Our Financial Confessionals are back! Here’s the latest from a guy who not only day trades, but day trades penny stocks 😱
Not a post you’ll typically see on this blog since I’m a huge buy-and-hold/index guy, but as promised earlier in the year, I want to be better about sharing other perspectives and strategies out there… Plus, some of his “rules” here are actually pretty good no matter how you invest!
So please enjoy today, a note from a fellow reader of this blog, “Brandon”, who shares his experience with day trading as well as why he loves a newer investing app on the scene over Robinhood.
Links to previous Confessionals can be found at the bottom of this post…
I’ve Been Day Trading For 3 Years
So, day trading initially was a rocky start, meeting every expectation that you’ll hear about them: DANGER DANGER DANGER! Hah.
When I first started I had a major loss, so I went back to do more research and build my knowledge of how people make money on these things. A few books later, and a golden set of rules that I continually abide by, I now average 1-2% gain on my portfolio each day I trade…
Biggest loss: 84% of original portfolio ($2,000) after becoming too attached to a company called MoviePass — Big lesson learned here was not to fall in love with these stocks!
Biggest gain: 231% on a company called AXSM -> after a drug trial achieved its primary endpoint towards FDA approval.
I specifically look for news items pre-market, and then have automatic alerts pushed to my phone from an application called Thinkorswim. These alerts will filter any news items or SEC filings for a watchlist I create. I begin by looking for stocks that are due for news or have had significant runs in the past, and then once I have that list set up, I’ll get an alert, check the chart to confirm volume is coming in, and then enter that stock…
My golden set of rules:
#1. I keep emotion out of it. You have to avoid becoming attached to a stock, or the idea of a stock based on its business model or possible FDA approvals etc. as I learned early on.
#2. I always have an exit strategy. This is where having a cash account that allows day-trading like with the Webull app is king. Using this strategy you can enter and exit a stock the same day without the risk of being marked a “pattern day trader” and having your account locked, or worse closed per the SEC rules. A lot of people starting out will buy a stock, and if they have a margin account (default for the Robinhood app) they may not have a day trade in order to exit that stock… So they’ll hold overnight possibly risking further loss or bad news being released the following morning.
#3. I set acceptable loss and gain goals. I aim to gain 5-7% on any entry to a stock, and calculate the price it would have to reach in order to obtain those goals. Then I watch.. Once it hits that price I exit – no emotions, no “coulda shoulda”. When it hits, 5-7% gains I exit. This is in my personal opinion where a lot of people go wrong. They hope for that rocket that reaches 60-80% and hold just long enough for it to erase any gains at all… For acceptable losses, I usually mark this between 3-4% depending on the size of the position I enter. Once it hits that mark, I also exit. This is extremely important to avoid any huge losses because these stocks will drop FAST.
#4. I review trades each day. I’ve developed a habit of going back and looking at all the trades I made that day, and determining if there was something I could have done better in executing those trades… If there was a loss, was there something I didn’t see that I could look for in the future? Did I make a purchase too close to an earnings release? * ALWAYS RISKY WITH PENNY STOCKS * I then take those findings and incorporate them into my planning for future trades.
#5. I’m not afraid to take a day off. Just because you have money in an account ready to go to work for you, doesn’t mean you should make a trade… Like on days President Trump puts out a tweet regarding the trade war. Usually a good day to take off from the market, as even good news won’t respond normally!
#6. I never enter a position with more than 20% of my total portfolio value. You’ve heard the phrase “don’t put all your eggs in the same basket” right? The same goes with day trading. If you drop the basket, all your Benjamins get crushed, haha…
How I fund my portfolio: I take 20% of my after tax paycheck and divide it two ways: 10% into a standard savings account (2.2% interest w/ Ally Bank), and then 10% into my Webull portfolio funds. Half of that portfolio then gets divided into long-term positions, and the other half towards day trading and highly volatile stocks. So basically 5% of my after tax money goes into day trading, which accounts for 25% of my overall saving/investing.
