If anyone has read some of my previous entries I apologize in advance since I will possibly be repeating myself here, but I believe some of the things I am internalizing to be well worth mentioning a thousand times. Also, full disclosure, all of my trades for the week were paper trades.
This week I managed to not overtrade (to my standards anyways. Again, these were all paper trades), focused on two patterns and differentiated clearly which pattern I am better at (breakouts + pullbacks). I also managed to trade only during the morning and late afternoon, when the odds are there. So in sum I managed to put myself in a position where the results of my trading system would not be polluted by my emotional decisions (aka gambling), thus allowing me to truly judge how good or bad I am with these patterns.
So my process so far:
After having had several trading teachers across different niches, I am fully convinced nothing else has the potential of penny stocks (unless perhaps cryptos which I dipped my toe in back in the day and got burned. Not for me). And if you are trading penny stocks, I think it is fair to say Tim Sykes' strategies and patterns have proven themselves over and over again.
So far so good.
Next step would be to determine which one of his patterns you like the best, study and practice it until you master it, and then move onto the next, right? That is the point I was at a few weeks ago. I liked morning dip buys of overnight gappers, and I was also pretty good at buying breakouts based on the results of a few months of trading.
Here is where I identified my first problem; I overtraded like crazy, with sometimes 10 or even more trades a day. This was partly due to my actual addiction to trading, but also because I had a hard time differentiating a play with good potential vs one that was a lot more risky (why do some breakouts work and some others don't??? How can i tell them apart before it is too late?). I also focused strictly on the price action, level 2... without really looking at the big picture and understanding what the stock was doing or trying to do (which would be Tim's reasoning behind pattern development). And finally, saving best for last, I would NOT cut losses quickly, managing to build up a healthy collection of bags.
So I took a step back and realized all my problems stemmed from my overtrading. Yes, cutting losses quickly is a must, but sticking to the best plays is what puts you in a position to succeed. The rest of the plays you take are little more than gambling. Thus I decided I needed a more strict set of rules to go in. Something that gave me some guarantee that a breakout would not turn around and come down crashing while limiting the number of trades I would take. And I found these rules in my first teacher (trader from Spain. Great teacher). Rewatching his videos I actually was able to draw A LOT of similarities between him and Sykes, even though they trade different niches and different time frames.
I like to think that Sykes sets the framework and the moment to go in, whereas my spanish teacher sets the detailed technique to do so. It has taken me a few weeks to adapt my spanish teacher's rules to Sykes' playfield but I think I finally have hit the sweet spot. By combining these two "sets of rules" I have managed to drastically reduce the number of plays (my winning % this week remains between 60-70%), I have dodged many bullets in the form of failed breakouts and I have let my winners run longer instead of rushing to take profits.
Here is my take away for the week:
Always understand which stage of the pattern is currently taking place. Only go in when the stock is strong and has strength left in the pattern. Avoid mature stages. This rule takes priority over everything else.
Breakouts + pullbacks offer the best guarantees (vs simple breakouts). Use Uxio's technique to time your entries. If a pullback does not happen (preferably all the way down to the actual support) skip the trade, no harm done.
Respect the importance of the Risk/Benefit ratio. If it is not above 2 or even better 3 or higher, the trade is not worth it regardless of how many things it has going for it.
Going in with the proper position size based on your risk level, entry price and Stop Loss is a must. A position that is too big can be very harmful.
Focus on volatile stocks. Those offer by far the biggest opportunities.
Draw main supports and resistances on a daily chart. Draw minor supports and resistances on an hourly chart. ONLY go in at those points. Supports and resistances on smaller time frames do not offer a good enough guarantee.
Wait for the pattern to draw itself before you go in. Do not anticipate it, and do not chase it. There is an exact point where you should get in, and where you should get out.
Selling 50% of your position when running into resistance before reaching your goal is amazing. I had never done it before but it makes things so much easier and less stressful rather than deciding between selling or keeping your entire position.
I am back to taking a screenshot of all my trades and reviewing them at the end of the day, writing a commentary in retrospect about each one of them. Great way to speed up one's learning, boys and girls.
Writing my thoughts (things I did well vs wrong, things I observed, things to focus on the next day...) about the trading day in a journal after the market closes.
Like in my previous entries, I am perfectly aware that some of these things are the ABCs of trading, no need to get all philosophical about them and I am not pumping my chest for thinking I have discovered the wheel. But also like in my previous entries, I will say studying your ABCs and truly internalizing them are two very different things. Again, all the things I write about today are not backed up by real money results, but rather simple paper trading, so I can't really claim to have proven much this week, but I do feel I am on the right path.