Lessons From A $10+ Million Penny Stock Trader

many of you know I came to the conference last year my expectations were blown away the speakers and the presentations were great I'm a big skeptic when it comes to trading seminars and education for sale I really don't think too many of them are worth it but this conference that Tim has put together as an exception I've been looking forward to coming back all year I was registered to attend and I was recommending to other traders long before Tim invited me to speak so I'm honored to be here and be speaking to you today before we begin I want to extend a big thank you to some people who were a tremendous help to me Zach show us in the corner the PowerPoint artist Mark Patterson is not here and Scott Herman proved to be very valuable consultants and my wife Kimberly she Becca who's sitting towards the back she made many many sacrifices to make this possible I don't want anyone to get mad at me for missing lunch so to make sure we finish on time I want you to hold your questions until after them dump the presentation we have a lot of stuff I want to get through I'm going to stick around during lunch and again after the presentation fin RDF after the conference finishes today I will stick around until every question is answered so please feel free to come up to me later and we'll I'll answer any question you have thank you I have with me three of my all-time favorite trading books the market Wizards by Jack Swagger we are going to start off today with some quick trivia the first person to get the question right gets a copy of the book the Dow hit a high of 381 in 1929 what was the last year you could have invested in the stock market with the Dow still below the 1929 peak let's give me a guess 19:54 who's closest it's a full 25 years later now the Dow hit 190 no six did you use Google but the Dow hit 119 oh six investors would have one more chance to invest in the market with the Dow below 100 in 1942 a full 36 years later so if history is any guide back up the Dow's most recent peak in 2007 was fourteen thousand 100 now if history is any guide that means you'll have one more chance to invest in the market the Dow below that level sometime around 20 37 Charles Dow invented the Dow Jones Industrial Average in 1896 this one for the next copy of the new market Wizards how many stocks from the original Dow are still there today do I hear one who said it first alright give it to you you got it ge is the only stock remaining in the Dow from 1896 tracking hundreds of stocks like most modern indexes would have been a monumental task before the days of computers and calculators interestingly the Dow is not an index it's an average that means it's not market cap weighted it's simply an average of all the prices so a $5 move on a $200 stock has the exact same impact on the Dow it's a $5 move on a $10 stock last question this one for the stock market Wizards stock market closed for four days following the terrorist attacks of 9/11 stock market was also closed for four days excuse me that's not the answer by the way that's not the answer or stock market was also closed in 1914 when World War one started how long was trading suspended at the outbreak of World War one he's closest for months we got it there was so much fear of financial panic that our government forced trading to be suspended for four months in 1914 and now no prize for this one does anybody know what percent of new traders fail well there is no exact answer but I always wondered about this so I did some digging around I was surprised I actually found a number of different sources for that statistic and here are a few of them researchers in Taiwan track the performance of traders over five years and perhaps the most comprehensive study ever done on the profitability of traders they found that out of a typical six month period more than eight out of ten day traders lose money there was a New York Times article that said regulators who have examined the books of day trading firms say that more than nine out of ten traders wind up losing money in 2008 the prop firm to code trading was shut down by the SEC and the legal proceedings that followed the records of the accounts were made public there were 206 active accounts when the firm was shut down out of those only 33 were profitable 84% of them were not making money what's more only 7 accounts were worth more than $50,000 meaning only 3% of the traders were demonstrating any serious success so these sources put the failure rate somewhere above the 80 to 90 percent range but those numbers include established experienced traders if we look at new traders then the failure rate would easily be much higher perhaps a lot higher than 90% and what do I think I think it's easy to make money trading stocks but it's even easier to lose money there are plenty of examples of traders who make money for a while then go on to lose it all after almost 13 years of experience I still find that consistent profitable trading is extremely challenging the only thing that convinces me that I'm any good at this is the balance in my trading account only one out of ten people that attempt the trade will want to make money and stay in the business obviously we all want to belong to that minority the 10% of traders who succeed in this short time we have together today I want to talk to you about joining that 10% Club please call the meeting to order I don't know that you but I'm not interested in just mediocre success my goal is to be a great trader I want to be among the best of those 10% I'm going to share with you my story of how I got started and I'll offer some advice and insights on how to improve and I'll tell you what I think you need to do to succeed despite the challenges facing us it can be done let's start at the beginning my first experience with the stock market was back in 1988 when I was in the eighth grade I had the opportunity to being a stock market contest put on by the school we had teams of three players each and each team was given $100,000 to play with there were over 100 teams competing among all the schools in the region unfortunately my teammates being young adolescent boys that they were didn't have much interest in winning no they were way too excited by the opportunity to buy Playboy symbol PLA honestly I didn't care much for their juvenile strategy I wanted to play to win needless to say playboy didn't do much to during the ten-week contest and we ended up with a modest loss but the next