I can’t tell you how many times I have been woken up in the middle of the night by an investor who was sleepless over a position that was going the wrong way.

The Dow Average cratered by 1,200 points, Gold was down $50, the Euro was spiking two cents, and oil was making one of its periodic $5 moves.

Of course, my answer is always the same.

Cut your position in half. If your position is so large that it won’t let you sleep at night on the bad days, then you have bitten off more than you can chew.

If you still can’t sleep, then cut it in half again.

Which brings me to an endlessly recurring question I get when making my rounds calling readers.

What is the right size for a single position? How much money should they be pouring into my Trade Alerts?

Spoiler alert! The answer is different for everyone.

For example, I will not hesitate to pour my entire net worth into a single option position. The only thing that holds me back is the exchange contract limits. But then I spend 12 hours a day in front of screens making sure it goes the right way.

That’s just me.

If you have a day job, would rather spend your time on a golf course, or are only interested in a five-year view, this may not be for you.

I have been trading this market for over half a century. I have probably done more research than you ever will (I basically do nothing but research all day, even when I’m backpacking, by audio book).

And I have been taking risks for my entire life, the financial and the other kind, quite successfully so, I might add. So my taking a risk is not the same as your taking a risk.

Taking risks is like drinking a fine Kentucky sipping Bourbon. The more frequently you drink, the more you have to imbibe to get a good buzz.

Eventually, you have to quit and start the cycle all over again. Otherwise, you become an alcoholic.

So, you can understand why it is best to start out small when taking on your first positions. Imagine if the first time you went out to drink with your college dorm roommates, you finished off an entire bottle of Ripple or Thunderbird. The results would be disastrous and nauseous, as they were for me.

So, I’ll take you through the drill that I always used to break in beginning traders at Morgan Stanley’s institutional equity trading desk.

You may be new to investing, new to trading, and find all of this money stuff scary. Or you may be wary, entrusting your hard-earned money to advice from a newsletter you found on the Internet!

What if my wife finds out I’m doing this with our money?

YIKES!

That is totally understandable, given that 99% of the newsletters out there are fake, written by fresh-faced kids just out of college with degrees in Creative Writing but without a scintilla of experience in the financial markets. And I know most of the 1% who are real.

I constantly hear of new subscribers who are now on their tenth $5,000 a year subscription, and Mad Hedge Fund Trader is the first one they have actually made money with.

So, it is totally understandable that you proceed with caution.

I always tell new readers to start out paper trading. Virtually all online brokers now have these wonderful paper trading facilities where you can practice the art with pretend money.

Don’t know how to use it?

They also offer endless hours of free tutorials on how to use their platform. These are great. After all, they want to get you into the market, trading, and paying commission as soon as possible.

You can put up any conceivable strategy, and they will elegantly chart out the potential profit and loss. Whenever you hit the wrong button and your money all goes “poof” and disappears, you just hit the reset button and start all over again.

No harm, no foul.

After you have run up a string of two or three consecutive winners, it’s now time to try the real thing. But start with only one single options contract, or a few shares of stock or an ETF. If you completely blow up, you will only be out a few hundred dollars.

Again, it’s not the end of the world.

Let’s say you hit a few singles with the onesies. It’s now time to ramp up. Trade 2, 3, 4, 5,1 0, 50, or 100 contracts. Pretty soon, you’ll be one of the BSDs of the marketplace.

Then, you’ll notice that your broker starts following your trades since you always seem to be right.  That is the story of my life.

This doesn’t mean that you will enjoy trading nirvana for the rest of your life. You could hit a bad patch, get stopped out of several positions in a row, and lose money. Or you could get bitten by a black swan (it hurts!).

Those of you who have been following me for 17 years have seen this happen to me several times and now know what to expect. I shrink the size, reduce the frequency, and stay small until my mojo comes back.

And my mojo always comes back.

You can shrink back to trading one contract or quit trading altogether. Use the free time to analyze your mistakes, rethink your assumptions, and figure out where you went wrong.

Was I complacent? Was I greedy? Did hubris strike again? My favorite: I was in a meeting when I should have been selling. Having a 100% cash position can suddenly lift the fog of war and be a refreshingly clarifying experience. By the way, perennially losing traders always have lots of excuses.

We all get complacent and greedy. To err is human.

Then, reenter the fray once you feel comfortable again. Start out with a soft pitch.

Over time, this will become second nature. You will automatically know when to increase and decrease your size.

And you won’t have to wake me in the middle of the night.

