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My Rules of Trading and What Happens When You Break Them

The past 2 weeks have been a bit rough and I am still a bit gun shy.  I am working to rebuild my confidence and start making profitable trades again.  First I will explain the rules of trading I established for myself.  I will then explain how I managed to break all of them and how much of my account I gave up while learning these rules.

The Rules

Rule #1, Cut Losses Quickly.  This is a rule from Tim Sykes and he makes no secret that it is the most important rule.  Everyone who has read or watched any of his free content knows this rule.  This is so important because when you trade lower priced stocks, almost all of them are eventually going to zero.  You never know when that is going to happen and you don’t want to be trapped in the trade when the stock does go to zero.

Rule #2, Plan Every Trade.  I keep a pen and paper at my desk and sketch out a basic plan before I make the trade.  The notes include the stock symbol, position size (number of shares), entry point, and 2 exit points.  I include 2 exit points, one is a stop, the price where I will get out to protect my account; the other exit is the target price, where I hope to sell and take a profit.

Rule #3, NEVER CHASE.  Plain and simple, if I miss my entry point that’s it, I missed it.  I will never buy above my entry point again.  It is better to keep my account intact and use it to fight another day.  There will always be another spiker, when you miss one use it as motivation to find the next one.  Never sulk and think about what could have been, because it is not what happened.

Rule #4, Stick to the Plan.  A plan is only useful if you use it and stick to it.  Not only must you make a plan but you must stick to that plan.

Rule #5, Cut Losses Quickly.  This rule is so important I listed it twice.  Everyday before I trade, I read all these rules and remind myself that they are the ticket to my future success.

A successful trade, in my book, is one that is executed according to these rules.

Sample Plan

Here are the actual notes I was taking on 10/8.

Note the top line is the only position I took, my position (P) was 1000 shares for $5.03 each.  My stop was $5, and my target was the top of the initial spike.  Given I had an issue selling and sold below this price, I made a plan and stuck to it for the most part.

Everything else on there was part of a watchlist for the day.  I keep a few notes on each one as the morning progresses.  I have noted some entry points for DNR and UUU.  Neither got to the target price so I didn’t trade either one.

Breaking the Rules of Trading

On 9/21 I was watching the market and all the weed stocks were continuing to blow up.  IGC, one I had traded last year was in play and moving fast.  It had closed at $2.14 the day before and opened at $2.70.  I decided that if it broke through $3 I would buy it and ride the spike as long as I could.  I placed a buy order at $3.05 but was too late.  Another order at $3.25, too late again, $3.50, $3.75 I couldn’t catch it as it was moving too fast.  Finally as it blasted above $4 I placed another order at $4.05, it executed at $4.03!  I bought 6000 shares for a total cost of $24,184.95.

I was happy to finally be in as this had the potential to keep running!  After the order executed I realized that I was actually too late again, my order had filled because the price had reversed.  I was suddenly staring at a $1,000 – $2,000 loss.  What a disaster I had created for myself!  Not wanting to just give up 10% of my account, I looked for reasons not to sell.  I got a nudge from someone on twitter encouraging me not to sell, they thought it would come back.

As the day progressed the price rebounded, I placed a break-even limit order at $4.03.  As the price moved quickly above and back below that price, my order never executed.  Not enough people bought at that level to take my shares.  As the price slipped further from $4 I was a wreck mentally.  I kept looking for and finding reasons not to sell.  In the back of my head I kept saying, the first loss is the smallest, but I managed to drown out this voice.

Planning Again

At the end of the day the stock completely crashed closing at $2.81.  I never sold and was looking at a loss of $8,000 on paper.  I took my time over the weekend and came up with a plan, I would sell at the first sign of weakness after the markets opened on Monday.

Monday morning rolled around and the stock opened at $2.57 and started dropping, I sold as soon as I could at $2.38.  The sale was $14,292.01.  This was a loss of $9,892.94, about 40%.  This was also about 1/2 of my trading account since I was using margin.  The rest of the week I kept my trade sizes small and cut my losses quickly.  I have begun picking back up again but am concentrating on trading based on the rules listed above.

As an additional reminder I have scheduled an automatic text from myself everyday at 9:25 AM.
“Cut losses // Make plan // Don’t chase
-Future self (you’ll thank me)”

Since this time I’ve had a few decent wins and several small losses.  I’m still a little trigger shy but I am conditioning myself to be a profitable trader by first minimizing losses; now I am working on maximizing profits.

Final Thoughts and Notes

I had a long delay between this post and my last, I needed time to get my head right and wait a few weeks before I revisited this story.  While I wish it hadn’t happened, I will use this as a learning opportunity and will hone the emotions in a positive energy.  90% of traders lose, I’m working everyday to join the 10% on the other side.  Check back often to see where I am on my journey.

All my trades can be found here: Profit.ly
Profit.ly is the social media for traders.  I encourage you to post all your trades as well.

In my next post I will tell you about the Pattern Day Trade rule and how to get around it.

Thanks for reading and happy trading!  Follow me on twitter of all trades live!

Penny Stocks to Watch: HMNY & SGMD

The past couple weeks have brought MoviePass and it’s parent company HMNY to its knees.  With no path to profitability and massive losses piling up, the stock has lost 99.9% of its value in just a few weeks.  The reverse split puts its original share price at $0.0002, that’s 2 hundredths of a penny!  With the original share structure it would take 50 shares to make a full penny.  Is this company done-for?  Or is this an incredible once-in-a-life-time opportunity to make some killer profits?  I’ll share my thoughts and moves below.

