The 30-Minute Stock Trader

by Laurens Bensdorp

  When the market crashes, advisors will say: “Yeah, you’re down 45 percent, but the index is down 56 percent! We’re actually doing well, relatively. The market will go up long term, and you’ll make your money back.” They don’t know when the market will go back up, though, or by how much, and you’re forced to deal with the stress of losing your hard-earned savings in the meantime. You may never see that money again. They’ll tell you, “You just have to deal with this.” They make you believe that it’s “part of the game,” that this is normal and happens to every investor. It’s not, as you’ll learn in this book.

  Of course, you don’t have to deal with this, because your money should have been out of the market. You only have to deal with a tanking balance if you hand your money to someone without skin in the game. There is no guarantee your balance will turn around. The “experts” are lying to you, because they have a different agenda—they want commissions.

  And the thing is, when you add up all of the hidden fees, more than 90 percent of advisors don’t even beat the index. Advisors need a huge staff to conduct their complicated analysis, and they pass that cost off to you, through management and transaction costs, and sometimes performance fees. If you bought the index yourself, you wouldn’t have paid any of these costs. You could have done what they’re doing, on your own, for free.

  The wealth management industry wants you to depend on them. They want you to think you can’t invest on your own, even though you can. That the only people in the know are smart analysts from the big banks who can analyze company fundamentals, pick the right stocks for you, so you hold and profit forever.

  But the analysts from big banks are not traders. They don’t make a living buying or selling stocks. They make a living recommending stocks, writing what people want to read, and they don’t have any skin in your game. They get their salary and that’s it, regardless of how their recommendations perform.

  Their job is to sound smart, look good, and convince you to hire them. They’re good at that. They’re not good at making you money. They get paid whether you win or lose. They get paid when they beat the index, even if the index is tanking, and you’re losing half of your money. If they beat the index, they’ll not only get paid, but they’ll also get praise from their bosses, and bonuses, as your retirement funds vanish.

  Hiring one of these firms would be like a basketball coach hiring a sportswriter to make his lineup decisions. “I’m sorry, Kobe Bryant, but a writer said that you aren’t playing well, so you’re not playing tonight.” If the team lost, the writer would keep his job and his salary, but the coach would get fired. It sounds ridiculous, but that’s how the financial world works.

  Not only are advisors’ incentives misaligned with yours, but their strategies are flawed.

  In certain times, like bull markets or the recent up markets since 2009, their strategies will work. Those times are great for buy-and-hold strategies, but they aren’t sustainable, because the market will inevitably shift. Sooner or later, it will end in catastrophe, like 1929 or 2008.

  The good times, like right now (October 2016), are the most dangerous. The market has been on an uptrend since 2009, so buy and hold has outperformed most quantified strategies. That means inexperienced traders are convinced that buy and hold works, that stocks will always go up in the long run. The longer this happens, the more stupid capital will be invested in the market, and the larger the downturn will be when the happy days are over. Excess greed will cause the inverse reaction of excess fear, and the market will drop sharply.

  Another example was after the dot-com boom. There was a bull market from March, 1995 to the early 2000s. Everybody was trading long in tech stocks, and making 30 to 50 percent a year, easily. Everything was going up. Then the NASDAQ dropped 80 percent in two years.

  This trend has happened over and over. Don’t get greedy. Prepare for the inevitable bad times, so that you don’t lose your hard-earned savings.

  Fundamental traders say, “This stock should be priced at X based on our fundamental analysis.” Then they’ll peer into their crystal ball, saying, “This company’s management is good; therefore, their price will go up.” But you don’t know everything that’s going on in a company from a few numbers. That’s pseudoscience.

  A company’s stock price is not determined by its fundamentals. A market, by definition, means prices are determined by money flowing in and out—supply and demand. This is decided by the emotions of the traders and investors who create the demand, or basic desire, to buy or sell the stocks. A stock’s price is the result of the aggregate perception of traders, not the company’s fundamentals. If the market likes a company, its price goes up. It’s as simple as that.

  You could have had the greatest company in the world in 2008, with healthy earnings ratios and the like, but market sentiment would have killed you. All stocks went down, on average, 50 percent. Your fundamental trading analysis could have been perfect, but you would have lost half of your value because your exits weren’t based on price action.

  If you use a fundamentals approach—“I believe in this stock,” “I think management is good,” or, “The price is going down, but that just means we can get a good price”—you’ll have irrational confidence in holding a losing stock. If the stock keeps going down, like Enron in the 2000s, when the press told you to keep riding this “great stock that was so cheap,” reality will hit you like a ton of bricks. You’ll lose all of your money. Enron went to zero.

  Without exits based on price action, you’re forced to rely on company reports and the news. By ignoring price, you’re exposed to the next potential Enron scenario. You can’t wait until your stock drops 70 percent, and banks and analysts tell you to sell. That’s far too late; you will have lost a fortune.

  Price earnings numbers are based on earnings numbers, but if those reports don’t reflect a clear and honest reality, which they often don’t, those numbers are useless. They’re often manipulated. Price action is real, yet it’s ignored by most fundamental traders.

