I’m back to trading!
This is a major milestone for me. It may not seem like a big deal — anyone can just open a brokerage account and start trading — but for me it marks a major accomplishment.
I haven’t traded with real money for TWO years. Even though I did my “stock homework” every single day during that time.
Well before that, I traded for FIVE years with real money. But my account was too small. I was making money on the actual trades but the commissions and fees were eating up all my profits. The costs as an active swing trader in a negative-sum game were 1-2% of my account… PER MONTH. I needed to make 20-25% a year just to breakeven! Understandably, my account balance was slowly and steadily declining.
I determined the absolute minimum to make the game winnable with my level of activity would be $30,000. I would stop trading with real money until I hit this point.
Of course, I thought I’d hit this goal sooner.
I could have reached it earlier but lots of other things took priority during that time, such as getting married and paying off my wife’s credit card debt. To me, hitting this goal feels like I just paid off a 30k debt. Now we can use our net income for other goals. Like paying off actual debt!
My Trading Goal
I want to be very clear about my trading goal — it is not to achieve a positive return.
A positive return is not good enough.
In trading, the benchmark is the market. If you can’t beat the market, then you are quite simply wasting your time. You’re better off buying index funds and never touching them. The majority of people would be better off taking this advice. The markets are designed for wealth to shift from the many to the few. The few who have an edge. If I’m dedicating all this time and energy to trading, I intend to become one of those few.
Or else the return on my time would be negative.
During my trading hiatus, I realized I couldn’t just turn on a switch and be successful when I finally reached my 30k goal. I decided to paper trade – doing everything exactly as I would as if I had the real money. Focusing on the process. Finding the right setups. Improving my entries, targets, risk management, and every other part of the game. During that 13-month span, I earned a 26% return compared to 12% for the S&P. And I’m better now than when I started.
Now that is my trading goal… to beat the market. But not just beat the market…
To beat the market… AFTER-TAX.
Taxes = Public Enemy #1
The after-tax part is HUGE. So many people forget about taxes in trading. It’s not about what you MAKE but what you KEEP. Short-term capital gains are taxed at your ordinary income tax rate while long-term capital gains are taxed at a much lower rate.
At my current tax bracket, short-term stock gains would be taxed at approximately 25% while long-term capital gains would only be 15%. In order to break even versus the market, I actually need to outperform it by 15% each year.
As I move up tax brackets over time (hopefully), the game will get even HARDER.
I’ll have to outperform the market by an even greater margin in order to be successful. Short and long-term capital gains are taxed at the same rate for state taxes. This is where living in a state with no state income tax would be very beneficial to a trader’s bottom line. Too bad I just moved OUT of Florida! I’ll lose a little over 7% of any gain to state taxes now. Always seem to make things harder for myself.
August Trading Results
Technically, I could have put my money in the market a month or two earlier, but I intentionally waited. The market had been overbought and lacked broad participation from stocks, so I was looking for a buying opportunity.
In August, we got one. As soon as that occurred, I moved my money into a new brokerage account at Tradestation, my personal favorite platform for active traders.
All my results will be based off when I funded my account. For market comparison purposes, I will use the S&P close for Friday August 11th as the starting point. This actually INCREASES the benchmark’s return. If I used the July 31st close, the S&P would’ve been essentially flat for August.
I told you I like to make things harder for myself.
Here is the summary of my results for August:
Since this is my first month trading, the monthly and cumulative performances are identical. It goes without saying that this will be the only month where that is the case.
I narrowly beat the S&P in terms of gross monthly return. I then look at everything on an annualized basis because that’s where the tax implications come into play. And that’s the standard when discussing returns. But you can see after-tax I’m currently lagging a little bit.
August Trade Detail
Now it’s time to go into a little more detail. Here are the trades I made as well as the positions I still have open as of end of day August 31st.
I entered all the closed positions on 8/22 and 8/23 when the market showed a strong buy signal after its recent selloff. That buy signal did not provide the follow through I was looking for and the market traded flat the rest of the week. I ended up scratching these trades at the end of that week and the weak open on 8/29.
Normally, I don’t sell at weak opens but this was a situation of “run quickly or not at all.” The gap down on Monday 8/29 ended up being a shakeout as the market recovered the rest of the day. This was an even better buy signal than the previous Monday, so I started loading up on positions that day.
You may be wondering why the Closed P/L and Open P/L don’t reconcile exactly to the Ending Balance on the summary above. That’s because the cost of commissions are included in the closed positions but not the open positions. There are also monthly data fees ($2 per month). Additionally, all trades don’t execute right on the penny. Some prices execute at fractional pennies which is not represented here.
In trading, the market is the benchmark. My goal is to beat the market after-tax. Consistently. By consistently, I mean annually. Of course, there will be times of over performance and under performance but a year is a long enough timeframe to truly measure how you stack up.
How serious am I about this?
Pretty damn serious.
My ultimate goal is to build up enough capital to trade for a living. At the same time, I’m also interested in joining (or starting) a hedge fund. In order to even be considered for a hedge fund, I need to have a successful track record… with REAL money. My paper trading results don’t mean diddly. In addition to my own tracking, I’ve also linked my account to FundSeeder where investors seek to find undiscovered trading talent.
But in order to to be “discovered,” you have to be one of the best. Needless to say, I’ve got my work cut out for me. The good news: I plan to share my trading journey along the way. Stay tuned.