The answer to this key question, “How to trade one thousand dollars into one million dollars” is very interesting to me and I have been thinking about this a lot lately.
Now you might be wondering why I am choosing the 1000 dollar level as the starting level for such a question. The answer is simply because it is a nice even round number and it is reasonably ‘low’ and also somewhere close to what initial minimum deposits are at several popular brokerage houses.
What got me first interested in this question were those ads for Forex Trading where they offered starting accounts at only 250 to 300 dollars and then promised the ability of high leverage. After seeing those adds, it occurred to me how great it would be if someone could start with 300 dollars in a forex account and then trade it into very large amounts. It seems like an impossible feat, especially with the complications of leverage in forex.
But a starting brokerage account of 500 to 1000 dollars is quite common these days. We see ETRADE showing commercials with a baby and a kitten trying to woo new trading customers. It would seem that a TV ad showing a baby and a kitten is targeting a more general widespread audience.
So there are likely millions of trading accounts out there that are starting at these minimums. But even if they are not starting out with a 500 or 1000 dollar minimum, most people can usually scrape 500 to 1000 dollars somehow. A lot of people at all income levels still somehow manage to spend 1500 per year for an iphone or a $1000 60” HD TV.
So Why Not Set Aside $500 to $1000 into a Brokerage Account with the Intention of Trading it Into 1 Million Dollars ?
It seems like an enticing goal.
But is it possible?
I really want to know the answer to this question, and I am very curious to see what other’s opinions are on this question.
Whether you are reading this posting on April 8, 2011 or one year from now, I am very interested to hear ongoing comments to this post about HOW, IF, IN WHAT WAY, WITH WHAT STRATEGY such a feat could be accomplished ?
At this stage there are no right or wrong answers to this question. I am looking for idea formation and brainstorming with the point of eventually coming up with a refined trading system that could accomplish such a goal repeatedly, not just once.
If you think about it, the beginning quantity of trading capital is almost a mute point if your trading DNA and trading system is always sound. Why? Because whether you start with 500, 1000, or 100,000, if the trading system and trading DNA of the trader is sound, then any amount of capital should be able to be compounded to large amounts eventually.
The main differentiator would simply be the TIME it takes to reach such a a goal. Obviously if you start trading with 100K, it is going to take a lot less time to reach larger numbers such as 1 million than if you start with 1000 dollars.
So the main focus should be on the trading system and the trading DNA that creates a profitable money machine.
In my experience I have realized that at least half the battle (maybe much more ) of trading is psychological and also related to discipline. The lack of trading discipline and the proper psychology can doom a 1000 dollar or a 100K account. They key is to get the trading DNA correct, the method, the analysis and the selection and then the trade management as well.
Aside from psychology and discipline, TRADE SELECTION is a huge factor in the success or failure in growing any account.
Let’s face it. The EASE and SPEED with which one can place a trade is astounding, not to mention the very LARGE SELECTION of trading symbols. These three devils, EASE, SPEED and LARGE SELECTION in my opinion can be the poison that can easily destroy any trading account.
If it is the goal to trade 1000 into 1 million dollars, then in my mind such a system needs to have a strong focus on selectivity, patience, and limited selection.
In a future post I will attempt to come up with some type of BLUEPRINT process as to how this goal can be best accomplished and will then try to act on the system.
One of my biggest problems in trading has always been a LACK OF STRUCTURE. I am hoping that by writing out a system to trade 1000 into 1 million with a clearly defined path, that I can help build more structure and discipline into my trading.
Can Such a Trading System Succeed ?
I don’t have the system yet, but I will attempt to write one up in a future posting. So I cannot answer the question if it can succeed or not. I do know that there are only 3 possible outcomes.
- The account grows slowly but surely to the desired target.
- The account ‘churns’ with not only more trading losses than wins, but also commission expense that further hinders the account. So the account eventually goes to zero.
- The account ‘churns’ sideways for a very long time where the initial capital value essential remains the same (for a long time) because of equal number of wins versus losses.
If the first attempt at trading 1000 into 1 million dollars fails, then I will take all information learned from the first attempt, and apply it towards the second attempt in the hopes that correcting previous ‘wrongs’ will eventually lead to a refined winning system.
Of course I don’t intend for this to fail, but this is an experiment and I have to be realistic on first time expectations. I would say the overriding goal is to use this as a learning experience not only for myself but maybe also for others to show either what is being done WRONG or RIGHT, and then attempt to (over time) eliminate all or most of the WRONGS so that the best trading DNA becomes the end result.