  Any type of trend-following strategy (like the ones in the following example) would have saved you from staying in Enron until it was bankrupt. However, two brokerage firms, using fundamental analysis, RBC Capital Markets and UBS Warburg, didn’t downgrade Enron from a “strong buy” until the stock had fallen from its fifty-two-week high of $84.87 to $4.14, in late 2001.

  In the following table, you’ll see nine different trend-following exits. None of these exits follows a magic formula—they’re all simple, with one thing in common. They all follow price action. They ignore analyst reports and price-earnings ratios—the exit point is defined by looking at price action, nothing more.

  Any one of these various exits would have prevented disaster easily. Some exit earlier, and some later, but the evidence is clear that any kind of simple price action would have saved you from catastrophe. Which one you chose wouldn’t have mattered—the problem was that most people didn’t have an exit strategy at all.

  What happens when the earnings information you’re relying on isn’t correct? Enron. Bankruptcy. You must base your trading decisions on price action. Fee-based advisors don’t, and they therefore expose you to the risk of ruin.

  Why would you pay someone money for a suboptimal strategy, where you bear all the risk, and they get paid even if you lose money?

  You’re smarter than that, which is why you’ve picked up this book.

  I’m not here to sell you my expertise in picking stocks. That’s not a winning strategy. My philosophy is that anyone can set up a winning, automated stock trading strategy that need not require more than thirty minutes of work a day. Your strategy will beat the market consistently, and employ varied strategies so that you’ll make money even when the market is going down.

  It involves using a quantified approach in which we define our trading decisions based on programming proven rules, based on historical price action data, into a computer, which then does all the grunt work for you. It’s back
ward looking, based on statistical evidence, rather than forward looking, paying “experts” to peer into a crystal ball.

  You’ll be able to ignore misleading TV messages, because your computer will tell you exactly what to do. It takes the confusion and stressful emotions out of trading.

  You’ll have to work hard up front, in identifying and crafting the perfect strategy for you to make money long term. But I’ll walk you through the process, step by step (this is what I do with my coaching clients), so that you won’t need experts anymore and can make money on your own.

  This is how the process works.

  First, you formulate a hypothesis of how the stock market works. In order to trade successfully, you need a clear vision of your beliefs. Your beliefs are the core tenet to any successful trading strategy. Without clear beliefs, you won’t be able to define rules nor trade a strategy successfully.

  Next, you need to use those beliefs to create a rule-based process of entry and exit criteria for which stocks to buy and sell. Once your beliefs are clear and proven true based on sound market principles, they need to be quantified into specific rules. The more specific they are, the easier your trading.

  Then, this is all converted into an algorithm by a programmer, with back-testing software. I hired a programmer to do this for me. The human mind is unable to process such large quantities of information on a daily basis, so you leave the computing to…a computer. You automate my beliefs and rules, and the computer evaluates them in a matter of minutes. Not only does it save time, but it evaluates without your natural human bias, which we all have. The computer does nothing but computes the strategy and spits out accurate data.

  Next, you need a historical data provider to back test your strategy. In order to actually trade your strategy, you need scientific proof that it has an edge. Otherwise, you’ll lose money. We need to first determine if there is an edge, then quantify it so that we know what to expect in the future.

  Finally, you optimize the combinations to get your desired results, and then determine whether or not it’s tradable. Once you have a data provider and your rules correctly coded, you define the exact parameters. There is a specific process for this, and it must be done correctly. The task is not to create parameters that show the best results, because past results don’t guarantee future results. It could have been a coincidence. You need to test your parameters and see if they can be trusted to perform well in the future, too. Your strategy must be robust.

  Once your strategy is created, implementation is easy. Every day, you download the daily price updates. Then, you scan with your software and code (written for stocks that fit the criteria of your strategy). These two actions simply require clicking a few buttons. The computer does all of the work.

  Every day, the software provides you with the buy and sell orders, automatically.

  Then you simply enter the orders in your broker platform manually or in an automated way, and go about your day.

  As you can see, the process can be divided into three areas:

  Your beliefs of the stock market, and how you can make money

  Programming and testing

  Execution

  This looks like a lot of work, but it’s not. I began turning my beliefs into a strategy in 2007, and it has taken me a long time to perfect it, but once it’s done, you have it for life. Creating your strategy is difficult work, but it grants you a lifelong asset.

  Now, the whole trading process takes me less than thirty minutes a day. All I need to do is the execution part, clicking a few buttons and entering my orders into my brokerage platform.

  You’ll have to work hard up front, in order to identify and craft the perfect strategy for you to make money long term. But I’ll walk you through the process, step by step (this is what I do with my mentoring clients), so that you won’t need experts anymore—you can make money on your own.

  To build your own thirty-minute trading strategy, you need to start by getting to know yourself. Who are you, in terms of trading? What’s the optimal trading strategy for your personality? Are you impatient? Not at all? Are you a crowd follower, or an independent thinker? If you have one of those qualities, then what should you do about it, to compensate or take advantage?

