Directional Position Trading

​IVAN'S STORY ​(Stock Market Investing Case Study 5 of 8)

Ivan began investing in the stock market more than 30 years ago.  It all started one evening when he was sitting on his porch. He had just completed his university degree, and he realized he had too many bills to pay despite earning a great salary compared to his summer job. He decided in that moment to change his financial habits. At that time, his net worth was approximately 3K.

Over the course of the next 32 years, his investing and trading produced more than one million dollars in capital gains.  On an annual basis, he achieved a positive return over 80% of the time, with about 34% being the best year and about -5% being the worst year. Active investing was a secondary activity until he retired from his traditional job in 2005. It’s been his primary occupation since, although he doesn’t do it for the money anymore. He does it for the peace of mind and to learn more about himself. He enjoys being in the flow of it.

In the beginning

After the decision on the porch, his focus was on cutting expenses, saving money and learning about the mechanics and the psychology of investing and money management (he has a record of his spending since 1994 in Quicken). Once he had enough savings, he turned over 5K of his 25K savings to a broker who invested it in mutual funds and a bond fund (he wanted to see how the broker would manage his 5K before giving him the full 25K). 

In 1987, on the day the market lost 22%, Ivan tried in vain to reach his broker to sell his bond investment because it had quadrupled and he wanted to lock in his profit. It took two days to finally reach his broker and by that time his investment had lost half the gain. He sold it in spite of his broker’s protests. Ivan realized that his broker was too busy taking care of other clients and that his account wasn’t big enough for his broker to pay serious attention to it.

It is that experience that prompted Ivan to take charge of his investing.

He began studying no-load index funds for the diversification they offered since he didn’t know how to pick stocks at that time. He was self-motivated to make it work and he was confident he could figure it out with help from his problem-solving skills, his personal investment reading/study, his creativity and his analytical mind.

Over the years, he spent literally thousands of hours learning. He gave up on having someone help him (i.e. like a broker or advisor). He says 1987 was an excellent year for its many lessons. He has been managing his investments himself ever since.

In looking back at the beginning of his journey, Ivan notes that it turned out much better than he had anticipated.

At the beginning, he expected very little. He didn’t know enough to expect much more than conventions dictated. All he wanted was a small return for his investments. He was aiming for a little better than what guaranteed investments certificates (GICs) were paying at the time. He thought he would be perfectly happy with 15% (GICs were paying high interest back then). He hadn’t considered long term exponential growth.

Ivan tried several methods

Ivan tried all types of investment methods. He found that what works best for him is directional position trading. He likes it best because of the correlation between the effort of choosing a stock and the reward that ensues, i.e. the profit of the trade. He holds a position anywhere between three to 18 months, and he can have as many as 40 positions at a time. When the market upside is less certain, he may have as little as eight positions, or none.

Over the years, he invested in stocks, funds, futures and options however he now uses mostly stocks and options.  He monitors his accounts every day to evaluate whether it is time to sell, buy more or continue holding. As he became more knowledgeable, Ivan used his background in advanced mathematics to maximize profit.

In his experience, profit isn’t really a function of technical analysis, fundamental analysis, or even seasonal analysis.  

Rather, he found that trading is mostly a function of our reactions to losing or making money and our unconscious beliefs about money. Ivan learned first-hand how profit potential is affected mostly by psychological factors (60%), then money management (30%) and lastly, method (10%).  He says some professional traders believe psychology represents 100% of the equation.  Ivan found the works of Dr. Alexander Elder and of Dr. Van Tharp to be good resources on this topic.

Some years he can have a 50K gain, other years a 25K loss. Ivan recalls one year when he stopped trading for eight straight months because he had experienced a series of losses. He learned that the irregular and unexpected fluctuations affect our emotional strength which in turn affects our trading which further affects our emotions. It can become an increasingly dangerous circle. Ivan learned that if he is losing money, it is best to stop trading until he is off the emotional wheel.

The frustrations

For example, 2008 was a very frustrating year for him and he also remembers around 2003 when he had his biggest loss in one day – 35K which was a big deal at the time. It took him five weeks to recover psychologically. Now, when he sees the market turning, rather than work against it, he takes a break. In his trading career, Ivan stopped completely three times, and he recalls that there were a couple of times when he should have stopped but he didn’t due to his own poor psychology.

Ivan believes many people seek to lose (unconsciously), and so they do.  He believes this is the real reason 90% of traders lose money. Everyone starts out believing they will be part of the 10% who are profitable. Everyone starts out believing they will be better than the average, yet this is a mathematical impossibility.

He also knows from experience how emotions deeply affect our ability to pursue a goal. He gives the example of when his mother was ill and how it affected him and his trading. He also remembers the time when he stopped trading for a full 14 months (but he did continue studying the market during that time).

Easing back into it after a break

When he starts up again, he eases back into it slowly, with small positions, working his way back to where he was before he stopped. Ivan thinks of it as walking a wood plank on the ground versus a wood plank in between two skyscrapers.  It’s the same wood plank and the same action, but the environment is totally different. Ivan uses this example to illustrate the change from trading small amounts of money to trading larger sums of money. It’s not the same. The difference is psychology. For large sums of money, he found that the investing game changes dramatically.

Having acquired much experience, Ivan says he doesn’t trade so much based on “rules” as he does based on judgement and experience. He sees the trade – he knows ahead of time what his plan is before he takes the trade and he doesn’t use hard stops, but he does know, in his mind, where his stops are.  Ivan monitors his accounts on a daily basis.

When he is trading, he is in a trance-like state (ego-less), totally focused on what he is doing. At the same time, he is also very self-aware. It is necessary if he is to recognize when he is not trading properly.  If he feels himself approach an emotional danger zone, he stops and gets himself centered again. 

He believes his success is due to his determination, his strong problem solving skills, his hard work and because he is goal-oriented. 

He recalls when he was 15 years old – he already had three very clear goals: he wanted financial independence, love and wisdom. 

Based on his experience, Ivan found that it is difficult to know for certain whether trades are successful due to luck or skill. It took him 10 years to feel certain that his success was a function of his skill. He says the market has humbled him more than anything. His favorite quote is “Everyone gets exactly what they want out of the market” (Ed Seykota).
 
Ivan offers the following insights for beginners:

• Find your best style and your best instrument. Find what works for you. Remember your method might not work for others.
  
  
• Learn multiple methods – learn when they succeed and when they fail. Learn about money management. Learn about yourself. In short, learn, learn, learn.
  
  
• Don’t trade unless you are extremely well prepared.
  
  
• Start small. Only increase when you see a steady rise in your equity.
  
  
• Focus on protecting your capital. Accept that some periods won’t be as profitable as past periods. Fluctuations are to be expected, however if you lose your entire capital, you’re out for good.
  
  
• Realize that trading is a stressful occupation and find an effective stress reliever for re-centering. Do what works for you.
  
  
• Realize that trading is a solitary activity. Find a way to temper the loneliness. Or better yet, learn to be comfortable with solitude.

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* Case study based on April 23, 2015 interview conducted by Y. Gagnon