Sugarmade (SGMD), is a small California-based company that supports the legal cannabis industry.  They have a few innovative products and have made several acquisitions in the past year.  This is also the stock I have made my single largest profit on, you can read more about that here.  They sent out a press release last week which sent the share price soaring!  It gained 40% in just one day!  This company has a lot of potential between now and the end of the year.

The Fall of MoviePass and Impacts on HMNY

HMNY (HELIOS AND MATHESON ANALYTICS INC.) is the parent company of MoviePass, MoviePass Ventures, Moviefone, and Zone Technologies.  We will start with the big news, MoviePass, which has been in the news and has been declared dead by many.  I disagree and actually see some potential with its new business model.

MoviePass’ original offering was to allow subscribers to pay $10 a month and see as many movies as they wanted with a few restrictions.  Moviepass was paying full price for the tickets, which can run well over $10 per movie.  I have read many articles where analysis have theorized that MoviePass wanted to use the gym subscription model where they sell many subscriptions but few actually get used.  I reject this completely because movies are already big business and the industry is making money hand over fist through people who come and pay more than $10 to see a movie.  If you offer them the same entertainment at a fraction of the price, people will flock to it and use it.  This is what Moviepass was counting on.

According their annual filing, HMNY intended to grow the subscriber base quickly and exponentially and leverage their  purchasing power into multiple revenue streams from studios, theaters, concessions and advertisers.  At the time of the acquisition, MoviePass accounted for about 6% of movie ticket sales in the United States.  With the incredibly discounted offer, they hoped to grow that number to well over 50% at a lightening pace.  If they control that much of the ticket purchasing they will have a lot of negotiation power and push movie goers toward or away from certain movies and theaters.  They would essentially take control of the market and be able to dictate the terms to the rest of the industry.

The Future of HMNY

Keep in mind that MoviePass is only one of HMNY’s multiple companies.  It is possible for a company to have one company go bankrupt and keep the others intact.  That in and of itself tells me that HMNY has a future even if MoviePass does not.

MoviePass Ventures is set to release a movie staring Bruce Willis, a top A-list celebrity.  His name alone will bring in $50 million in revenue even if the movie is terrible.  Moviefone is a website that has more than 6 million monthly visitors.  Zone Technologies is working a unique GPS that keeps you away from high crime areas.

The current market cap, or valuation, for HMNY is about $100K even though they have more than that in cash on hand.  At $0.05 this is a bargain in my eyes.  There is a chance the whole company gets de-listed from the exchange or declares bankruptcy, which means I could lose everything I put in.  On the other hand, the share price could climb back over $1 within a few weeks or months and even see $6-$8 in the next year or two.

My Move:

As the share price fell over several weeks I kept an eye out for a buying opportunity.
On 8/3 the price appeared to bottom out at $0.06 per share.
On 8/6 the price spiked to $0.18 on news of a new business model for MoviePass, $10 for 3 movies a month.

I sold 650 shares (1/2 my position) of RIOT for $6.75 each.  Total sale was $4,384.19 a loss of $614.31, about 12%.
I bought 52,000 shares of HMNY for $0.085 each, total cost $4,429.90.

I could be dead wrong about this stock, please trade at your own risk.

Sugarmade’s Upgrade

A press release from 8/8 stated that the company was now current with all it’s filings.  They had been behind for a while and many investors grew weary of the company because they took so long to get the proper filings in.  The press release, not yet confirmed by regulators, stated that they were now current on all filings required by the SEC.  They further stated that they were upgraded back to the OTCQB market.  See below for an explanation of these markets.

The Markets

OTC, over-the-counter markets, is where penny stocks live.  The OTC market is divided into 3 segments in order to give traders and investors an idea of how risky the stock is.

The lowest is OTC PINK, also known as pink sheets and OTC other.  These stocks are behind on their filings and no one really knows how legit the company really is.  There are few requirements to be listed in the pink.  Some are shell companies, some might not actually have any revenue, the pink are the wild west, this is the place to buy lottery tickets.  Some might skyrocket while most will fizzle out.

The next tier up is OTC-QB.  These companies are required to have a share price of at least $0.01, not be in bankruptcy, be current on all their filings and have a qualified sponsor.  This is the tier that SGMD claims to be in.

The top tier is OTC-QX.  These companies must have a minimum share price of $0.25 and market cap above $10 million. Filing and sponsorship requirements still apply.  These are the least risky of the riskiest stocks.

All stocks have some risk, the NYSE has the most stable and least risky stocks.  The NASDAQ is very tech stock heavy, so there is much more volitility here.  The OTC markets are the wild west.

Sugarmade (SGMD)

Last year the price spiked to $0.43 without prospects of an upgrade.  I am currently holding 41,000 shares with an average price of about $0.15 each.  My intention is to hold these as the price climbs and set a stop-loss order at $0.40 after it breaches this level.  The price has the potential to reach $1 or more within the next year.  I will likely be involved with this stock to some extent for the foreseeable future.

Final notes and Thoughts

The two penny stocks I discussed today are extremely risky.  My personal investment in these companies is not advice to do the same.  Please keep in mind that I could lose my entire investment in either of these companies.

On a personal note, I got a raise at my day job.  My new take home pay is about $100 more per week.  Beginning 8/3 I will be contributing an additional $50 per week to my trading account.  That is now $100 per week to my trading account and $105 to my IRA.

Please follow this blog to see if I can make trading my full time job by the end of the year.  Follow me on twitter for live trades.  Thanks for reading and happy trading!