Here is one last tip. Beginners try to hit home runs while pros aim for hundreds of singles. Home runs only happen in the movies (Trading Places, Wall Street, Margin Call).

Good luck and good trading.

 

 

Watch Out! They Bite!

Not a day goes by without me hearing from a reader about the competition.

They previously subscribed to a newsletter that promised a top-drawer education, an insider’s insights, and spectacular returns, sometimes 100% or more a month.

“Doubled in a day” is a frequently heard term.

The entry-level costs are only a few bucks, but they are ever teased onward by the “trade of the century”, a certain 100X winner that they will reveal to you only after another upgrade to their service.

Customers eventually spend outrageous amounts of money, $5,000, $10,000, or even $100,000 a year for the service.

They then lose their shirts.

I hear from readers who have gone through as many as ten of these scams before they find me. Some have lost millions of dollars. Others have been wiped out.

The sob stories are legion.

Then, they find the Diary of a Mad Hedge Fund Trader.

This is the source of all those effusive testimonials you find on my website (click here)

Believe me, they come in every day. I don’t make this stuff up.

Here is the problem. I work in an industry where 99% of the participants are frauds. They are giant Internet marketing firms with hundreds or thousands of employees.

They spend millions to buy your email address. They then spend millions more on copywriters and programmers to pen and distribute top-rate invitations to you to get rich.

Some of these pitches are so compelling that even I take a look from time to time. These guys are slick, really slick.

None of these people have ever worked on Wall Street. They have never been employed as traders. They have not even traded for their own account.

They would know which end of a stock to hold upward if you handed one to them.

For the most part, they are twenty-something kids who got an “A” in creative writing if they ever went to school. Many haven’t.

So, by putting your faith and your wealth in these newsletters and “trade-mentoring” services, you are placing them in the hands of kids without any experience whatsoever.

Hence the disastrous results. You’d have a better outcome tossing a coin or throwing darts at a dartboard.

Some of the larger services hire washed-out has-been investment professionals who become the “face” of the company and lend it some bogus credibility.

They know the lingo, can quote you statistics all day long, and may even boast of proprietary models and hidden indicators. But chances are they have never made a trading dollar in their life.

Without exception, they are lightweight, has-beens, and wannabes who never made it to the big show. None have ever traded for a living. If they did, they would be broke.

Better to sell the shovels to the gold miners than to try it themselves.

They include the oil newsletter that never saw the crash coming, the fixed income service that is always predicting the return of hyperinflation and a crash, and the perennial prediction that the Dow Average is about to plunge to 3,000.

And because these guys are lousy at their jobs, they always tell you to do THE EXACT OPPOSITE of the right thing to do at market extremes.

Just saw a flash crash? Sell everything! The next crash is here! Just hit a new all-time high? Load the boat! The market is about to double! For them, markets are always about zero or to infinity.

Here’s another problem. Negativity outsells a positive outlook hugely, sometimes by 10:1. It makes people look smarter. That’s the source of all of these Armageddon scenarios. They make a ton of money for their purveyors.

It’s not about being right or dispensing sage advice and proper guidance. It’s only about making a dollar, nothing else. There is no guilt or responsibility involved whatsoever.

All of this is done at your expense. I get emails from victims who sold their houses at the market bottom and want to know what to do now that the house has doubled in value and rents are rising.

There are a lot of people out there who drank the Master Limited Partnership Kool-Aid and put all of their assets there to get double-digit yields. If they are lucky, they are down only 90%.

The precious metal area is a favorite of Internet marketers during the 2010’s. Readers who bought this sector on margin, as they were urged to do with great urgency, lost everything.

I know this all sounds like sour grapes coming from me. The sad reality is that out of hundreds of competing investment and trading newsletters in the industry, I can count on one hand those run by true professionals, and I know most of them.

The rest are all crooks.

Yes, I know who these people are. But I am not going to name any names. No time to sling mud here. I can hear the collective sighs of relief already.

This is why I strive to provide the opposite of the con men. To me, it is more important to be right than to be rich. I will give you my unvarnished, undiluted views, even if it is bad for my business, which it often is.

This is why we publish our model trading performance on a daily basis, warts and all.

Notice that no other newsletter does this. If they did, they would only show huge losses, which don’t sell well. It’s all about making tons of incredible claims without a shred of documentation.

So please continue trolling the web for new investment insights and trading opportunities. After all, that’s how you found me all those years ago. But I will give you a piece of advice:

Caveat emptor!

Buyer beware!

I Think I’ll Recommend This One