The answer is always “Yes”, it still works. It works, because my strategy is not to jump onto some fad or some temporary arbitrage opportunity. No, my strategy is to understand what the price is telling you, to read it, and to trade it. Price is a constant, the one true signal. When you can understand its message, you can make money in any market conditions.

Here’s a video with a few simple trades which I hope will illustrate that even in these difficult economic times, the market continues to offer plenty of profit potential.

My own feeling that as long as real people account for the majority of the volume being traded each day, even if only a very tiny majority, then nothing has changed for us.

News outlets and people who have space to fill in magazines, newspapers, and television shows, like to try and find a new bogeyman to blame for the financial woes in the world. The “computers are taking over the markets” argument often comes up when markets start falling dramatically. But computers aren’t driving the direction, the micro trades they make are simply following the price, they’re not making it. They might exaggerate price swings to some minor degree, but they aren’t the determining factor. (Incidentally, exaggerated price swings are great news for day traders like us, they make for bigger and easier profits!)

In the meantime, those of us who understand how to read price can continue to profit as we always have done – or even more so while prices are swinging even more than usual.

On a similar theme, shorting has been temporarily banned in some European countries I note. This is of course, a completely ridiculous measure that serves no purpose other than giving the impression that politicians are “doing something”. When you consider than on the other side of any short sale there has to be a buyer, it’s clear why shorting in itself is not responsible for falling markets!

Why not? Well as I’m sure you’ve figured out by now, I like to try and make my life easy and stress-free. So when it comes to trading, I look for stocks with large range and good momentum, because they are easier to trade profitably. Penny stocks have neither range nor momentum. So they’re hard to trade. But don’t just take my word for it, let’s look at a quick example which will illustrate the point.

Here’s a chart for RIMM (yes, it’s an old chart, this is a redux post!) It’s a simple line chart to make the illustration clear:

?
At the time of this chart, RIMM is what I would call a regularly priced stock. Look at the range the price moves in between 9:00 and 11:00 – it goes all the way from $53.80 to $55.50, which is a $1.70 move. If you could take a trade that caught even just a small part of this move, you’d be in for a decent chunk of profit.

If you were trading a thousand shares (easy to do on margin) and you took just 25 cents out of this $1.70 move, you would make $250 profit. 25 cents is around 15% of the move. So as you can see, regular stocks give the opportunity to make good profits even if you miss 85% of the action!

Now let’s compare that regular priced stock with a penny stock. Here’s a chart for ACAD, the same day as the RIMM chart:

The price is around a dollar, which to me qualifies it as a penny stock. In the same time period as RIMM above (9:00 to 11:00), the price moved just 6 cents. Even if we waited until midday, the maximum range was only 10 cents.

Clearly, to make any money trading this stock, you’d have to catch all of the move. Catching a whole move from start to finish is hard! Catching 15% of a move is easy.

15% of the move on RIMM was worth four times as much as 100% of the move on ACAD. I don’t know about you, but I don’t really want to work six times harder to make four times less money.

Now at this point you might be thinking okay, why not just trade penny stocks with bigger size, to make up for the lack of range? To answer that question, we need to add volume to the charts we just looked at. Here’s RIMM again:?

The volume bars are 5 minute intervals, so in our 9:00 to 11:00 range, the volume of stock traded was around 100 – 200 thousand shares every five minutes. Now here’s ACAD with volume:

The volume was under 20 thousand shares traded every five minutes, and most of the time, well under. So you simply can’t trade huge size with penny stocks, because most of the tine there’s nobody to take the other side of your trade.

To recap then: I like to make my life easy. Catching a small part of a large move is easy, and also very profitable. Catching a large part of a small move is difficult, and much less profitable. That’s why I don’t trade penny stocks.

I know a lot of people think the word business means boring sales meetings, endless conference calls, and regret fuelled office parties, but it doesn’t have to mean just that. When I talk about trading being a business, I mean that it is a professional occupation that should be treated as such.

For any business to succeed, it needs certain elements to be in place:

* A clear objective
* A plan of how to achieve that objective
* Competent staff who can carry out that plan

And in any business, there are some important functions that must be carried out in order to ensure its smooth running, and indeed ultimately its survival:

* Record keeping and reporting
* Accounting
* Budgeting
* Disaster planning
* Training

All of the above can be, and should be, applied to trading. Of course, for the average trader, the “competent staff” will be the trader themselves. They will likely also be the record keeper, accountant, and maybe the qualified first-aider too! But just because a trader is a one-man band, doesn’t absolve them from their duties as a business person.

So why do so many people ignore all this? Why do they think they can just open a chart and start trading? My best guess is that it’s because it’s so easy to “just start trading”. The barriers to entry are so low as to be virtually non-existent.

Think about it. If you decide you want to be a trader, what do you need? Some charts and data. That’s easy, there are free charting programs around, and data is cheap at a few dollars a month. Then you need a broker account. The recent crop of web based brokers let you get up and running in no time at all, and with a minimal deposit. Back in the day, you had to sign all sorts of bits of paper and mail them off along with proof of identity, solvency, etc. But that’s all changed, now electronic signatures make the task a breeze. At worst, an emailed scanned signature is enough to get going.

And that’s about it. With minimal time and money, literally anyone can become a “trader” overnight, or quicker. Compare that to starting almost any other kind of business, and it’s plain to see that trading is almost too easy.

This ease comes at a price. With so little distance between having the idea “I want to try trading” and making the first trade, there is little time to consider the training that might be required to make a success of the endeavour. Again, think about what might happen when starting virtually any other career, such as nurse, teacher, submarine captain, or architect. These are not professions you can start practicing overnight. The barriers to entry are high, and they force you to consider the training required.

Trading is not unique in being easy to start. The internet is opening up all sorts of areas of work that were previously the preserve of the well educated and well trained. Journalism and photography are but two examples. Now anyone with a keyboard and a camera can create work and get it online for the world to see. The difference though, is that an amateur photographer or blogger has little to lose aside, perhaps, from a small helping of self-esteem. The trader on the other hand, puts real money at risk the moment they open their first trade.

Low barriers to entry, and relatively high risk mean that many try, and many fail. Which is a real shame, because just a little research and training can make trading a viable option for almost anybody who is willing to put in the effort.

(Here’s the link to Mike’s video, mentioned in my video above)

BTW: I’m trying out a new way of embedding these videos. They’re HTML5 with Flash fallback (so my techie guy says!), which apparently means they should work on iPads as well as regular browsers. I love my iPad, so this is a Good Thing!

Fortunately, there are only three things that could be wrong with your trading if you’re not making the kind of profits you want.

In this video, I look at what those three things are, how to find which apply to you, and then how to fix them.