How I Trade

What methodology do I follow?

This is a very tough question. What methodology do I follow? For me it is best done than said! When somebody asked this question to me for the first time I was caught on the spot. I follow an empirical method to investing. I do have some principles that I try to follow. After doing a lot of trading and analysing my trades I have found that there are some things that if I try to adhere to in general, I remain in good shape, whatever happens to the market. And these become my priciples. Here are some.

Be flexible.

Have a compelling reason when you enter a trade.

Try to have a macro picture.

Analyse your trades and learn from mistakes.

Understand your psychology and capatilize on your strengths supressing your weaknesses.

Have patience.

Limit your losses, grab your gains (don't be too optimistic).

I can go on and on... There are so many. If I keep on thinking, it may go endless. Of course these things are quite easy to say, but I know they are difficult to adhere to. How effectively you can control your mind, will eventually dictate how successful you become. What I have learnt is that everybody has a different psychology and comfort level. As mentioned in Alexandar Alder's book Trading for a Living the beast is in your head. You need to understand how your brain works and adapt.

What kind of investor am I?

I am an equity investor. I have (at least for now) only invested in equities (only on the US stock exchanges). I have not done options, bonds, tresuries or currencies trading. I also do not invest in Mutual Funds (hey I am young and I want to do it myself, why do I get in somebody's boat). I do not do day trading. In more than 4 years that I have traded, there was only one instance where I bought and sold a stock on the same day. In stocks I go long as well as short (this I have started pretty recently). Actually really speaking eventually I intend to do the whole gamut of this. But for now I will be sticking to stocks only.

To elaborate a little bit, I do not have any specific rules as to which stocks I buy. Small caps, Mid caps, Large caps, Blue chips, cheap stocks under $5, expensive ones above $400 (you know this one!) all are ok - as long as the company makes my cut. And how does a company make my cut? Hmmm, that is interesting. There is not single source or specific way that I start following a company. Usually it starts with me reading an interesting article, review somewhere on the Internet. Or say somebody like Cramer (our Mad Money guy) would recommend it. Or a company is featured in say IBD (Investors Business Daily). But this is just the start. It takes a while before I decide to do anything with the stock.

How do I select a stock?

I rely a lot on analysts (the guys who research companies) and their recommendation to get a sense of a company and it's valuation. I am not an economics grad and am trying to learn the trade. So I (at least for now) do not know how to value a company properly. My best option is to look at different analyst research reports (whichever I can get access to). My brokerage firm TD Waterhouse gives me access to a variety of research reports from Goldman Sachs, S&P, Argus etc. I also look at First Call ratings and estimates from Yahoo Finance. Investors Business Daily ratings also give a good perspective about how a stock is doing. If I like what I see and read then the stock comes in my list. Then I start following the stock. Many of the stocks that are in my list currently, I have been following them for at least more than 6 months, and some years. That means I have gone through multiple of their earnings cycle. That does not mean that I was holding the stock all the time. All this observation gives me kind of sense of what to expect from the stock, short term, mid term and long term. I can make my trades more confidently. It allows me to factor in the risk of my trades and being comfortable with my trades.

Stay tuned!