Resources: I love to read, and I’ve read all of the suggested books you currently have up on Budgets Are Sexy… In addition, I went out and purchased “Penny Stocks for Dummies” which details all the negative and positive catalysts for a movement on these stocks. It also touches on fundamental analysis as well as technical analysis. In addition to that, I read “Candlestick Charting for dummies” which was a HUGE help getting my mind wrapped around which way a stock will go, if it’s reached its max on the current catalyst, or if its oversold and starting to uptrend.
However, the most beneficial resource I found was a Facebook group called “Penny Stocks w/ Webull & Robinhood for Beginners“. Typically these groups tend to be very toxic, however this particular group is run by a single admin who runs an alert service (similar to Mad Money Jim Cramer’s alerts) but the group is 100% supportive with a zero tolerance policy towards bullying, stock pumping, and referral link spamming. In this group anyone who asks a question is treated like a team member, and actively works to increase each other’s knowledge and strategies.
My Cash account strategy: I set myself up in order to enter no more than 5 positions in a single day. Therefore, I take my total portfolio value and divide that by 5 (# of trading days) that will give me the amount I am able to trade each day… I then divide that number by the number of day trades I wish to make, giving me the amount of cash I can use for each position. Of course I can tinker with it and allow 3 small entries and 2 large ones if I wanted for that day, but I keep it simple by just dividing by an even 5.
All together since I’ve started day trading again I’ve contributed about $5,000 and I’ve turned that into $12,560.
At the end of the day, if someone randomly came up to me and asked what I thought of trading penny stocks, I would tell them it’s not for everyone. However if you have a set of rules you follow and always continue to improve your process, there’s money to be made.
EDITOR’S NOTE: None of this makes me personally want to go out and start day trading anytime soon (don’t even have the time for it if I wanted to! haha…), but I will say that if you re-look at those “rules” up there, they’re actually pretty applicable to *normal* investing too: knowing your limits, not putting in too much where you regret it later, reviewing past actions to improve future results, knowing the end game!, etc. So I will say out of all the day trading stories I’ve heard over my lifetime, this one is much more focused and strategic which I appreciate ;) So thanks for taking the time, Brandon!
Oh, and then here are his notes on why he switched to the Webull investing app after using Robinhood for two years and getting frustrated. I haven’t poked around it much myself yet, but it does look promising and can be used regardless of how you like to invest.
Oh, and if you’re a beginner and have an itch to trade individual stocks and go against our sound advice… PLEASE do plenty of research and use trusted sites for your research. For example, here’s a running list of best stocks for beginners from our friends over at Millennial Money!
**There are no affiliate links to any of these apps or other items in the post, FYI, outside of the Amazon books. I’m just linking them here for quicker access for anyone interested in perusing further**
Pros to Webull:
- Commission free trading!
- Longer pre-market and after-hours trading (also free). Webull’s extended hours are 4:00am-9:30am and 4:00pm-8:00pm, compared to only 9:00am- 9:30am and 4:00pm-6:00pm w/ Robinhood.
- They have a paper trading system built right into the app for those still learning the way to trading
- They give you cash accounts! Cash accounts take a little bit of planning and dedication, but with them comes the ability to day-trade more than three times a day without being locked out
- They do awesome promotions. During Christmas season they offered a $100,000 give away split between those members who collect “cards” by participating in the app’s various features… which resulted in me getting a nice $78 contribution
- If you refer a friend they get a free stock for signing up, and after an initial deposit they get another free stock
- More advanced features than Robinhood like better technical analysis options, including Bid and Ask analysis, news and press releases as well as fundamental analysis.
Previous confessionals told over the years:
- Financial Confessional: “I Became So Obsessed With Being Rich That I’m Now Sitting in Prison”
- Financial Confessional: “I Turned My Back on My Wealthy Parents to Live a Life of My Own.”
- Financial Confessional: “We Used to Blow Our Money on Motorcycles & Airplanes”
- Financial Confessional: “I’ve Spent over $40,000 on Amazon”
- Financial Confessional: “I Bought a Used Honda for $45,000”
- Financial Confessional: “I Used To Be An Escort”
- Financial Confessional: “I Used to *Hire* Escorts”
- Financial Confessional: “I Was a Check-Bouncing, Collector-Dodging Accountant!”
[Bull photo cred: Sam Valadi]
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!