year I grew wider I recruited two teammates who were completely indifferent and convinced them to let me manage the entire 100,000 for the first six weeks I scoured and studied the financial pages of the local newspaper looking for patterns something that could give me an edge besides just picking companies that sounded cool tried lots of different ideas usually trading low-priced stocks and an attempt to capture a big move and at first nothing worked six weeks into the competition I was dead last out of over 100 teams 100 grand reduced to $65,000 LX 21 was on the verge of his first ever account blow up but then I noticed something oak industries symbol Oh a que every few days would alternate between closing at one dollar and one in 1/8 my first stock trading system was born bite at a dollar short at one and 1/8 after it worked a few times much to my shock and surprise it closed at one and a quarter a 25% game unfortunately time ran out on me my account now at one hundred six thousand dollars a gain of over sixty percent in four weeks I finished first in my school but fell short of being the regional winner by just one or two thousand dollars the real victory though was the seed it planted in me idea of making money just by playing with stocks fast forward 10 years happily married and living in New Jersey I worked for a small family-run company we installed sound systems computer networking and all sorts of electronics one job we had was at a real nice house on the bay it was a huge job speakers security cameras home automation the works this guy was loaded and he wanted it all Marco Fiore a bachelor in his early 30s made his fortune day trading at 6 foot plus and over 250 pounds this guy looked and acted like someone right out of The Sopranos he was the perfect stereotype for mid-level Italian mafioso I would love to ask him to teach me how to trade but the prob was he had an unimaginably bad temper once we were scheduled to work at his house finishing up a home automation system that had very complicated voice recognition software marco took the day off so that he and my boss glen could spend the whole day programming the system glen was not the most reliable type he couldn't make it that day and forgot to tell Marco but my coworker nice still went big mistake when we arrived without Glen Marco flipped he's not here he canceled I took the day off for that you guys have any idea how much money he just cost me I make $10,000 a day you guys cost me $10,000 hope you're awake $10,000 a day as stuck with me I would have been happy to make $1,000 a week let alone $10,000 a day but now I knew what I wanted to be when I grew up a day trader in that picture I found a Marco I found it in this book born to steal when the mafia hit Wall Street I would only find out years later that Marco is not a day trader he was one of the head honchos of a big boiler room operation run by the mob ten grand a day yep those guys are good don't jump to conclusions running a boiler room still looks good on a resume here's his updated bio an accomplished businessman mr. fury has a strong background in mergers and acquisitions strategic planning operations and now Marco Fiore is Marc Fiore the movie producer making movies such as mob Street a film about the Mafia running Wall Street and other mafia flicks here he is with John Travolta and John Gotti junior promoting the upcoming Gotti and the shadow of my father don't underestimate stock promoters would take me another couple years till I started I moved on and started a small business building wooden swing sets was pretty good money and I enjoyed the work but being self-employed no one was withholding my income taxes by November my first year in business I had over $25,000 in the bank most of it earmarked the IRS wasn't due until the following April 5 months to go and I had 25,000 sitting in a checking account I wanted to do something with it this was 1998 online trading was taking off day traders were making ten thousand dollars a day so I just start decided to start researching stocks see if I could find something to do with my 25 grand wasn't planning to do anything until I found a really good idea this wasn't my money I could not afford to lose it so stock research practically became a full-time job I looked everywhere I looked at websites I would spend hours at the local borders flipping through every trading book I would try services but nothing was worthwhile I had to learn everything the old-fashioned way figure it out for weeks on end I would read and research whenever I could finally late one night I had my Eureka moment I found a chart pattern two short internet stocks now I was ready to go in January of 1999 I took some time away from building swing sets armed with my short trade account I put my 25 grand of IRS money to work and started trading it was always my intent to return to building swing sets but then a few weeks I was making more money trading within a few months I was making far more money trading I never actually decided to become a trader I simply never stopped trading over the years I've had far too many near-death experiences with blow ups and my first one happened after only six months of trading here I was I was on a roll I was making a prop on every single short I could do no wrong in July of 1999 I saw stock Metricon symbol m co M start making some relatively large moves once it was up almost 200 percent on the week I placed a few trades nothing too big then he kept up so I shorted some more and it kept going so I shorted some more before I know it I had too many shares of the stock that would not stop going up only a few weeks before the stock was trading at $5 and then on July 9th 1999 my 25th birthday the stock broke through the $50 level and surged all the way to $55 a share my account was down by 50% on this one trade I couldn't take it any longer the stock kept going I would be broke so I felt like there was no choice and I covered just like that at the top of a month's to run I covered my entire position a loss of almost $50,000 now we're a to later when I recovered my sanity I took another look at that stock and you know what with fresh eyes I could see that the right time the short it was now but it was too late not on my broker side shares too short and of course metric um crashed over the next few days it was devastated my confidence was shattered words cannot describe the trauma going from invincible on top of the world to screwing up so bad to blowing more money on a