After my huge swing trade in FNMA that I wrote about last week, I had several other smaller winning trades in this stock. One occurred on the breakout continuation pattern at $4.81 (a pattern I detail in my book) and another scalp trade on the break continuation pattern at $5.87. Unfortunately, I was visiting my relative at a nursing home on the day FNMA crashed, or else I would have definitely placed several more trades that day.
The amount of money a person can earn in trading is defined by the amount of trading capital they have and the level of risk that they are willing and able to accept. This risk/reward dynamic is how all trading decisions are formed and if you plan to succeed in trading, it is very important to understand this concept. The so-called guru’s that post they earned $50,000 or even $200,000 in one trade are trading penny stocks with five hundred thousand or even millions of dollars and the average new trader has nowhere near this amount of money so it does not make sense to think you are going to replicate these huge profits, but they put this out there to make you believe it’s completely feasible when in fact it is completely illogical! I do earn quite a bit of money but I have no interest in providing you with unrealistic expectations.
I usually will only swing trade a stock during the first significant breakout (in this case the one at $3.50) and then I like to limit most follow up trades to an intraday basis (day trading the stock for a few hours or scalping it for just minutes to lower my risk). Occasionally I will also gap trade stock as well. Earlier this week FNMA hit a key level that I follow and experienced a huge 40% sell-off down to $3.16. This wasn’t a surprise in any way. I even told many other people that this was inevitable long before it occurred. Lots of uninformed people had large paper profits on this stock, but had no trading plan and ended up losing all of their profits because they didn’t lock in their gains.
This is the way that the average losing new trader or investors operate because they let their emotions like fear and greed get in the way of making rational decisions. There’s very little chance a person is going to buy a stock like FNMA at 3.50 and sell at the high at $6.40. Other than due to pure luck, this is just like winning the lottery because there’s absolutely no way with 100% certainty to predict how far a stock will go (without inside information). This is why successful traders define a trading plan which governs the decisions they will make ahead of time because then they don’t have to think and can just act as planned.
Now you could have bought this penny stock at $3.50 (or even before then) intending to hold for 10 years and potentially could have been right eventually but the real reason for this huge 40% sell-off was the fact that the government came out with a press release for the second time which stated they’re planning to”wind down” FNMA and FMCC (the sister stock to FNMA). By wind down they mean retire the FNMA and FMCC entirely and in effect eliminate all current shareholders.
Now of course this is extremely negative news but anybody that can read would have known this was already the case because they released this news in May 2013. Of course, greedy people don’t act rationally and instead calculate the imaginary 7 figure profits in their mind that they believe they will earn, which is quite foolish, to say the least. FNMA has managed to bounce for the past 3 days and may continue to move back to the $4.75, but I won’t be trading this one until my system tells me it’s time.
Most people don’t realize it but trading is 90% mental and 10% is related to understanding advanced technical analysis and risk management. So many people get this backward or are completely unaware of the mental side of trading. They buy a stock with the belief that it is going to rise by a large amount so that they can get rich quickly. This is such a flawed way of thinking (1 dimensional instead of 3 dimensional way of thinking) and in fact, is one of the main reasons why traders like myself (and hopefully you) can capitalize on these misinformed individuals. The mental aspects of trading take some time to learn but there’s no question in my mind that they define a person’s success and failure in the market.
Trading is more in-depth than most people think. It’s not a “game”, and it’s not a “hobby”. If you are serious about learning the sky is the limit, click here