The Fundamentalist
Nicolas opened an account with a brokerage firm and started with $15,800 to trade on Wall Street. Initially, the market was on a bull run and everything went well. However, it slowed down later.
He was not bothered by the occasional setbacks. However, he praised himself for a successful trade and blamed the broker for an unsuccessful one.
He realized that no matter how big or small his profits and losses were, the broker always made money. He understood that even the advisors were not giving a perfect stock to make money. He was selling a few stocks too quickly to make small profits. His profits and losses were offsetting each other.
He then entered the over-the-counter market (the market of unlisted securities) and bought stocks of around 6-7 companies. In such a market, the stock prices change according to the bid and ask prices. Whenever he wanted to sell his stocks he found it hard to find a buyer. And when he did, the deal would end up in a loss. Consequently, he returned to the listed securities.
Through his experience, he learnt the following lessons-
- It's better not to follow The tips from the advisory service as they are not perfect. The vast majority of advisory services are dangerous if they do not set risk criteria for their subscribers. Most of these are written by people who make money on the letters not trading.
- It is always better to trade a historically proven system because brokers can also be wrong. Each trade should make sense and fit inside your trading plan.
- In trading you have to let your winners run and cut your losses short. If you cut your winners short by taking $100 profits twice and let your losers run and then lose $200 two times you are down $2000 after ten trades. That is a great procedure for going broke over a long period.
- Trade in listed stocks only and keep a healthy volume of over 500,000 shares a day. Never trade in the “over-the-counter” market and penny stocks. There is very little regulation in the over-the-counter market and it is very dangerous to buy a stock that could have no possible buyer when you are ready to sell.
- Do not listen to rumours because they are false most of the time and add no value to trading. Nicolas Darvas did not trade rumours, he traded price action.
- Instead of gambling, one should study the market. Companies with innovative products and real earnings are the ones that go up in value. A few junk stocks may rise for a period based on anticipated game-changing information but they usually sink back to their original prices.
- Trading will be much better if the focus is on a limited amount of best stocks rather than holding a dozen stocks for a shorter period. Buy the good stocks when they are at their strongest and breaking out of key resistance points.
During the same period, the author developed his fundamental approach to analyzing stocks. In this approach, he considered the earnings, dividend history and other reports of the company. One of his stocks, Virginian Railway, gave him a profit of $1303. With the help of his broker, he decided to find out the reason behind its good performance. Thereupon, he realized that the company had a fine earnings record and paid a good dividend. Its monetary position was impressive. The reason behind the company's rise was its fundamentals which made him more confident about this approach. Thereafter, he started studying the company profiles and their reports but still, the stocks he chose were not enacting as per the analysis.
Takeaway: One of the most important things a trader can do is take responsibility for his trading results. There must be a plan to use and follow a methodology with discipline and focus.
The major mistake that new traders make is that they believe activity is equivalent to success.
As a Darvas-style trader, ONLY the very best stocks in the market should be bought. Buying junk stocks or trying to watch 100 stocks at one time is a waste of time.
Insider buying is not a good indicator, so trade the chart not, the insider’s sentiments.