Initial Thoughts on How to Compound 1000 into 1 Million
I have a few initial thoughts on how to compound 1000 into 1 million. Keep in mind that I am just brainstorming here with initial ideas.
I would prefer to take a more aggressive approach to achieving the goal. I would rather not wait 10 years or longer to achieve this goal. So the only way I know to avoid such a long duration is to use the principle of compounding (at least in the early phases) and apply it to the trading capital.
Specifically what I am referring to is applying all proceeds from each trade towards the next trade. So for example if my first trade is XYZ Stock for 1000 dollars, and it turns a profit of 10% or 100 dollars, then the next trade would be placed for 1100 dollars. Then if I am able to achieve another 10% return on that 1100 dollars, the profit would be 110 dollars for total proceeds of 1210. So then the entire 1210 would be used for the next trade and so on….
This is a very aggressive approach, but I feel it needs to be this aggressive in the early going to avoid having to wait 5 or 10 years to achieve this goal.
Just for fun, lets say somehow I already know of 27 total trades that will return me exactly 30%.
So, If I earn 30% on 1000 and then place all the proceeds in the next trade which also earns 30% and then another one after that, and then 25 more after that, I will already have arrived at the goal of 1 million dollars from 1000.
To be exact, if I can place 30 trades that each earn 30% and in each case I plow all future proceeds into the next trade, it would come up with a final number of $1,129,382 by the 27th trade.
That is quite an amazing statistic. Can you imagine making the decision to only place 27 more trades for the rest of your life with the definite chief aim of achieving 30% on each trade?
The problem is that earning 30% 27 consecutive times is extremely extremely difficult. Maybe not impossible, but very very difficult.
Instead, I would rather focus on a target of earning maybe 5 to 10% per trade.
Assuming no losses at all, compounding 1000 dollars at 5% for each trade would take 142 trades to reach 1 million dollars.
And compounding 1000 dollars at 10% for each trade would take 75 total trades (again assuming no losses).
If we assume that every other trade is a 10% gainer and every other trade is a 3% loss, then it would take 214 trades to get to 1 million (this does not take into account commissions).
So I think somewhere in between 5% to 10% target gains per trade is reasonable. It is still quite an aggressive target %, but I think it more achievable than most other targets.
I would rather stay away from any targets under 5% because that is more suitable for much larger capital amounts and day trading.
I would say that before 10K is reached as a target, 10% targeted gains per trade is the main goal.
After 10K perhaps a more conservative 5% target is appropriate.
A Long Only Trading Strategy
I think only a long only trading strategy is appropriate for this to work. If the market turns into a devastating 2 or 3 year bear market again then I would have to reconsider, but for now, a long only strategy appears to make the most sense. And there is always the additional flexibility of going long inverse ETFS if necessary.
Initial Thoughts on Trade Selection
Trade selection is extremely important if this is going to work. The ‘old days’ of seeing some hot stock trade during the day and jumping in because it ‘looks good’ is not appropriate for this type of system.
Instead, I need to come up with a system that is more structured.
Specifically, I will eventually be writing and printing out a specific CHECKLIST of items I must do before a trade actually makes it to the table.
Again, brainstorming, these are some initial ideas on what this checklist or to do list would have on it:
- Is the stock or ETF trading ABOVE its 30 WEEK moving average ?
- What are the current HIGHEST relative strength sectors of the market and is the stock I am considering in one of the highest relative strength sectors?
- WRITE DOWN what the KEY ADVANTAGES are of the particular stock candidate as opposed to other stocks or ETFS ? What makes this setup so fantastically great ? (provide clear specific evidence).
- Is the daily MACD oversold and in buy mode ?
- Is the daily MACD histogram near a buy signal ?
- WHAT are the Wyckoff Resistance and Support levels that define either a break out or a break down in this stock ?
- Does the stock have suitable ease of movement that it can achieve a 10% gain in a reasonable amount of time ?
- WHERE WHERE WHERE EXACTLY is the LOWEST RISK ENTRY PRICE for the stock you are considering ???
- HOW CLOSE OR FAR AWAY is the stock to its current UP TREND LINE ? (stocks that are too ‘steep’ up and away from their up trend lines are at high risk of retracing down again).
- Is the volume clean and crisp on the advances and small and shallow on the declines? Or is it all over the place ?
- Are you buying this stock on a DECLINE to SUPPORT (of a support area or trend line) or after a MULTI DAY ADVANCE ?
- What has been the structure of RSI during the stocks movements? Has it been trending above 50 range or sloppy below 50 ?
- What is the current MARKET CLUB TRADE TRIANGLE SIGNAL for the stock or ETF on the daily, weekly and monthly basis ?