single mistake than you ever made in a single year with only six months of experience it was natural to question whether any of this was actual was it just a hot run and now my time was up I seriously considered quitting while still ahead confidence is not easily restored after a wreck of this magnitude go ask Baron Kimball fortunately I didn't quit I decided to persevere a little longer things were slow for a little while then the market really started to heat up the internet bubble went crazy beyond my wildest dreams the Nasdaq index doubled in only seven months if you weren't trading back then and there's simply nothing to compare it to every day there were stocks doubling and tripling it was insane and I was shorting into it like a madman from July to the end of the year my account grew from a low at fifty five thousand to over six hundred fifty thousand dollars thank God I didn't quit I've been trading ever since there's a lot I've learned since my early days I'm going to share some of that with you now let me start with this question who would make the best trader an accountant a broker an economist a mathematician or Jim Cramer kidding about Cramer or a poker player there's no correct what's your guess poker player there's no correct answer but I strongly believe that by far the poker player to make the best trader author the market Wizards jack Schwager notes that it is interesting that so many of the traders I have interviewed our poker players I learn more about option trading strategy by playing poker than I did in all my college economics courses combined if you apply the same principles of poker strategy to trading it increases your odds of winning significantly why is this what could playing poker teach a trader several things first of all poker players pay attention to their opponents they want to know who they're playing against who are the smart players who has deep pockets who likes to bluff I find that in trading it is really helpful to try to understand the other traders that are in your stocks I pay attention to who else is in the trade who is buying and who is selling just like in poker you want to pay attention to your opponent's second good poker players have superb money management skills in poker you're out of the game if your count drops to zero good players are notorious for folding quickly a good player knows when a bit big and when to quit and traders should do the same perhaps even more important poker players learn to think in terms of odds probabilities they do not predict the next card or what hands are going to have they observe and interpret then bet based on the odds when the odds are poor they fold when the odds are good they bet and when the odds are really good they bet big I found an immediate improvement in my trading the day I officially stopped trying to predict I realized that all my profits were coming from reacting to what I saw never from predicting what I thought would happen now I try to only think in terms of odds and probabilities when the odds are in my favor I bet on the odds are strongly in my favor I bet big I do not predict the outcome I merely look for good opportunities and bet accordingly I used to work every day of every week of every month of the year I barely ever took days off to avoid burnout a couple of years ago I started taking summers off when I'm off from trading I'll still check in here and there just to keep an eye on things does anybody remember liquid metal back in 2010 that's a stock I surely would have traded if I wasn't often trading if you remember see no global shipping this past summer si NO si no global shipping that's another stock I surely would have traded if I wasn't off from trading when I took a look at both of those charts I had no idea where I would have traded them at first glance I think I might have entered too early and trying to figure out where I would have exited it's just a wild guess and this made me realize something I can't trade part-time I can't just check in with the markets I need to be immersed in the markets to be in sync with everything going on when I'm immersed in the market I become fluent in its language I'm able to interpret it when I'm away becomes a foreign language and it doesn't make much sense what does this mean why is immersion important to me a chart pattern by itself is often not enough to determine when and where to place trades I read chart patterns all the time but without understanding the entire situation it's much harder to figure out what to do there are times when the exact same chart pattern could be a buy or a sell so when I read a stock chart I want to take in all available information on the stock and then put the chart and the price action into context of everything I see the first thing to do is identify why is it up or why is it down what's the catalyst behind the move is there any news out are there any rumors are any analyst following it did any of them change the recommendation or price target I try to gauge the sentiment on the stock I look at chat rooms message boards twittering I want to know who else is trading it other a lot of day traders in the name a lot of people shorting it how about people with a big following is the media talking about it how about bloggers or seeking alpha some stocks move in sympathy with others another company in the sector at major major news there's often carryover even fundamentals can come into play do they have a lot of cash or debt what's the float or insiders buying or selling and finally the type of market wearing can have a huge influence on how stocks trade most information can quickly be filtered out as noise but what's most important in what should be focused on changes each time once identify the key elements behind stocks move then I can begin to understand the chart pattern I could not imagine doing this if I were trading part-time or only checking in with the market used to trade a little more like that and I would miss stuff all the time I don't mean just missing opportunities I would focus on the setup and miss pieces of the puzzle that could have greatly improved my entry or exit remember metric um the stock I told you about you get killed on my first year in retrospect I can tell you there were pieces of the story I missed I could have avoided that loss I might have actually made a profit on that stock if I was more in sync with everything going on I have over 400 stocks on my watch list most of them I'm just watching I have alerts on them just