Practice Stock Trading Systems

Part I, the Disaster

I am disgusted- thoroughly disgusted.  We are just trying to learn to trade stocks here.  What’s to unreasonable about that?  Purchase a stock watch the price rise moderately and sell for a small profit.  Sure, some stock trades will not work that event must be expected.  Still, we thought we were on the right path to learn stock trading.

This month changed all that steely resolve.  Stock options expired yesterday and I took a bath, lost my rear end, however you want to phrase it.  My gambling account, otherwise known as my online stock trading account, was down $750.  That’s about 5% of the total account value.

I know, you say “so what?”  Seven hundred fifty dollars does not sound like a lot of money.  In the grand scheme of things when you need a million dollars to retire, neither $750 nor 5% sound significant.  I’m here to tell you one of these numbers was big enough to break my spirit.

And that number is $750.  As I said we’re just trying to learn how to trade stocks and that loss devastated my trading confidence.  Here’s the lesson:  We have talked about practice trading stocks and compared buying stocks with real and virtual money and we have suggested  that you may more easily ignore losses with virtual money.  Those ideas are true, but this month  I learned that I have an absolute dollar loss threshold.  Seven hundred fifty dollars is too much to loose in my “learn stock trading” account.  Forget 4% or 5%.

You don’t know if 5% will let you hire the high school student to shovel snow off your driveway.  Maybe you cannot even buy a warm cup of soup with 5%.   It’s easy to talk about 5% in an unemotional tone.  Make that 5% equal $750 and the tone changes.  I know absolutely that for $750  can buy a powerful snow blower – and produce a rate of return every year as inflation raises the price of hired snow shovelers.

Back to my stock trading education.  Our theory states that everyone has a stock trading threshold beyond which you cannot maintain your stock trading system.  Call it the stock trader threshold of pain if you like.  This real absolute number draws a deep line in the stock market sand.  If you know your number, you are lucky.  Our theory says that you are learning to trade stocks with real knowledge of an important limit.

My online trading account is on restriction, in time-out – not one more online stock trade until I digest this disaster  I am not going to loose that much money in one month again.  If that reaction causes me to miss the big “opportunity,” so be it.  We understand that this reaction is typical.  People, maybe a majority of people, find loss more painful than success is pleasurable.  And so, we seek to avoid loss.

We cannot emphasize enough the visceral nature of our reaction to this loss.  We have decided to continue to learn how to trade stock.  But we will not make another stock market trade until we have revised our stock trading system.  We will study the roots of this disaster in another post.  Our point here is that we need to know our limit of pain, that our limit is a real absolute number and that we need to learn to trade stocks with that limit built into our trading system.

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