Stevie
One of the problems new traders encounter in trying to trade with and build on a small account are the pattern day trader restrictions. With any account of less than $25,000 you are only allowed three day trades (buying a security and selling it on the same day) during a rolling five-day period. This can get a bit frustrating, but actually may be a blessing in disguise for the novice trader.
Why a blessing? Because you will learn to become much more discriminating about what you choose to take a position in, hopefully choosing those positions with the highest probability of producing profits of which you MUST take in order to build your account. The downfall of many new traders is that of not taking profits because of the fear that the price will move higher and you may miss out on the highest price. Shifting your thinking from the fear of the price going higher and not being in on the action to the fear of losing what’s already on table may be a good idea, because those profits can disappear in an instant. A good happy medium is to sell half. This way, you can lock in some profits and then if the price moves higher, there’s even more profits but, on the chance it moves lower, you’ve made some money and added a brick in the building of your account. You can always add back on the dips.
Let’s look at the chart below and estimate how an account would look if you had taken a position on 3/13 at .72. Suppose you bought 3000 ($2160.00) shares of this stock on some fantastic news; it was making a run up and you just knew it was going to the moon. I’m using the chart below simply because this one is on our watch list. Anyway, you read on YAHOO!Finance it had a target price of $2.50 so you go ahead and sit through all the dips and rips and today on April 26 it’s closing price was .79 making the value of your shares $2370. So you have an unrealized gain of $210. You’ve made 8.86% on your investment.
So now let’s go back and re-visit the idea of selling 1/2 the shares on that first big run up on 3/21. The stock opens on a gap up at 1.03 and starts a nice run upwards. You, playing it safe and wanting to lock in some profits end up selling 1500 shares at 1.18 ($1770.00) which lands about in the middle of the run. You take a profit of $690 and keep the other shares. At close on April 26, you now have $2955. Got that?
Okay–so now let’s have some more fun. Say you day trade those 1500 shares that you sold. And I won’t even use the very tops and bottoms just in case you don’t choose the perfect entry and exit points. You get in on March 27 at .84 and out at .98. Then you do it again on April 6 getting in at .78 and out at .97 for a combined profit of $495. Now add that to your account balance of $2955 which totals $3450. Now look at the chart. Might be worth buying those 1500 shares once again at .79.
The point is that profits must be taken in order to really build an account. Waiting for a home run feels like a random act based more on luck. If you really want to start making money NOW, you have to make it happen, which means making the decision to actually trade your account. It takes a lot of work and planning, but the results can be incredible. You can make it happen.
Stevie.Speaking of “fantastic news” Do you like the idea of trading the following morning after earnings release(or a significant overnight news).If so do you have a strategy for that?
This is an interesting question because when I first started trading, I pretty much only traded on the news, which spelled ‘bad news’ for me and my account. News can be emotional and infuse a lot of interest and enthusiasm in buyers which will run up the price. But watch out because there’s always a selloff and profit taking so if I don’t get in before the news to be able to experience that great gap up it’ll have in the morning, I wait until the sell off. I’ve found that if the company starts getting media coverage then it’ll remain quite active and I’ll daytrade on that. I’ve found many times that by the time the earnings come out, it’s already too late to get in. I have had success in after hours trading on news, but honestly, I consider it gambling. I’ve had experiences when a company will have an excellent piece of news come out at 4PM and I’d buy after hours just convinced it was going to shoot up in the morning, but then they’d release a less than stellar earnings report in the morning to negate the good news–at least for a while. Most probably the only people profiting were the ones actually selling the stock in the after hours trading session. You have to remember, there’s a lot of marketing involved to pump up prices, especially with the little crappy companies. WOW–too funny. As I’m writing this response, a piece of news just came into my inbox from Intercloud Systems (ICLD). I am long this stock and it closed it’s trading session yesterday at .025. Here’s the news:
NEW YORK, April 27, 2017 (GLOBE NEWSWIRE) — InterCloud Systems, Inc. (the “Company” or “InterCloud”) (OTCQB:ICLD), a leading provider of networking orchestration and automation solutions and services, today announced the sale of a majority interest in its AW Solutions, Inc. subsidiary. AW Solutions provided DAS and WiFi engineering services. Under the terms of this asset sale, InterCloud will recieve a $2.0 million convertible note in the new company, an additional working capital adjustment in 60 days and a potential earnout after six months. In addition, InterCloud will retain a 19.9% ownership interest in the new company.
Mark Munro, CEO of InterCloud stated, “The sale of this business asset is a continued attempt to realign InterCloud’s business units around profitable higher margin work. The AW Solutions sale has given InterCloud the opportunity to continue to improve our P&L and balance sheet. InterCloud is exploring the sale of other non-core assets as well. This reorganization is providing us the changes necessary to attract conventional asset based lending solutions in order to fuel growth in our core areas.”
So let’s use this as an example today and I’ll let you know what impact it has on the stock and how I end up trading it 😉
Nice example! Really illustrates the lesson. Thank you.
Great! Let me know if you have any questions about it. It’s pretty simple and took me a while to understand the importance and taking profits. Sometimes you just have to see the difference on paper. I’m glad you were able to take away something from the article.
Stevie,
Just as another example, CATB came out with news on Tuesday that sent its stock up from 1.50 to 2.02 pre-market. The market opened and within 10 minutes it “shot” up from 2.02 to 2.05 and started falling until it hit 1.35 before recovering a little. Patience IS a virtue.
Also, thanks for the ICLD example. I’ll be watching.
ICLD is pretty flat. The news didn’t seem to phase it. On the other hand, it is up 6%.