Author: Investa

The main goal of trading is to achieve financial freedom. However, profiting from trading does not necessarily equate to financial freedom. There are significant metrics that should be taken into account in order to determine whether your trading system is actually helping you get closer and closer to that dream of financial freedom. This article provides insight on what to look out for when measuring your performance. 

Returns

An easy way to visualize your actual returns is to divide your total profits over the total hours(days) you have spent on trading. Are you making more money than you do on your regular job/business or are you earning way below minimum wage?

Of course, we should also take into account that trading is a lifelong journey and past performance is not an indicator of future results. However, figuring out how much money you make per hour on trading will help you determine whether or not your system is profitable. You do not necessarily have to quit trading but maybe you have to reevaluate your system. 

The key takeaway is to determine whether or not active trading is truly for you. Perhaps it would be more profitable to just passively invest and work on a different project (e.g. an online business). This is called opportunity cost.

In this scenario, the computation for opportunity cost goes as follows: profits that you could have made from doing something else (e.g. online business) minus the profits that you actually make from trading.. Ultimately, the decision is up to you but this is an important metric to determine whether or not trading is actually making you money.

Composition of your Day

How much time do you spend trading every day? Picture this, if you are trading for 4 hours everyday and you sleep for 8 hours everyday, you are effectively spending a quarter of your time awake on trading. It is easy to get caught up in stocks during market hours but putting things into proportion really puts things into perspective.

Do your returns match the proportion that trading takes up in your day? If it doesn’t, then you can do two things: spend less time trading or get greater returns. The former action is passive while the latter requires more dedication. This choice is dependent on how much time and effort you are willing to put into trading.

Efficiency

Assuming that you spend 4 hours every day trading, do you really need the whole four hours? In most cases, it is worth exploring trading tools such as screeners and price alerts. This will reduce the time that you spend actually trading without having to sacrifice potential returns. Remember, sticking to your trading plan is key to success. If you have a trading plan, there is no real need to monitor the markets yourself!

Conclusion

Ultimately, we should accept the fact that the key to financial success is to capitalize on our individual strengths. Some people are simply good at trading while others might be even better at something else.

With this said, trading can be for everyone but we should always take into consideration the amount of time and effort that we are willing to put into it. It is important to devote our time to things that we are actually good at in order to increase our impact not just to ourselves but our impact to the world as well.

Along with a multitude of factors to consider before properly trading the markets, correct position sizing and tranching parameters are imperative. These two aspects are within the spectrum of the Risk Management System where it is factors that a market participant can control.

It is a fact that there are matters that we cannot control in the financial markets, such as the price movement, black swan events, errors in the trader’s end (e.g. internet connection), among others. Instead, we can direct our focus to aspects that we can control, such as our management with risk, our trade plan, our trading psychology, among others.

The importance of proper position sizing and tranching is to mitigate our risk of depleting our portfolio drastically. Going all-in on one trade is as risky as jumping on a body of water without assuring whether it contains toxic chemicals, a shark, or whatnot.

A market participant must test the waters first, then scale or pyramid their position on the way up to increase their value-wise profits. This is the polar opposite to that of averaging down, where an individual would increase their position as the stock decreases. The problem with this is that there is an inevitable risk that the said name would go lower, which would decrease their value-wise losses drastically. As Jesse Livermore exclaims, thou shall not average down. 

To deploy a proper position size on an individual’s trades, the trader must assess their desired number of stock positions. Initially, holding four to six names is ideal. However, there is a multitude of traders who owns ten stocks at a time. Mark Minervini would hold 20-25 positions at a time. As they say, to each their own. 

The advantage of having multiple positions is that there is a high chance that you could possess a potential leader given that the scope is larger than that of a trader who wishes to acquire or maintain, for example, five positions. The problem with this approach is that you will be spread too thin. 

You could apply any approach with your trades if, in the end, your winning stocks are substantially scaled on the way up. This is to fully take advantage of the direction of the trend. For example, although Mark Minervini holds that many positions, he eventually ends up with at least 10 positions as time progresses. Wherein the 20-25 positions will be cut in 10 based on the individual performances of a stock. Essentially, the laggards in his portfolio are thrown away. Mark’s leading stocks are incrementally scaled on the upside. Pluck the weeds and water the flowers, as they say.

It is best to test the waters before purchasing a said stock. If you want to hold five stock positions at a time, the trader can deploy 10% of his portfolio to a name with 1VAR. As the trade goes in your favor, the trader can add another tranche or a new trade incrementally for the said stock, so on and so forth, until their position encompasses 20% of their portfolio. This will enable the trader to maximize the movement of the said stock, wherein their value-gains will incrementally increase. 

It is only applicable to scale your positions on the upside if an opportunity represents itself. Therefore, you must not force the tranche trade if there is no deemed opportunity at all. Every trade should have a basis. Always remember that patience is the key to navigate the trading landscape. 

Again, you can do any approach if you apply proper risk management in all your trades. Always make sure to properly allocate our positions in a trade to maximize the opportunity at hand. Our goal as traders is to survive and prolong our journey as a market participant. Focusing on the bigger picture is of the essence to open one’s mind in this endeavor. The goal of a trader should be lifelong sustenance of the profits that they earn.  

