Feel free to post questions, experiences, or answers here! Below are some common questions and answers.
Question: I only have $5000 to trade. Can I trade the Spec-K trading system?
Answer: Only partially. With this small an amount of trading funds, you cannot implement the diversification of trades that Spec-K calls for. You really can only execute one trade at a time (or suffer excessive commission costs relative to trade size and average profit per trade). As a result of only making one trade at a time, your amount of variance in your account equity will be substantially higher than trading the full Spec-K system. You will be at a substantially higher risk of “trader’s ruin” (gambler’s ruin as applied to traders). Consider carefully what your situation will be if you have the bad luck of having two or three consecutive losing trades; will you be able to continue (and for that matter, should you?). Insufficient trading funds to diversify definitely does compromise some key elements of the Spec-K trading system.
Question: How do you recommend I “paper trade”? Are there any tools available to help me keep track of my paper trading?
Answer: A simple spreadsheet works just fine: enter on a per line basis the date of entry, how many shares, the purchase price, the likely commission, and eventually the exit date, exit price, net profit or loss including commission, and total number of trade days to exit. Have an area of the sheet where you compute average trade result (sum of all actual net results divided by total completed trades). That’s the most critical statistic, though you can also track statistics like the ratio of winners to losers, the average trade length, etcetera. This all said, there are many web services to support paper trading: a simple google search on “paper trading” will find quite a few. I don’t have any to recommend over any others.
Question: The charts in the book are difficult to see on my Kindle device. What do you recommend?
Answer: Try using the Kindle for PC or Mac application, which will allow you to display the book in much larger format on your computer monitor. For Kindle for PC software is available here: Kindle for PC and here: Kindle for Mac.
Question: Why does Spec-K take profits so quickly, rather than letting profitable trades continue to run? Doesn’t exiting trades quickly hurt performance?
Answer: Exiting trades quickly would hurt performance…if we exited and let our money sit idle.
But we don’t. The system clearly and explicitly calls for that money to go right back into a fresh trade, asap.
What’s happening in a Spec-K trade is we take the quickly available, high probability small profit. We don’t wait for the lower probability larger profit. And while that lower probability larger profit is or isn’t developing in the price action of the stock we just exited, where is our money instead? In a new trade with what is almost certainly a better set up than the current situation in the trade we just exited, looking again for a quick, high probability small profit.
The larger the target gain you are looking for, the longer it will take to achieve, and the lower the probability you’ll achieve it over any given length of time. With the Spec-K approach, we aren’t satisfied with “longer” and “less likely”. We want profits fast, over and over again.
The probabilities of larger gains in stocks drop dramatically as you increase the target profit level. The probability of getting a 15% gain is tremendously less than a 3% gain. By grabbing more likely small profits quickly and repeatedly rather than “letting our winners run”, we actually gain more quickly. We also eliminate the problem of “when do we sell?” that comes with letting winners run. Usually that means letting them run until they start breaking down, and that usually means substantial profit percentage points are not cashed in.
This is why Spec-K takes quick small profits. It simply grows our total trading capital (our aggregate profits) more quickly and more reliably. A side benefit (which is huge!) is the specifics of our exit rules are mechanical, and we don’t have to make difficult discretionary decisions on when “enough is enough”, or “is this pullback a sign I should exit?”, and the like.