- What is the current chart analysis score for the stock or ETF on a scale of 0 to 100 ?
- DOES THERE EXIST A SEMI LARGE, LARGE or MEDIUM TRADE structure to trade off of ? IF NOT, then WHY are you placing this trade?
- Has the stock clearly established itself to be in an uptrend? Or is it in a very weak early state ?
- Are the most recent candlesticks warning of a reversal? ie. doji’s, shooting stars, tri star doji, hammer reversals, piercing patterns etc.
- The market indices general direction (either bullish or bearish) should be generally known to keep trading odds in good favor. But the indices should not be a large majority of the decision process whether to go long a particular stock.
- During market index declines, it will be very important to OBSERVE those stocks that completely ignore the market decline and actually trade higher or strong as these stocks will offer the highest odds of upside on the eventual new uptrend.
- OBSERVE CAREFULLY the stock on how it has up trended. OBSERVE and see if on the retracements the stock has been very reluctant to retrace and has done only very minor or flat line retracements. THESE ARE THE STRONGEST STOCKS.
- If possible, before a trade is placed it will first be ‘hunted’ extensively by me and other visitors to the BestOnlineTrades.com site. In other words, we will study and follow and stalk a trade until it ripens to the most opportune timing. This approach will be used INSTEAD of the failed strategy of chasing after stocks with wild eyes during the trading day based on ‘whims’ and quick emotional decision making.
Initial Thoughts on RULES
There has to be some type of rule system for this that are not allowed to be violated under any circumstances otherwise there is no point in doing this. The rules are created to maintain discipline and structure and avoid common trading pitfalls.
- NO TRADE can be haphazardly entered DURING the trading DAY or at the opening of MARKET. Instead see point number two below this.
- ALL trades, before they are taken must be analyzed the NIGHT OR DAY BEFORE with VERY CLEAR ENTRY STRATEGY and DEFINED RISK LEVELS. In addition these trades must meet all of the rules outlined above under ‘initial thoughts on trade selection’.
- The prospective trade that is planned to be taken the next day MUST be first PRINTED OUT on PAPER and analyzed and studied on regular paper. Trendlines, risk levels (support and resistance), and the trade setup must be drawn on this sheet of paper with pencil. Ideal entry point and downside risk must also be drawn in and potential upside.
- ONLY TRADES that show MAXIMUM DOWNSIDE of 5% or less should be considered. Ideally trades should have only max 3% downside left if possible. This should be clearly seen in the chart and annotated.
- Do not trade a stock or hold a stock on an earnings date.
- The stock or ETF needs to have adequate liquidity. No chicken scratch type stocks or charts.
- No Trade entry will be done within the first hour of trading.
- Trades will only be place within the last HOUR of the trading day 3pm to 4pm assuming that the closing price and finishing candlestick are conforming to expectations. The reason why this is done is to eliminate whipsaws and attempt to only trade based on closing prices as much as possible.
- Before each trade, initiate the ‘save the world’ psychology to emphasize the importance of each trade ( see below).
- NO CNBC, or FUNDAMENTAL GENERAL MARKET NEWS will be seen or used. News on politics, deficits, government problems, earthquakes will be ignored completely and will not enter into the trading psychology.
- NO online MESSAGE boards will be scanned for other ‘opinions’ on why a stock is hot or not.
- Important specific earnings dates or other possible relevant specific stock news will be used ( in very small percentage) as a means for determining stock setup.
- Technical analysis will comprise 95% of the trade decision.
- ALL trades that comprise the mastermind project must be ‘scouted’ before a trade is placed into them. Essentially this means that trades are studied carefully in some cases for days or even weeks before suitable entry is identified.
More Thoughts on Trading Psychology
I think the only way this trading system will work if an emphasis is placed on the proper psychology before any trade is taken.
In my opinion, this system will only succeed if there is the psychology taken that there are severe consequences for each trade taken. In other words, I would like to take the mindset that every single trade of the system is extremely important. It is so important that perhaps life on earth depends on it. If any one of the trades fail, it could mean the end of life on earth as we know it. Or it could mean all of your family members will be taken away from you for the rest of your life never to see them again… or some other analogy you can think of.
That is just an example, but I am trying to impress the point that there are a possible 200 trades to be taken here. Each is not to be taken lightly or haphazardly. On the contrary, each trade is so important and almost a MUST WIN type situation. Losses of course are always possible, but the mindset must be to minimize any losses and if possible suffer no losses at all.
If not, then there will be major consequences. You can choose your own analogy, but the major point is the same.