in case but with so many stocks I need a way to narrow them down to the ones I want to trade I developed a basic rating system once a stock on my watch list becomes tradable I move it to the top of the watchlist and then assign it a rating from one to four one star rating is the most common trade set up they're not great but they're tradable if something merits a three star rating and I definitely do not want to miss it and four star trade setups are the best every once in a while there's a trade setup it's even better than a four star rating so I have to add one more level to talk to her you know we use on stage but it's very very special because if you can see you know the numbers all go to 11 look right across the board 11 or 11 most 11 in the Alps go up to 10 exactly does that mean it's louder than any louder well it's one louder isn't it it's not 10 you see most most blogs going to be playing at 10 you're on 10 here all the way up all the way up you know the way up you're on 10 on your guitar where can you go from there well I don't know where exactly what we do is if we need that extra push over the cliff you know we do put it onto a web in exactly one laughs why don't you just make 10 louder and make 10 be the top number and make that a little own these count to 11 my 5 star rating is an 11 on the vine now they aren't the best they're the best of the best the five-star rated trains are very rare they are gifts from the market when I first started trading I figured why not trade all the setups the lower rated setups would take up most of my time energy and buying power but would add little to my bottom line over time I began to realize that majority my profits were coming from the four and five star trades even though they were a small minority of my trades and sometimes by trading the one or two star setups I would completely miss a four or five star setup the distraction of having so many trades would cause inferior entries and exits I realized that the opportunity cost was so great that I could actually make more money by trading less I want to trade only the best setups now remember my boss Glenn the owner of the small company New Jersey I told you about he loved to make bets with friends we had a thing going when we had a disagreement we'd occasionally settle it with a friendly $1 bet I would win so often that I started to keep track after a few months I had won 19 out of 21 and the next time we had a little disagreement he wanted to settle at the usual way with a $1 bet and this time I declined the offer he looked at me the mix of buff element and disappointment what why won't you bet me because I only bet when I know I'm right my track record had nothing to do with being smarter than him or better than him it was because I was being very selective you want to win at trading and only bet when you know you're right the lesson here is don't trade just to keep busy I have to constantly fight that urge and I struggle with it just like everyone else it's hard to stare at moving numbers all day long and not act it's hard to watch people post trades and chat rooms all day long and not act but just because everyone else is buying waffles doesn't mean it's a good idea the fan is going to be lowering rates so get your money out of t-bills and put it all into muffles tasty waffles with lots of syrup actually come to think of it I think there's a name for people that trade that way jackal it's a jackal it looks like a jackal jackal jackal it's a jackal jackal I wasn't right the first time you said it why the hell would it be right the next ten times Trading to keep busy costs you money you need to be patient patient to wait for the best opportunities patient to wait for the best entries and patient when you're in a trade to let it work think of it this way as traders our job is to be patient but most of our time should be spent watching and waiting you know let me tell you I have insecurities in my heart I never feel like I'm gonna make any more money trading even if I'm up by half a million by June then in my heart it's all I expect to make for the whole year you know much I expect to make next year not the rational answer I mean the gut feeling zero you know where this comes from no matter how hard I work no matter how hard I try I cannot create trading opportunities I want to be ready for when they appear but I will not find them if they don't exist anytime I do find a great trade I'm an utter disbelief that people could be so foolish to let me find a stock for such an incredible price I'm always surprised to find the great trades I never expect to find one again it's all about waiting for the good opportunities the best of the best trades the legendary Jim Rogers said it best I just wait until there's money lying in the corner all I have to do is go over there and pick it up dynamic trade management exits based on the best chance of success going forward I spent years designing and testing computerized trading systems I never found a single trading system performance was improved by the use of price tops not one you ever notice how many times stops get hit and then the stock goes on exactly as expected there's so much noise in the market that stops get hit before the trade actually fails I do not like stops to me they're just arbitrary price points so how do I decide I should exit a trade well what's the reason I got in the trade what's the thesis for it I exit when the thesis is no longer valid what about profit targets if everything goes perfect I can expect a stock to hit a certain price that's the best case scenario what I also said I want to react not predict if I hold out for that best case scenario price that I'm predicting instead I want to read and reinterpret the trade each step of the way once again is the thesis still intact does everything I see continue to support the original idea sometimes the thesis actually improves and I'll hold on to the trait longer than I originally expected but once the thesis breaks down all exit it's the same method for both stops and profit targets I talk to you about being immersed in the market the market is in constant motion new information is always being revealed nothing is ever the same from moment to moment when something changes I want to adapt to it for both stops and profit targets I'm reading the trade moment-by-moment it's dynamic trade management but it's not always easy perhaps new information has come out and the stock is moving I have a mounting loss this may be a good