Discussion

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.

8 comments on “Discussion

  1. George says:

    What is the minimum account size to trade the system?
    Can you trade using a self directed IRA or do you need an account that can trade stocks on the short side?
    Do you need to be a full time trader or can you use the system after hours if employed full time?

    • Great questions George.

      There is no single answer to the minimum size account. The book speaks quite extensively to the need to break your funds into smaller units and execute independent trades with them, and why. Ten simultaneous trades are recommended, though you can do less. The account size issue relative to this spread is of course individual trade size, and hence average profit size, relative to commissions. The books covers this subject in a lot of detail, and also goes into multiple methods to drive commissions to very low per trade levels to help accommodate smaller trade sizes. That all said, probably $20k is a minimum, spreading out to five trades (your variance will be higher with all that implies again, this is spoken to at length in the book) instead of ten, and using deep discount commissions that average $2-3 each way per trade. You could trade $5k in single trade at a time, but then your variance is sky high and your risk of “trader’s ruin” (which I define as losing so much money you are going to stop trading, not losing all your money ala the formal definition of “gamblers ruin”) is relatively high. The ideal trading account size is $40k or more, and uses ten trades simultaneously at all times.

      Yes, I trade Spec-K out of an IRA account. No, there is no need to take short positions, this is a “long” position system only. There is an advanced and optional tactic detailed in the book for taking “insurance” bets when the market looks like it may roll over (I have one on at this very moment with this potential double top in place, read about that trade please in the trading examples section) that uses purchases of inverse ETF’s like DOG or SDS or others, but those kinds of buys are usually allowed in IRA accounts (they definitely are in mine, with Interactive Brokers).

      This is a relatively simple to run trading system. Most days (that means the majority of days, but not weeks at time) you don’t have to do anything; you are in trades, no trades close, nothing to do. When trades exit (which happens typically a couple of times a week, often several in the same day), you need to find new trades and get your money back in. That can all be done in a few minutes in the evening, assuming you are prepared. You do have to maintain a watchlist of excellent stocks that you may want enter in a trade; when a trade closes, you review the watch list, find a stock with the right set up for a trade, and take it. So maintaining the watchlist is something that needs some attention (30-60 minutes perhaps) every weekend or so.

      Overall, it’s a very lightweight system to run. Also, when you go on vacation or otherwise are not able to manage trading for a period of time, you DON’T need to exit everything! The exit rules can be implemented with straightforward limit and stop orders; you can just set those and forget about it for awhile. You obviously won’t get your money back into new trades during this period, but the existing trades will keep working for you until they are complete.

      I hope this gets to all your questions George, fire away if you’ve got more!

      -Kevin

  2. George says:

    Do you have an updated e-mail address? I have tried the e-mail address in the contact section a few times and get bounced messages. Thanks.

  3. joachim ober says:

    Hello,
    I consider buying your e-book, but what bothers me somewhat is, that the last update is from january and now
    we are in november. Just curious about the results.

    regards
    joachim

    • Joachim:

      I’ve had some life changes and along with that, changes in my trading practices over the last year. This has included an extended stint “day trading” (full-time trading), and generally using methods that are quite different from those presented in the Spec-k book, and the results I’ve been sharing here. So I’m afraid I’m unable to present my actual trading results using Spec-k in 2014. That said, a critical point of the book is that (1) your specific trading will vary considerably from mine and everyone else’s; Spec-k is not a system which prescribe specific stocks/trades, but rather which prescribes a set of practices that you deploy yourself with your own trade selections, and (2) you should always measure your own results and consider your investment choices based on those (via paper trading, ideally for an extensive time period). Ergo, “my results” aren’t all so material, even if I had them for 2014. Learn how to trade, trade it (on paper or small money), measure it, and if you like the results, you can increase your position sizing. Your results are what matter, not mine.

      • Joachim Ober says:

        Hello,
        thank your for your honest anwser I do appreciate it. I did understand that everyone may select other stocks and therefore your result may
        vary strongly (up or down) of those of other people. What interests me, is if this many-low-bets-in-high-frequency approach is
        still a feasible one – or did you abandon it completely ?

        regards
        Joachim

      • Every method of trading includes a set of tradeoffs. Spec-k is (in my opinion) an excellent choice for someone who (a) wants to trade aggressively to grow his capital, (b) has only a few hours a week to “give” to the trading effort, and (c) can stomach occasionally large drawdowns. Spec-K will bit you in a severe market downturn, like the fall we had this summer. The critical elements is to NOT PANIC and NOT STOP TRADING! The market cycle we’ve gone through demonstrates why. You couldn’t have predicted that turn at the bottom, or the size and quickness of the market climb back up. By trading through the short term adversity (easy to say, hard to do) you do well overall, over the long haul. Yes, I think it’s an exceptionally strong system, and will outperform any other method (certainly including amateur discretionary trading) that requires no more amount of time and expertise. Spec-K DOES put all your money to work, which alone is a major problem with most discretionary traders (though perhaps not; most are playing a negative expectation trading game, so putting less than all of their money to work is advantageous: they lose it all more slowly). Run spec-k for awhile yourself on paper, I’d encourage at least 6 months, and see for yourself.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s