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As there are different types of people that you will meet in your journey in life, the same principle applies at the beginning of your respective phase towards success in trading the markets. An aspiring market participant will ultimately submit themselves with a conscious choice of selecting what type of trader should they be.

These kinds of traders are separated into four categories, namely Day Traders, Momentum Traders, Swing Traders, and Position Traders. Each category is distinctive to that of its counterparties in terms of its timeframe and its style of approach towards a certain name.

Day Traders

These are are market participants who get in and out of a stock or any asset class within a few minutes to a few hours. These types of traders do not hold any position overnight wherein they would sell all their existing positions before the market closes. Most day traders use leverage to further amplify their percentage gains and losses from incremental price movements. 

Momentum Traders

These people focus on bigger moves such as a breakout or a breakdown for long and short trades respectively. Ideally, these types of traders latch on to price movement that is supported with massive volume until the trend bends. The timeframe for such traders may last for a few hours to several days. 

Swing Traders

These traders are similar to Momentum Traders. This type also latches on to the prevailing trend until it bends. The timeframe for such traders typically lasts from a few days to numerous weeks. Both Momentum and Swing Traders focus on daily moves rather than intraday fluctuations, which is most applicable for traders who are also working a day job. 

Position Traders

Lastly, Position traders focus more on the bigger picture moves in a stock or any asset class. This type of trading is the exact opposite of Day Trading. Position Traders typically anticipate explosive moves that they deem to last in the longer term. Also, they are not concerned with daily fluctuations as they naturally hold their positions within a few weeks to numerous months. 

It is possible to mix these types depending on your personality and your goal towards the financial markets. For example, an individual could both be a mix of Swing and Position trading as they wish. To further aid an aspiring market participant on what type of trader do they belong, they may ask these questions amongst themselves.

What is my time horizon? Do I want to hold names in the short-term, medium-term, or long-term?

How much time could I spend in trading the markets? Do I have a day job? Can I trade the markets while I am working or only whenever I am free?

Do I want to see results quickly? Is it okay for me to execute trades every time or sometimes? 

Whichever type of trader that an individual may decide to be, it all comes down to their commitment to this craft. This endeavor requires patience, discipline, and hard work. An aspiring market participant should dedicate their deliberate practice or one’s 10,000+ hours to succeed in the markets. 

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It may seem really challenging and difficult, but it’s not only the job of the accountants or finance majors to check out and interpret the values in the financial statements. Difficult to absorb this? Well, yes. It will be difficult to take in. Number here, numbers there! But, understanding the balance sheet is both an art and science. It takes determination and a great skill in interpreting the numbers.

The balance sheet is one of the important financial statements that not only accountants must see, but even investors and traders. If you want to see the financial position of the company, check on the balance sheet! It reflects the growth of the assets and liabilities. At the same time, with the numbers on the balance sheet, you can see how the company handles the debt, “Malaya na ba sa utang?”. Now let’s understand the structure of the balance sheet. There are 3 main elements that makes up a balance sheet. We have the assets, liabilities, and owner’s equity. Now, let’s get to know more of each element. 

The Assets

Assets are known to be the resources of the company, which is divided into 2: the current and non-current. The difference between the current and non-current is the liquidity. Current assets are the resources that can be easily converted into cash, on a time period of 1 year. You must check on this portion to know if the company relies more on assets than liabilities. The examples of current assets are cash, accounts receivables, and prepayments.

On the other hand, non-current assets are the resources that would take more than a year to be converted into cash. These types of assets do not necessarily need a during of 12 months to have the resources cashed. Some examples are long term investment, PPE (Plant, Property, and Equipment) and other intangible assets. 

Checking the summary of the balance sheet or the graph of the assets can say a lot about the company’s growth on their resources. You may want to consider a company who can also easily liquidate its resources!

The Liabilities

Liabilities are obligations of a certain enterprise or a company. Just like the assets, liabilities are divided into a current and non-current liability. Current liabilities are expected to be settled within 12 months or 1 year. Examples of current liabilities include accounts payable, notes, loans, and interest payable. Meanwhile, non-current liabilities are expected to be settled after 1 year. Examples of this are mortgage, bonds, and long-term notes payable.

“Utang na naman!” Is this necessarily a bad thing? No! Liabilities can serve as another source of assets. However, if it turns out that you rely on too much liability, you can experience financial hardships! Remember, kahit si Aling Marites, mahihirapan kakasingil ng tatlong buwang utang mo!

The Equity

The equity illustrates the claimed resources of the business by the owner. These includes the capital investments, drawings, common stock, preferred stock, and the retained earnings. Take note that if the company has a negative equity, it illustrated that the quantity and value of its assets are not capable of covering the company’s liabilities, and this is a warning signal!

The balance sheet is more than just the assets, liabilities, and equity. This financial statement shows if the company is able to pay its obligations when times are rough, just like during this pandemic. With the help of the balance sheet, you can identify whether or not the company is a good investment through its value in assets, liabilities, and equity!

At the same time, mastering the skill in checking at the figures can help you know the company’s growth and sustainability. Continue to be wise and disciplined in studying your lessons and analysis! Sooner or later, you are able to choose your stocks wisely!