opportunity to add to the trade or maybe a sign to get out now I have to quickly decide what to do I want to make a decision based on what's the highest probability of success going forward not based on where I bought it or how much money I'm losing so if I'm having a lot of trouble figuring out the best thing to do I use this technique I'll clear my mind as much as possible I imagine that this is the very first time I've ever seen the stock the chart and everything that goes with it it says if I don't have an open gainer I don't have a position I've never traded the stock before then I ask myself if I didn't currently have a position what would I do right here if I never traded this before would I buy it or short it now looking for the quick answer from the gut I'm trying to avoid any rationalizing a lot of times it's the rationalizing that got me into the trouble spot in the first place this may sound weird but sometimes I'm really confused it's actually best to ask and answer the question out loud by speaking and hearing our thoughts we have different parts of the brain sometimes you can get a surprising answer when you ask and into the question out loud I'm short and the answer is I'd buy here I exit immediately sometimes the answer is I'd be shorting here which case I made up adding to it and often the answer is I do nothing which case reduce my position size and continue to watch for more clues unfortunately I don't come close to my full potential I screw up all the time and it's sabotage in myself i overthink trades I chicken out of good trades and take profits way too early I hold on to losses like a dumbass and I'll hold on to profitable trades too long just sit there as the trade reverses and watch my profits evaporate I should know better in any given week I probably only make fifty to seventy-five percent of what I could if I executed my strategy perfectly even when I'm on top of things I probably realize less than 90% of what I could make but I don't believe that anyone realizes 100% their potential if two traders trade the same system they will often have drastically different results this means that a large part of our profits are not determined by the strategy but by the trader himself as a trader I want to perform as close as I can to my full potential why is it difficult to act in ways that maximize our profits the problem is that traders are human human mind is programmed by evolution this program to enhance the organisms chance of survival it is not programmed to be a good trader what's good for survival it's often the opposite what's good for trading few of us have access to a trading coach so each one of us is our own coach that means we are the ones must master our emotions and our thinking to become the best trader possible you must become a master of your own mind mastering the self as a trader is never complete it is a journey with many setbacks but the rewards are plenty I start with learning as much as I can I study books on trading psychology next I want to be an objective observer myself I observe myself when I trade I want to be brutally honest with what I see the bottom line the P&L doesn't care about my ego to find faults I need to be humble enough to admit them that's not always easy let's about the different elements of the self you want to be aware of and master the biases I'm so concerned about when I describe the clear your mind technique see our brains are always trying to convince us we're right through many built-in biases here are some of the major ones blind spot bias if you don't think you have this bias than you do it's the tendency to see biases and other people around you but to be blind to the influence of the bias in yourself improving as a trader means actively looking for the influences of your biases not denying them this one is probably the biggest one for traders confirmation bias confirmation bias is the tendency to look for and find evidence to support your already existing beliefs and to ignore or reinterpret anything that contradicts your beliefs confirmation bias is real easy to see in politics our party is always perfect it does things for the right reasons the opposing party is always incompetent it has evil motives and of course we believe these things because we look for and cherry-pick the things that prove it and trading this is very dangerous if you're long a stock the tendency is to look for all the reasons why you're right why it's such a great trade the market doesn't care how good your arguments are and neither should you the only thing you should care about is making money so you should be playing devil's advocate actively explore reasons why you're wrong where else does confirmation bias come into play I see it all the time and people try to pick a bottom or top on a stock I admit I do it too I remember back in September when the stock for Netflix dropped by almost a hundred dollars in a week each day is it dropped people were trying to pick the bottom and each day they readily found plenty of reasons why the bottom was in but each time they bought it it just kept going lower confirmation bias is also dangerous when using technical analysis if you look at enough in decay you can almost always find something that confirms what you're looking for in fact you can often just change the timeframe on an indicator because you convert a cell signal into a lie some cost buys the tendency to believe in something because of the cost sunk into that belief once we start to lose money on a trade we are very reluctant to take a loss and move on this is natural we all do it but it's definitely not very beneficial for trading the odds of success going forward have nothing to do with how much money you're losing trust me I've had occasions where I was short of stock sitting on a large loss and if it weren't for having a loss I might have been buying it and going long my bias gets in the way and hindsight bias this one drives me crazy it's the tendency to view past events as predictable hindsight bias will convince you that trading is easier than it is I kick myself over and over for leaving money on the table and missing such obvious good traits the knee-jerk response is to get the next one unfortunately the result is over trading and trading too aggressively now by far the aspect of trading psychology that gets the most attention are the emotional extremes of fear and greed there's plenty written about it we should all be very familiar with it I just want to make two points it