My stock market and trading philosphy (4-2-2010)

(EDIT: after reviewing this, I realized that the majority of my opinions remain the same, however, the practical application is headed in a new direction).

What is a stock market philosophy?

As I use the term, a stock market philosophy is a person's evolving perspective and approach to the stock market. Highly personal, and quite subjective. Everyone has one, whether they trade or not, but if they are traders, then their market philosophy is the basis for developing and applying a trade strategy. As a trader, and someone with a vested interest in what happens in the stock market, I like to think that mine is at least somewhat relevant and in line with reality. As I find where and where it isn't a good match with reality (e.g., when I am losing money), I adjust it.


Before I started actively trading, I spent quite a bit of time thinking about how the market works, and how I could subsequently capitalize on it. My philosophy has changed a lot since then. Here are what I think are the important parts (nothing new - but concise and my own):

The stock market is an incredibly efficient economy

Meaning, as a general rule, and over some length of time, the price of a stock perfectly reflects what market participants think it is worth.

The stock market is not a perfect economy

However efficient, there is still some delay (or friction) in the spread of information and subsequent delay between what most of the market thinks a stock is worth and what it is currently trading for. The delay between what everyone thinks a stock is worth and the value of what it is currently trading at represents an opportunity for the savvy trader to make money.

Value is subjective - no single method or trader makes the rules

People don't all agree on how to properly value a stock, and if we did, the basis for valuation would rapidly change - some of us would try to anticipate what everyone else is doing and cash in; by necessity causing someone else to not profit as they expected, eventually leading to a change in the valuation basis.

The market is never wrong

That is to say, the majority market opinion is what drives longer term stock price.

Market participants are human

And more or less like me. Common characteristics include (in no particular order):

• Some people want to make money in the short term
• People use multiple (and sometimes difficult or impossible to quantify) criteria to determine when to trade a particular stock
• Some people are constantly adapting, refining, or re-vamping our approach to the market - i.e., what we think works or doesn't work
• People are what make short term price action incredibly difficult to understand, predict, and/or explain.

Conclusion:

Plenty of things to talk about here. A personal market philosophy is the foundation for a personal trading strategy - I would encrouage new traders to spend some time thinking about how they think things work, what is important, and what is not. And make it your own. If you take the time, I think you will see a lot of what I have outlined evident in my overall entry and exit strategies.
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Who am I?

I am pretty much an average guy, with maybe a little more on my plate than most guys my age. I am thirty-something, and a full time husband and father. And... a full time employee, part time engineering consultant, and full time student (I am currently finishing up my PhD in engineering - ABD as of 12/14/2009!!!). I manage to find some time between the cracks for short term stock market trading.

I work hard and want to work less. When it comes to trading, I have made quite a few blunders, and expect to make quite a few more. I seem to learn trading lessons best the difficult way - it provides a sense of 'lesson ownership'; consider this blog a good faith effort to lend some of this sense of ownership to others - if you want to try and learn from my mistakes, keep reading!

My overall goal is to determine whether or not profitable short term stock market trading is a myth. And whether or not short term trading offers everything that I keep telling myself it does: plenty of money, and the freedom to work less, independent of geographical location (think Costa Rica!!). I expect that finding this out is going to be expensive and a lot of work.

I officially started this adventure in Spring of 2009. I started blogging about it on December 31, 2009.

What I am not:

I am not a writer.
I am not a financial consultant.
I do not have unlimited financial resources.
I am not particularly clever, or brilliant.
I am not (very) afraid of sounding goofy.

What is this all about?

Do people need another opinion on day trading?

Probably not.

Do people need something like some proof on whether or not day trading is actually profitable?

Well, if you are anything like me - more than dreadfully curious about it all, finding yourself entertaining thoughts of what life would be like if day trading were profitable, and wondering what it really takes to pull it off - then yes, this blog has a place in the world.

This is my real world experiment in day trading (or rather, at this point, short term stock market trading). I plan on documenting - for the sake of posterity (and simply because writing about all of this keeps me on track) my successes, failures, frustrations, and any of the yet-to-come hard earned lessons, in real time. I think there is a very real chance of failure - Anne Logue cites an 80% first year failure rate for day traders (Day Trading for Dummies), and I remember reading somewhere that typical losses while learning the hows of day trading are around $20,000. I still have a ways to go.

The last month and a half has been profitable, after actively trading - and losing - since last spring. I am not conceited enough to pretend to be an expert, but I have learned a few things that I wish I had known when I started; and I thought someone else might appreciate the real-world application.

Which is why I decided to start a blog.

If you have done any research at all on trading/investing in the stock market, you come away realizing that there are a lot of things to think about when starting to trade. I found it all quite overwhelming: which category of approach, which markets, propensity to risk, initial sources of funding, brokerage, tax considerations, etc., etc. All great information, and worthy of considerable thought - I slogged thru it all. But when it comes down to it, to find out if day trading is actually going to work, a guy needs to start trading. This is the story of what happened - and what is happening - as I am starting: what I personally find important, what I find out about myself, and how much money is floating around. Un-rehearsed and no guarantees.

What you won't find on this blog:

A list of which stocks I currently own, or recommendations on what to buy, or my exact buy criteria. (I am somewhat dubious of personal buy recommendations, I come away thinking they are self serving, or that I am getting the information too late...)

What you will find: a lot of messy honesty, a lot of evolving personal opinion.

When it comes down to it, no matter how complex the tools and approach, the value of the trading account has to increase. And if mine is not, then I will try to figure out why and change my approach.

So - if you have questions about day trading, questions like:

* Can I make money doing this?
* How much money can I make?
* How much money do I need in order to make money doing this?
* Do I have what it takes to make money doing this?
* How much time does it take?


Then keep reading! Not that my answers to the questions will be right, but if you are willing to benefit from my mistakes, I am sure there will be plenty of material for lessons. There are a lot of people writing a lot of stuff on how to be a successful day trader... one question that has always bugged me - if these people are so successful at it, then why aren't they doing more trading and less writing? Maybe I will be able to ask the same question about myself some day. =)