This ‘you must perform or else’ psychology I think is important because each and every day there exists HUNDREDS AND THOUSANDS of TRADING DISTRACTIONS that try to LURE you into FALSE and DEAD END TRADES.
There are simply TOO MANY trading choices each day (thousands of symbols). The fact is that there usually only exists a SMALL HANDFUL that make the BEST ONLINE TRADES and these if possible need to be identified.
The distractions and misinformation can come from business news networks, hot tips, other online traders, scary news on CNN, co workers, other supposedly trade gurus who seem to know it all. Other trader fears or opinions should be avoided at all costs.
Begin with the End in Mind
As part of this system, each day in the morning for 1 minute and each night for 1 minute it will be assumed that that goal is already achieved and that the 1 million dollars is already in possession as a result of applying this strategy.
This should be a very vibrant visualization that the 1 million dollars is already in your possession and that the goal has successfully been accomplished. Do this for 1 minute every morning and 1 minute every night.
This principle is not my own, but of Napolean Hill, famous author of the ground breaking book “Think and Grow Rich”.
Proposed Versus Finalized Trades
Trades that are still being analyzed will be assigned the ‘Proposed’ label for further discussion and analysis. Proposed trades are still important because they may eventually turn into finalized trades that are ready to be taken the next day.
Assuming the MASTERMIND project works correctly at some point there should be some type of diversification of trades. I usually prefer ‘concentrated diversification’ to excessive diversification.
For now my initial thoughts on the required diversification are as follows:
|Working Capital||Minimum Number of Trades|
|1K to 10K||1|
|10K to 50K||3|
|50K to 100K||5|
|100K to 200K||6|
|200K to 500K||7|
|500K to 1 Million||8|
I have to say that diversification has always been the most difficult aspect of trading for me to deal with. I usually prefer to have very very limited diversification. I would rather stand to benefit the most possible, on the highest probability trades I can find. But sometimes I am wrong, and in those cases diversification can help a lot.
Requiring 20, 30, 40, or 50 or more trades for working capital over 100K seems like overkill to me, in effect spreading dumb money around. I realize there is probably a much more precise way to calculate optimum diversification for a given capital amount, but for now I am going to rely on what I have in the table above.
Even More Trading Psychology
In order for the MASTERMIND project to work I think one has to start with a CLEAN SLATE mentally. This means forgetting about how good or bad your previous trades were and allowing oneself to start fresh with a better clear perspective.
In addition to starting with a clear and unobstructed mind, a second important mental quality required for this to work is a resolute FOCUS on the goal at hand, and how the pieces of the plan build to form the much larger end goal.
A laser focus is required especially when attempting to identify the trades to enter, establishing them as the most highly probably candidates for the targeted 5 to 10% gains.
The Power of the Mastermind
Ideally, such a project of turning 1000 into 1 Million would best work through the power of a mastermind group, each of whom are laser focused on achieving the same end objective.
I really cannot say whether an online blog is the most suitable platform for such a group. I would say that probably some type of real ‘trading club’ with 12 traders who meet daily or weekly is much more appropriate.
I always welcome feedback from all viewpoints on the bestonlinetrades.com blog, but the blog in the current state does not have any clear structure by which a particular stock could be scrutinized and picked apart by multiple parties.
Of course any new stock that I am considering as part of the mastermind project will be written about and is always open to comments.
Depending on how smoothly or unsmooth the first phase of this experiment goes, I may open up ‘threads’ for each potential stock so that it can be discussed more thoroughly.
I think this project could be a lot of fun.
As I already indicated I have no idea whether or not such a project could succeed. I very much want it to succeed, but to a certain degree, the failure of this project could offer some good lessons for self improvement down the road as well.
I think there is a certain power in writing about a specific group of trades with a very specific purpose and end goal.
I suspect that a lot of the private trading (not broker or hedge fund etc.) that goes on out there across the world, is simply just that, ‘trading’… with no very specific goal or project. I am not saying that people who trade do not desire to make substantial profits over the longer term. They surely all do. But I doubt that a batch of 100 to 200 trades are pre planned with a specific end goal and definite purpose.
I think the major differentiator between what I am proposing here and just regular day to day trading is that this system tries to take a much more careful focused approach. There is also the possibility that it will also take a considerably much longer time.
One of the problems I have found with trading is the desire to get results FAST and with larger than normal percentage gains. I am hoping that by following this system, those trading pitfalls can be avoided and maybe eliminated.
Future postings that have to do with this project are going to be filed under the category title of ‘MASTERMIND PROJECT’ and also with tag category of ‘MASTERMIND PROJECT’.