is not fear or greed that's the problem it's the impact they have on you that's the problem I've had many trades where despite skyrocketing fear due to a mounting loss I was still able to execute my trade according to my plan you don't have to suppress fear and greed just not give in to it the second thing I want to point out emotions are part of the human experience I've heard it said that you should trade without emotion show me someone without emotion and I'll show you someone without passion emotion and passion are the driving forces that motivate us to succeed imagine aaron rodgers the star quarterback of the Green Bay Packers in the Super Bowl last year do you think he wasn't full of emotion heading into that game do you think he just casually walked into the first play of the game with a ho-hum attitude of course not the trait of great champions is not that they don't have emotions but that they're able to channel their emotions in positive ways the extreme emotions become a positive energy that drives them to have peak performances when it counts most and now the one that to me is much bigger than fear agreed confidence / confidence to be specific I pay more attention to my confidence levels than anything else so many of my biggest losses came on the heels of an increase in confidence that now I do everything I can to minimize my confidence remember the metric calm trade where I blew half my count I was way too confident what happens when champion athletes get too confident mike tyson was one of the most feared fighters in boxing history the undefeated undisputed heavyweight champion of the world he knocked out almost everyone he met and often in the first round in 1990 he went on to fight Buster Douglas a relative nobody Tyson was a 42 to 1 favorite this fight was supposed to be a warm-up bout for his next opponent Evander Holyfield Tyson did not take the fight seriously overconfident he didn't try and prepare the way he usually did and Tyson did just lose and one of the biggest upsets in sporting history he got knocked out show me an overconfident athlete and I'll show you someone who was on the verge of an upset just like a champion boxer I'm susceptible to getting knocked out when I get too confident my confidence ever balloons into hubris watch out every time it's ever happened I had my head handed to me on a platter when I'm overconfident I'm not on guard I put too much money on trades I take trades I shouldn't and I don't see the warning signs of when I'm wrong in order to suppress my confidence I try not to celebrate my big wins the big wins aren't because I'm so awesome Orma genius they're gifts from the market I won't have a constant fear that my next big loss will be right around the corner I bet you guys would be surprised to see how little confidence I have so how can I do it without confidence its conviction there's a subtle yet profound difference between confidence and conviction when I'm in the zone I have a strong conviction to take the appropriate action to follow my plan even when I almost even when I have almost zero confidence its conviction I want not confidence I want to break things up a little the stock market is a big auction I thought it'd be fun if we could play a little auction game I want to raise money for charity so we're going to use real money Las Vegas was hit harder by the recession than any other major city in America let's give back to the community we're in will donate the proceeds of this game to three square a local charity that fights hunger and property poverty in the area I need two volunteers to play the way the game works is I auction off a hundred dollar bill the winner gets to keep the hundred dollar bill but both players will donate their bid to three square I need two volunteers anyone interested in playing where is Tim yeah come on sure Reaper no booth come on up thought so what's your name Rick Rick good to meet you Greg could you thank you volunteering thanks Tim appreciate your enthusiasm come on now this is for charity let's do this come on 200 bucks I like I do is big for this yeah it was bidding for it your bid goes to charity if you win get the hundred bucks okay are you awake winner gets a cup of coffee yeah all right want to start we're just gonna keep bidding bid 10 bucks I've seen this before aah get down I'm sorry I'll bid I can't win but I'll bid 20 all right 25 25 30 Nestle I can take this your blackmail are you serious nevermind my game just do it sorry uh 30 all right 35 now we have 40 50 we got 50 55 echoes 60 we got 67 hundred 705 no seven bucks of charity seven hundred bucks of charity got it congratulations thank you 501c3 yes cool and sorry 66 again thank you very much appreciate it go get a coffee oh it's for poverty and helping the hungry do I get to meet them they're right outside in the hallway all right let's talk about the blow-up what are the ways that traders blow up their accounts what excuse me ma'am don't you think you've gambled enough no okay we're required by law to ask every 75 hours get on the free grain I hope Marge Simpson doesn't remind you of yourself at the trading computer the trader is losing over and over but they can't seem to stop trading then they are probably addicted to the action the only way they stop trading is to bleed the account to death second trading too big often new traders don't have much choice they start with a small account making back losses when a trader when traders take large losses their natural impulse is to recoup it quickly they find themselves increasing the trade size and repetitively making large bets they compound the original loss until there's not much left and last poor money management money management is what keeps you in the game when things aren't going so well if you trade long enough you're bound to have some bad luck some stretches of trading where you do everything right but you still have a string of losses without proper money management the traders account account may not survive such a slump hopefully you will graduate from making these errors as you get better and build up a substantial account it's understandable that a new trader could blow up an account they're still learning but when you read the market Wizards books you find that even some of the great traders experienced blow ups Victor Neto offer a legend in his own right blew up twice long term capital management was run by some of the most brilliant minds and Finance including two Nobel Prize winners their fund blew up in