Reply to a letter from Michael Lai

Today I received an e-mail asking details about my background from a beginner. My friend Michael Lai wanted some follow up from my previous article entitled “in Should you leave your day job to trade?” (http://stockoftheday.blogspot.com/2006/03/should-you-leave-your-day-job-to-trade.html) I think also that he wanted some guidance in this very stressful career of trading stocks.

He accurately noted that I have persevered. He further goes to say that I did so using what he calls “astute thinking” (I would just call stubbornness) through very difficult times, perhaps because I had an early profitable experience with options and thought it could be done again. My friend offered this kind remark: “Although I am only a beginner in options trading, I am much inspired by your intentions to contribute to a greater cause in countries that are not as fortunate...” I truly believe in Albert Einstein’s quote that we are in this earth for the purpose of serving others, only”.

It is quite clear to me that my friend is curious about my motivation. Perhaps he is keen to discover my motivations and hence make a better judgment about what to make of my blogs, hehehe. I will now address some of his questions and hopefully you all will ask away too. I find that the psychology of trading is perhaps the most important aspect of this very stressful business.

I first got interested in investing in the early 90’s when I started to work for the pharmaceutical industry as a pathologist. At first, I just wanted to find a way to park my excess cash in investments that would be more productive than savings accounts. At first, I started with a 401K plan. A retirement plan that the companies here in America contribute matching some of the funds you deposit out of your own paycheck (what a great investment vehicle, by the way). I invested the maximum amount every month for as long as I worked in that industry. First I bought a book called “Personal Finance for Dummies”, one of those books that are actually written for smart people with little knowledge in a subject. One of the best recommendations was to invest in the S&P500 – no load, indexed funds. Knowing that most mutual funds do NOT beat the S&P, it made perfect sense to do that. Now a days, you can trade shares in the S&P, without having to go to a mutual fund provider, just by buying them in a deep discount broker. If I was < 40 years old and still working, that would be my instrument of choice. So you see, a good job here in the USA and some capital to deposit in a retirement account may be all you need for early retirement. There is no need to go into options and certainly it is not a good idea to leave a well paying job to go day trading options.

If you are still with me is because you are interested in Options even still. I started trading options back in 1995 (great timing). I read the book “at the crest of the tidal wave by Robert Prechter (which by the way was wrong by 5 years). I also read the book Elliott Wave Explained: A Real-World Guide to Predicting & Profiting from Market Turns by Robert C. Beckman. I learned to read charts with some basic software that allowed me to log-transform charts and draw some channel lines, and that is how I made my Elliott wave counts. I relied on it, and I thought they were so predictable, that I traded options in a handful of stocks I had made careful manual counts for. This
Approach was actually quite productive. Soon, I begun to trade options because of their leverage. Knowing that I could be right most of the time using the Ellliott wave principles. A friend once told me every trading system works until it doesn’t. Although the reversal of the market was not a surprise for me at all, I found myself unable to take advantage of the downtrend using puts. I entered a dark period in my life in which I was not trading and I was paralyzed by fear of investing in anything at all.

In September 2002, with this background of insecurity and fear I attended my first Optionetics seminar. And why not? They Guaranteed success within days of attending the seminar. Their optimistic and jovial demeanor seem to assured me that their approach was so easy even a cave man could do it. Surely they knew something I didn’t know. A few thousands seem like a small price to pay for me to get back on the proverbial saddle again. In my first seminar, one of their traders introduced my to the very exclusive software “advanced Get” and how you could take advantage of Elliott wave 4 bottoms to enter trades that would succeed 80% of the time. With my previous knowledge of Elliott I knew about “truncated 5th waves”. So I asked about this caveat. I was ridiculed by the speaker who dismissed my question amid the laughter of the audience.

I tell you this because you should understand, if you are a beginner, that there is nothing easy about trading options. I have spend 4 years now, looking for a “consistent” approach to trading, and found two approaches that suit me, with all the experience I have. So here is what my friend Michael asks: “I want to come back to the point of perseverance again. Did you ever think of just giving up at any point of your trading/investing? If so, why did you keep going? Did you believe that there was money to be made at the beginning or did you have to convince yourself of that fact?”

I did indeed know that there was money to be made in options because I had made a great deal of money in the 90’s. So I know it was possible, my uncertainty was on how to do it. I thought Optionetics was the answer but it wasn’t. The answer was inside me all along. Optionetics teach you all you need to know about options, but little about candidate selection and trigger systems, and most of all practically nothing about trade management. At least that was he case when I attended the basic seminar in 2002. I needed to rediscover my own “magic” if you will, which is nothing more than the confidence of putting the trade expecting nothing but the best, but fully aware that many of the trades are not going to turn out. The QST and the PCCRC systems give me the confidence that I will not lose my entire accounts. This has taken a long, long time to achieve, but I Do believe it can be done. Remember, however, that I have been doing this practically full time for 4 years now. Why did I keep going? Because I did not have a better alternative. I am still working as a consulting pathologist out of my office at home, I have my source of income from CD’s and pathology jobs, but I spend several hours a day trying strategies, and ways to make money with those two systems. I am very happy with the results, but I would not recommend anyone to follow this path, unless they have a lot of time and capital in their hands. There were plenty of times when I thought that I was wasting my effort and although I was not making much money, I seem to be keeping my capital, so kept ongoing. Last year at about this time, I started to successfully increase my trading accounts with the PCCRC approach. Today, I am using the QST hopefully as a way to generate great returns with little cash.

Michael concludes: “I am of the opinion that the more you help other people, the more you help yourself (but not the other way around). I know that you are sharing your experiences in order to learn from other people as well.”

Well Michael, I benefit by putting my thoughts in order so that I can share them with others. I am more judicious about my trading because my moves must be justified to my audience. In that sense I benefit by being a better trader to show that I am serious about it. Perhaps others can respond to Michael’s next question: “Do you get a lot of response to your blog, and what kind of people are they normally? Are you hoping that by helping people along the way, they might also be inspired to pass their knowledge to other people, thus creating a chain reaction? “ Yes Michael, it is the “pay it forward principle. If you don’t think your contribution counts, please think again. Your questions tell others that they are not alone and in turn they will be encouraged to tell their stories and learn in the process. Pay it forward means to do something really great for others. This is my approach.

Michael says: I would like to thank you for giving me a more realistic view of trading options. That is not something that I can pay for at any options trading workshops (and probably not something that they would share). I am sure that your insight will go a long way into helping me develop my own trade plan (which at the moment is basically trial by error), and I have passed your website links to other friends I know who are also thinking and involved in options trading.

Excellent Michael, thanks for being here.!

Juan Sarmiento