  There are three elements to knowing yourself. You must know your personality type, your edge, and your beliefs (which can be broken down into psychological beliefs, strategy beliefs, and position beliefs). You need to define yourself in each of these terms before creating your strategy. Otherwise, you’re destined for failure.

  Let’s start with your personality type. Knowing yourself, and how your personality meshes with market principles, is essential. If you’re impatient, you’ll need to account for that. If you’re disciplined, you can follow a higher-frequency trading strategy, but you’d better be sure you’re actually disciplined. If you don’t have the discipline to follow a daily routine, make sure you have a strategy to compensate for that. It may be smart to use a strategy that trades once a week, for example. If you want to watch the news every day, you need to understand the potential harm of that, and plan accordingly.

  Trading success comes down to understanding and quantifying your edge versus the market. One of the biggest edges you can have is understanding yourself, and how your beliefs will reflect your trading. It’s difficult, but it will pay massive dividends—literally.

  We all know this stuff intellectually, but few people put in the work to understand themselves. The results are catastrophic. I know this, because I’ve made all of these mistakes. I had to learn the hard way, but you don’t have to.

  First, I learned to acknowledge the limitations of human nature. We all think we can avoid them, but we can’t. It is, indeed, our nature. Here are some universal principles I’ve learned, through ignoring them all and suffering the consequences.

  It goes against human nature to ever sell a stock at a loss. When you’ve lost money, human nature is to wait for the stock to rebound. It’s the sunk cost fallacy; our brains don’t want to admit we made a mistake. When you reframe the result to understand that it wasn’t a mistake, but rather one small result in an overall sea of long-term profitability, you can let that go. No individual trade matters; what matters is the long-term result of thousands of trades. Selling at a loss isn’t a bad thing, and it’s often the best thing you can do. It means you saved yourself further losses, which could have destroyed your balance.

  Next, decisions to sell should never be influenced by your initial buying price. Considering your initial price makes you fall prey to the sunk cost fallacy, or its reverse, thinking you haven’t milked the stock for all its worth. It makes you lose objectivity and rational thinking.

  This is easy to understand intellectually, but hard to follow in practice. Our emotions have more sway over our decisions than we care to admit. Most people refrain from selling a stock because they don’t want to close a position with a loss. That’s ridiculous. The market doesn’t care how much you paid for a certain stock, so why let your entry price impact your buying and selling?

  It’s crucial to learn this all through real-world experience, because there’s no way to simulate your emotional response to the unpredictability of the market. You need to know how it feels to win money, and more importantly, how it feels to lose money. You can read and study and think you know how to trade, but until you know how your psyche is impacted by constant losses (which everyone experiences), you are not ready to trade seriously. Start small, with money you can afford to lose. Treat it like an apprenticeship, or internship. Pay your dues, and learn through cheap failure. Otherwise, you’re doomed to fail expensively. Overconfidence in stock trading can ruin your life.

  I was so naive when I started. I had an initial base capital of $30,000, but I expected to earn $100,000 (or more) a year. That was ludicrous, and it led to impatience and overaggressive trading. I wasn’t unique, though. Many people I work with think they can make 300 percent profits or more a year, not understanding th
at aggressive trading comes with serious risk. I was undercapitalized, and it was the death of me.

  Worse, I didn’t have a plan or strategy. I just wanted to be Mr. Hotshot Trader. I needed clear and realistic objectives and goals, and a method of achieving them. I wanted to project a certain image to the outside world: a rich trader dominating this exciting, fast-paced world. It was nonsense. I needed a plan. I never defined which kind of strategy I would trade, or considered which strategy would suit me. Would I trade fundamentally, algorithmically, or through technical analysis?

  I just sat at my screen every day, watched the news and charts, and bought when I thought prices would rise. I always put a stop in, but neither the buying decision nor the exit point was based on rational strategy. I was just guessing, but I convinced myself that with experience I’d be able to “feel” the movement, and then I’d be rich.

  With an account of $30,000, I needed to take enormous risks in order to potentially make a living. My account rose and dropped 10 percent in a day, constantly, but I thought nothing of it. I thought I was close to finding the Holy Grail, that 100 percent correct strategy that would never fail.

  I had no self-knowledge. I didn’t know my strengths or weaknesses; I didn’t know who I was. Therefore, I had no idea what my edge was. I had no knowledge of psychology, and I did no work on myself. Trading is comparable to professional sports; you can only succeed with the proper mental state, training, and strategy. Trading is psychological warfare, yet I was going out there clueless. I had no chance at becoming a successful trader.

  Now I can see that I wanted to trade because I had a lack of adventure in my life. I thought trading could fill that void while getting me rich. But through years of transforming my thoughts, beliefs, and psychology, I’ve learned that trading is the worst place to look for excitement and adventure. Looking for excitement in the markets is a virtual guarantee of failure. It’s essential to have proper motives for trading. If you need adventure, find it elsewhere. That’s why I do adventure sports and travel constantly.