spectacular fashion so how could a seasoned trader someone who's been making money sometimes for years suddenly blow up surely he should know better than to make the typical beginner mistakes it doesn't start off with a wild bet in 2005 I had my best year ever I made over $450,000 on a single trade remember that one Tim I had it thank you I had a prime broker with Goldman Sachs they were just starting the cultivated niche as a specialty broker for small hedge funds and they took notice in my performance and proposed putting together a fund for me to manage they said they could even get the initial investors lined up they thought I was that good and I believed it you would think I learned my lesson from my near blow-up with Metro come in my first year trading with a big ego is dangerous as soon as you start to think you're smarter than the market you're asking for it you have to respect the market it is much bigger than you well I wanted to follow up 2005 with another great year I started to dream big I wanted to take it to the next level self-improvement books talk at length about the importance of setting goals so I set ambitious goals for 2006 I set a goal to make 3 million that year earlier I said react don't predict wait for opportunities these are important lessons I'm getting to that thank you as soon as you start to try to make things happen you start forcing trades stocks will go up or down on their own time you can't make money just because you want to well 2006 started off ok I was actually doing pretty well but I was unsatisfied with my typical returns along came a penny stock film X industries symbol FM x IQ it shot up from less than 25 cents a share to over $1 in just a few days it looked like a great opportunity for a quick profit so I shorted some at first it's just a regular old trade completely ordinary there's no warning sign trader doesn't see what's coming he's not planning to bet the farm on a single trade in his mind he's just doing what he's always done and so it was for me I had no idea what was coming question how much money can you lose when you buy a stock all of it 100% how much money can you lose when you short a stock right in theory the losses are infinite the potential losses are infinite when you short your risk exposure can be deceptively large your position size might not actually start off too big but as the stock goes up it mushrooms whenever you use leverage or sell short your potential losses are always larger than your account so on full mix FMX IQ went to $2 a share now I was getting excited this was a good opportunity getting better I was carrying a loss but I was going to make up for it by shorting more at this price and here's where the confidence becomes so dangerous overconfidence got me into the trade early overconfidence is how I ended up trading big and now overconfidence led to denial this can't happen to a good trader no I'm too smart to make such a bad trade but before long I was wiring money in from all my accounts to avoid a margin call from below 25 cents a share it surged past four dollars a share I now had 550 1,500 shares short I became such a big risk to my firm that my broker threatened to close out some of my position and of course could only get worse guess who disclosed a 4.8 million shared position in the stock none other than Goldman Sachs the same broker who was loaning me all those shares to shorten the head of the brokerage firm called me up to inform me we're gonna have to close out part of your position it's not going to be good when news of this it's the street well brokers are not good traders markets price in news and often sell on the news and of course he bought me in right near the top stock came close to $5 a share at the peak at one point I was staring at a loss of one and a half million dollars when is the best time to plan your exit when will you get out the best time to think about when you're going to exit a trade is before you get in the next best time is right after you enter the trade when hedge funds blow up they often explain it away as due to unusual circumstances or extreme market conditions a black swan as if they did everything right and the failure was due to something that only God could have predicted nonsense it's never an excuse to say you didn't see it coming a trader must assume full responsibility for anything that can happen what would you do if this trade no matter how unlikely becomes a black swan a once-in-a-lifetime event have you ever heard the phrase it can't go any lower it can't go any higher yes it can it can do whatever it once well slowly over the next few weeks the stock did come down a bit took a while until I closed out the entire position by the time it was all over I'd lost seven hundred seventy-one thousand dollars my motto thanks in part to this experience is expect the unexpected these days when I short a stock I try to think of the absolute worst case scenario possible what if the stock gets there what will I do will I survive there's no way to describe the psychological trauma of a loss of this magnitude I almost quit trading it took me years to recover in fact I never quite regained all my confidence to this day there's nothing I fear more than the blow up to anybody who wants to trade as a contrarian I want to warn you to be very careful and by the way to this day I never ever set monetary goals many great traders have had similar catastrophic experiences and quite a few of them are much worse than mine an experience like this could be the sad conclusion to your stint as a trader but the great traders learn from a disaster like a Phoenix they rise up from the ashes and they become even greater than they were before the market is a big competition we're all competing with each other for finite amount of money often one person's profit is someone else's loss in order to make it you need to have a higher standard than the masses average does not cut it even above average will not be enough being profitable demands a high level of accountability almost all of us here are self-employed we have no boss there's no one to tell us what to do no one to motivate us no one to guide us without someone to keep us in line we're on our own so to find a way to rise up to the challenge to put myself on a path of success I like to think of it like this a professional is someone who makes a living practicing as craft an amateur is someone who does it for fun as a hobby if I want to be successful if I want to consistently make money as