At the beginning of this journal I said: If at any point my account value falls below $25,000 I will stop trading. If this occurs I will take a step back and reevaluate. Live to trade another day.

As of the close on Thursday (3/8/2012) my account value was $24,877.

While I'm not terribly excited about this fact... I am proud that I'm not continuing to trade my account to $0 and that I am reevaluating my trading strategy. It also feels good to be honest and continue this journal opposed to quitting.

The major culprit was a horrendous trade in Deckers Outdoor (DECK). The stock was down 5% on the day and had pretty much flat-lined during the afternoon. I bought into this level, taking a counter-trend bet the share price would recover. When I entered this trade I did not have any stop in place or profit target in mind. My thought process was simple: The price had gone down 5% already so it shouldn't go down further.

After 2PM the stock started to drop. Once it had fallen even further, I thought two things:

1. I don't want to lose money on this trade. So I will average down.
2. The stock was already down around 5% and it is now down 6%... the stock really shouldn't drop further. So I will average down.

Long story short the stock continued to drop and I continued to average down. I ended up holding over-night hoping (key word here) for a bounce Thursday morning. Deckers opened down and continued to drop and I sold everything right before it rebounded to where I would have broken even on the trade. Instead I lost over 2k.

Although this might sound crazy, I'm glad the trade didn't come back and that I took a huge loss. Had I exited break-even it would only be to my future detriment. I would have been reinforcing bad behavior. While losing over 2k on one trade is hard to swallow I think its only for the best in the long run. It made me realize that I didn't have any plan or system in place.

I'm taking the weekend to write down a trading plan with hard-set rules.

While I added another 1K to my account to be above the 25K PDT rule, I am not going to trade live money until A) I have a plan with B) hard and fast rules.

Here are some overall things I am looking at:

1. REDUCE & FOCUS I think first and foremost I need to focus on a few instruments. Before I was looking at stocks that were up big or down big and jumping in and out without knowing anything about how the stock acts. Constantly jumping around creates many problems.

Here are three symbols I am looking at: SPY, USO, AAPL

Trading SPY has many benefits. The spread is .01, Round Trip commissions are $2 or less. I can adjust share size up or down easily. Although I have enough capital to trade the ES I think trading SPY is better in the beginning for these reasons. Also, if I do well with SPY I can always move to ES.

I think focusing on a few stocks will be so much easier. I won't constantly worry about scanning and looking at all these different stocks. I will reduce the number of charts and numbers flying at me. I will have to process far less and as a result be able to focus on my strategy and following my rules.

2. SETUP I have to find the setups I want to take and only trade those setups. I cannot arbitrarily make trades as I had been doing. I need a defined system in place and track it overtime. Only then, should I make changes etc.

3. TRADE MANAGEMENT I absolutely have to create a set of rules and follow them. Always using stops. Only risking a set amount per trade. Never averaging down (gee I think that might serve me well). etc.

4. PSYCHOLOGICAL What are my strengths and weaknesses? One thing I discovered is that I hate to lose. I need to accept that losing is part of trading. If I can accept losses and treat them as part of the business I will do much better.

I will be back soon to post my trading plan in detail and I hope people can comment on the strengths and weaknesses of the plan. Hope everyone is having a good weekend!

Congratulations for sticking with the plan.

Mike

Hi UnderPar,
I wish my golf was as good as yours.

Trading stocks is particularly difficult because they all have some personality, they tend to gap irrationally sometimes and are prone to big moves by major players before announcements. It is sometimes hard to figure why they move until the rest of us get information. I gave up on the stock picking concept a long time ago.

I kind of like futures. by focusing on a couple of instruments I learn what to expect from them and I can read their behaivior a bit. I found that 80% of stock movements are related to underlying index movements - so why not just focus on the index/future? It reduces the unpredictability of strange instruments. Of course, I'm no pro either.

A trading plan, to my mind, has to be specifically tailored to the instrument you are trading. In my case, I am only interested in specific situations and times because I have studied the probabilities of a specific response. I know some people can read a chart like a book, but before I risk money, I want to see something that falls into one of my setups. That helps to reduce the randomness from overtrading. I think of myself as a card counter at the blackjack table - the edge is thin, so the strategy has to be applied accurately and in small bets.

Good luck,
mkoning