Trading Lessons I Learned the Hard Way, Part 7

08/09/2012 8:30 am EST

Focus: STRATEGIES

Ron Wagner

Principal Partner, RevolutionaryTrading.com

Ron Wagner of Revolutionary Trading discusses the lessons he learned from his early days of trading, and how his trading has evolved to become profitable.

Find the previous article here. Start at the beginning here.

As I mentioned last time, I became very good at scanning and finding trading candidates. Well, I got a little ahead of myself, and naturally before I could scan, I had to develop a universe. The reason I started talking about scanning first is because it was more about the concept of knowing that I could take control of my own trading direction.

After I found my personal style of trading, it was actually very easy to just implement the requirements for my trading universe. At first, I wanted to scan everything available. I realized quickly that the style of trading that matched my personality was to take medium-sized gains on both my swing and daytrading trades. Let me explain more about this.

Let’s say, for example, I could take 500 shares on a swing trade. And let’s say my target was a $3 gain, as an example. It made no sense for me to try and do that on a stock priced at $100, as it would require more capital than I had at that time. I needed to find a good-quality setup on a stock priced at around $50. Sure, I may have been able to factor in taking 250 shares of the $100 stock and look for a $6 gain, but I knew myself and how I reacted to moves on my profitable trades.

On smaller-priced stocks I could take more shares if the situation presented itself, and then consider taking $1 or more. I ended up constructing a universe with stocks from $5 to $60 with good liquidity. For swing trading, I wanted at least 500,000 average daily shares traded, and for anything I would daytrade, at least 1 million shares. With this volume, I could get in and out of trades without too much concern.

A universe can include whatever is best for your personal trading style. It can be as small as a few selections to trade, up to a larger universe that allows plenty of trading choices on a regular basis. I found that by building my universe around my personal style of trading worked really well.

I spent a lot of time learning about my universe and got into the regimen of updating it about twice per year. The reason for this is that new IPOs come out, some companies merge, and some companies go out of business. I studied how each of my daytrade selections traded. I would stay away from those stocks that had huge block sales representing the majority of their daily volume.

I applied other important elements in the construction of my universe that have worked out very well over the years. It is well worth the time to do this and to gain familiarity of how stocks within your universe usually trade.

I have often said, I have many friends in my universe.

Lessons learned:

  1. Build a universe that is suitable to your capital account!
  2. Build a universe that will objectively provide you with the results you are looking for!
  3. Make sure to gain familiarity with your universe by spending time with it routinely!
  4. Don’t select something to trade from your universe just because you spent time choosing it!
  5. Be patient and let your universe make you money! And if it is not, then put yourself into a different universe!

Next issue, I will talk about how I put my universe to work, and one thing that improved my results greatly.

Ron Wagner can be found at Revolutionary Trading.

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