. He simply has a very good flair for finance in general.
Meanwhile I continued to focus solely on stocks and it just happened by chance that I read a book with an article about automated trading and martingale systems. I already knew that maringale, or any other average-down approach, is deeply flawed but after a couple months we both somehow ended up developing a sophisticated portfolio based martingale system. We convinced ourselves that the risk can be kept in check when you just mix enough carefully backtested and non correlated systems together, apply sound risk management and allow for a couple of the systems to fail in the process. Well it turned out that was not the case and it imploded in the end when the markets changed character in october 2012 just a couple month after we launched our system.
NZDAUD set out on a one year lasting steady rally without any noteworthy pullbacks. A martingale grid based system needs retracements otherwise it will just continue to average down until the inevitable margin call spoils the party. So we were guilty of overfitting our system to backtested data despite our efforts to avoid exactly that. Once the currency pair decided that the pricing was all wrong it just exploded to a new price level without looking back and killed our ‚sophisticated‘ system in the process. The full story of this endavour will probably be part of another article in the future.
Our computers, armed with an backup power supply system, ran 24/7 backtesting more than 10 strategies in parallel with high quality tick data, in hinsight spending all that computing power on mining bitcoins would have been more profitable I suppose. So while this initial adventure into forex prologned my learning curve to some degree I don’t consider it a waste of time. From time to time it can be very refreshing to leave your regular field as this allows you to see things from a different angle and it can also be a great source of inspiration and motivation. While it was certainly a failure from the profit perspective it nevertheless was a great experience which taught us a ton about risk and especially about portoflio management and we both ended up with a great trading partner who happened to be an old friend. From a business perspective it is also irreplaceable to have someone on your side you can trust and relate to.
Call it bad luck as we launched our system right into the only year within a 16 year period which had the ability to crush it. Markets change all the time and a rigid system which lacks the ability to adapt isn’t of any value.
A QUANTUM LEAP
Through our initial forex endavour I gained some fresh motivation to lift my discrete (read: non-automated) stock trading to the next level. In the following years I gave up my proud but useless excel spreadsheet and started to follow one guy only, Gil Morales. At that point I was already a member of his service for 2 years and his meta