School of Hard Knocks
At the writing of my previous post I had an IRA that I was going to actively trade with approximately $7000 in it. I started actively trading stocks with neutral results but then, with way too little knowledge, began trading options spreads. The worst part is that I was successful out of the gate. Pretty largely successful, actually. In the span of about three months I took my IRA from $7000 to around $8500. I then spent the next six months taking it from $8500 to $3500. After this colossal derp, I realized that I *may* not know what I was doing. I shoved the $3500 into what I considered some conservative positions and stepped away from investing for about a year.
At this point it was pretty obvious to me that I needed some education. This was a tough thing to admit as I work in the investment industry, but even my hubris couldn't argue with my results. I had access to some various online investing classes and started from step one. Even though I was already familiar with the basics of the stock market the refresher didn't hurt. I worked my way through courses in investing basics, the basics of stock, basic fundamental analysis, basic technical analysis, and basic options. I can summarize the lessons I learned fairly succinctly: Even though I was fairly knowledgeable and able to determine good stocks to follow, I was entering positions without an exit plan, and I was buying based on emotion, not on logic. I developed a set of criteria to add positions to my watchlist and then developed succinct rules for entering those positions. Further, I developed exit criteria as well. My last step was commiting to strictly adhere to the rules that I created while periodically reevaluating my criteria based on the performance of my trades.
So far I've done an excellent job of adhering to my plan. This has actually been the most difficult part of the whole thing. Part of my routine is that I evaluate the market by sector every weekend, drill down to sectors that are bottoming or moving sideways over the last 3 months, and then select stocks from within those sectors. As for the individual stocks, I require them to be 5 positive trends within the following criteria: Volume Ratio 5/30 Day, P/E Ratio, P/E Relative Ratio, Projected EPS Change, EPS Growth over 5 years, Company Growth Ratio, Acc/Dist Current, Cash Flow Growth over 5 years, Debt/Equity Ratio, Insider Trading, EPS rank within their industry group, Price rank within their industry group, and Industry Group rank. In addition to 5 positively trending criteria, no more than 3 of these categories can be negatively trending. Additionally, there has to be relative strength in the company's financials along with positive estimates from analysts. I also look for stocks with the same bottoming or sideways price performance over the last 3 months and am open to all but the most volatile of stocks. Lastly, the stocks must have average volume of over 250,000, be optionable, and have a PEG Ratio of less than 1. There have been several instances where I've wanted to compromise because a stock has had all but one of these criteria but I've held strong.
I'm on my second trade so far and it's worked out quite well. My first stock was KKD and I ended up with a 6.94% net gain between 2/15 and 4/16. This while the S & P returned 3.48% over the same period. My current trade is EGHT. I put the trade on 5/23 and am up 15.05% versus 1.20% for the S & P over the same period. Additionally, I've placed 11 trades in my paper money account, netting 6.27% since approximately April. This has been roughly equal to the S & P over the same period. I'm going to begin posting my weekly watchlist search results as part of my confirmation of this process.
So, after reading all of this, you're probably searching for a point. I didn't start with one outside of a sort of investing catharsis, but I think I'd encourage everybody out there to develop a plan and stick to it. Doing so eliminates the variable of our emotions, allowing us to better refine our method and ideally improve returns.