a trader then I have no choice like to think and act like a professional this is the essence of my personal philosophy here's what it means to me train like a professional recall that 90% of traders fail now consider how easy it is to become a trader anyone with a few thousand dollars to their name can open an account and call themselves a trader could you imagine any other business where this is the case short on my guitar and call myself a musician or what if I put QuickBooks in my computers that make me an accountant this is absurd but that's what some people are doing when they open up an account and just jump in to that I say of course most people will fail if it's that easy to get started consider what van Tharp said in the market Wizards book the top traders that I've worked with began their careers with an extensive study of the markets I began my career with two months of research before I placed my first trade and I continued to be a research maniac after that earlier I said it's conviction that you aren't and where does conviction come from both conviction and intuition are the result of many hours of study and practice conviction doesn't come from just reading a book or following a service after 13 years I still research a retraining books and I attend conferences I'm still in training take your training as seriously and train like a pro number to act like a professional there's a razor-thin margin between making and losing money on a trade I took a look at my last 3 years of trading and I found that my average profit was 1 point 4 percent per trade on a $5 stock that's only 7 pennies now mistimed entry on a final stock could easily be more than 7 cents a sloppy exit could easily cost me 7 cents even on a $20 stock 1.4% is only 28 cents I can't tell you how many times I went to sell my shares on the twenty dollar stock only to have the bottom drop out on me I press the send button and three seconds later with a tiny partial fill the stock is down 30 cents killing practically all my profit the point is that the little things can make a big difference so professionals pay attention to details they focus on fundamentals they look for every little edge they can find I have spent countless hours trying to find ways to make trading more efficient looking for ways to shave seconds off the time it takes to place orders and find information I wrote custom programs for stock alerts so I rarely miss a stock that's moving made my own order placement program just to take a few seconds off how long it takes to put in an order I go way over the top but so do professionals Lance Armstrong used to tweak his bike paying attention to every little millimeter of adjustment just to find the slightest improvement he would spend weeks in the wind tunnel during the offseason just to shave a few seconds off of his time trials pros realized that every little bit adds up how does a pro act in daily life once the perform his best every time he pays attention to both his mental and physical health I mean sleeping right eating right and exercising last work like a pro when I'm trading I want to be completely focused on trading I'm up at 4 a.m. Pacific time and I work past the market close at 1:00 I keep break short I don't even take breaks for meals I'll eat at my computer I try to avoid all distractions it means no personal phone calls no web surfing no emails I take this seriously so many times I took a loss or missed a profit for some dumb little reason just missing one little piece of information or a quick opportunity to grab a slightly better price every little bit adds up I've always been haunted by the impression that some traders don't have to work hard at this they brag about their success and make it sound easy it really bothered me for the longest time why do I have to work my ass off why does it always seem like I have to put in so much effort compared to everyone else over time I found out the traders who really succeed all work very hard Scott Herman the famous super secret broker knows many very successful traders he once remarked to me that of all the really profitable traders he knows every single one that works really hard many of the market Wizards make it a point to mention the hard the work they put in the irony is that so many people are drawn to the markets because it seems like an easy way to make a lot of money yet those who excel tend to be extraordinarily hard workers almost to a fault here a couple more excerpts I want to share with you how much vacation time do you take a year I don't take vacations during the trading days I haven't missed a day in the market in over ten years even when you're sick even when I'm sick I've traded through pneumonia I've traded with a temperature of 105 degrees he then goes on to describe his daily routine a 14-hour days and even working on Sundays don't you ever feel the need to take a break my desire to be the best trader is greater than my desire to take a break I don't like to get out of the swing Marty Schwartz was one of the greatest traders of all time in his autobiography he too talks of working 14-hour days when Jack Swagger asked him about his trading rules Schwartz made it a point to mentioned that the last line on his rules simply says work work and more work these guys make me look lazy even the best the legends of the industry work hard but working hard is not the same thing when you enjoy what you're doing putting in the long hours doesn't bother you when you're having fun if you're living your dream and making a few sacrifices really doesn't matter if you know how much work went into it you wouldn't call it genius I couldn't agree more only one out of ten new traders make it this does not mean you have only a 10% chance of success know if you follow the path of what the 90% do then your chance of failure is 100% follow the path of the 10% and your chance of success is 100% do not leave your success up to fate if you do the right things you will succeed it's up to you thank you my name is Tim Sykes and I teach people to trade stocks I am a self-made multi-millionaire so this is the ideal trade that I'm going to talk about I want you guys to understand every single aspect of this trade

Channel: Timothy Sykes

Views: 122,042

Rating: 4.8842316 out of 5

Keywords: tim sykes, timothy sykes, penny stock millionaire, Million Dollar Traders (TV Program), penny stocks, Penny Stock, Timothy Sykes (Person)

Id: gXzJm85mtns

Length: 67min 8sec (4028 seconds)

Published: Sat Jun 20 2015