Stocks are bouncing around this afternoon, as it appears everyone is waiting for earnings season to kick off before the market decides on its next move.
As for me, I’m waiting too… but it’s not for earnings… it’s for my setup.
You see, I specialize in trading small accounts ($25K or less). Now, for some, trading an account as low as $1K can be tricky because of the PDT Rule.
However, I’ve figured out a way to workaround the PDT Rule, while still being active in the market, and trading some of the fastest moving stocks in the market.
For example, check out the time and sales in CYTX from the other day:
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Rinse and repeat (SIML)…
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That said, I’ve developed a 5-step plan for trading profits. I’m able to nail winners like SIML and CYTX because I’m on the hunt for them.
For example, if you have a $2k trading account, you can barely buy 10 shares of Apple with that. The chances of Apple moving 30-50% in one single day are probably below zero. However, penny stocks move that much every single day.
Heck, ATAI is +200% from the other day…
The 5th step in my trading profits plan is scale and repeat.
Read on for my entire 5-step plan, as well as, case-study examples of trades, and how to put the plan into action.
Traders often ask me, “Jeff, how do I actually build a system to generate high percentage returns?”
Well, it’s pretty simple once you break it down to a 5-step system – what I call The Profit Prism.
Now, one thing setting some traders back is that they might not have a lot of capital to trade with. That’s completely fine… The Profit Prism aims to help traders with small accounts achieve extraordinary percentage returns. Even if you have a larger account and want to start learning how to trade… this simple and effective system can help you build your account into a larger one.
That said, let’s take a look at how you can start to develop a trading system.
Think about this like a pyramid, or prism.
1) Build A Strong Foundation
If you think about how a pyramid is built… you start with a foundation. Well, if you’re learning how to trade… the first thing you should do is learn and develop a repeatable strategy. That means finding a system that works for you and fits your schedule.
For example, what if you’re a busy professional who only has 30 minutes to an hour a day to dedicate to trading?
Well, learning how to day trade and trading multiple times a day probably wouldn’t help.
A scalable and repeatable strategy is what you want… something that allows you to go about your day, while just dedicating a short amount of time per day.
Now, one of my strategies is pretty simple.
Basically, I look for chart patterns after 3:00 PM, and look for potential stocks that can build momentum the next day. After I buy, I set my stops and have targets… and generally, by the next day… I’m taking profits (sometimes, I’ll have to hold the stocks for multiple days).
Here’s a look at what simple and scalable strategies can do for a small account.
Once you understand the basics of trading – namely chart patterns, volume, and how to enter orders… you can move onto the next step.
2) Backtest and Experiment
Just because you learn the basics of trading… that doesn’t mean you should just start trading with real money on the line.
A lot of beginners just read through whatever they can about trading… and start putting real money on the line on strategies that haven’t been proven… only to lose a significant portion of their account.
You see, it’s okay to paper trade and take a bit of time to get familiar with how stocks trade before you start to risk your hard-earned money.
You’re probably wondering how would I backtest a trade?
Well, it’s pretty simple.
You can just go back and look at stocks exhibiting a proven strategy. For example, here’s a look at one of my bread-and-butter setups – The Stair Step Higher.
If you just look at the chart, you can identify areas where you would have bought, stopped out, and taken profits. If you look at the chart above, you’ll notice Buy and Sell annotations. Well, you can do the same exact process with other patterns.
This helps you recognize patterns, and which ones work.
Thereafter, you can start to paper trade to get an idea of how your trading platform works. Make sure you choose the right broker when you’re trading penny stocks… the last thing you want to do is get a broker than nickels and dimes you.
What do you do with paper trades?
Well, trade it like you would with your real money… if you don’t treat paper money like real money, you won’t actually be able to remain disciplined when your risking actual money.
For example, let’s say you notice this pattern in a stock.
This is what I call the consolidation breakout.
What we’re looking for is the stock to have a strong move higher… followed by a drop, and the stock holding at a key support level. Now, support is just a price area where a stock has had a hard time breaking below. If you look at the daily chart on ATA Inc. (ATAI) above… you’ll notice a blue horizontal line. Well, that’s the support area. Basically, the stock had a hard time breaking below 90 cents.
Now, with this pattern, you want to buy as close to that level as possible. So when the stock reached $1.02, you could’ve bought some shares in your paper trading account… with a stop below 90 cents – say 88 cents. What we’re looking for is the stock to run up after consolidating (trading in a tight range for a while).
Thereafter, you would set a profit target. For example, you could set the profit target at $1.35 to sell half of your shares… and hold onto the rest.
It’s really that simple.
Now, once you’re confident to put real money on the line… it’s time to put your skills to the test.
3) Start Small
A lot of beginners think they’ll become overnight millionaires. Well, that’s very unlikely, especially when you have a small account. That said, when you’re putting real money on the line… keep your trades small.
Don’t try to look for home runs from the jump… look to get some base hits and prove you’re able to make money.
4) Optimize Your Strategy
After you start trading, it’s time to optimize your performance. Now, one way to do that would be journaling your trades.
When you journal your trades, you’re able to spot what’s working and what’s not… what you’re losing money in, and what you’re making money in… good patterns and bad patterns.
Here are some questions and ideas you can put in your trading journal:
- Stock Symbol traded, date and time of entries and exits.
- Did the trade work?
- How many shares did you buy?
- What was the pattern you traded? Was it a continuation pattern or a breakout pattern?
- Did you stick to your plan? In other words, did you buy at the price you said you would, did you take profits where you said you would? Did you stop out of the trade at the price you said you would?
- Keep a log of your wins and losses, percentage returns, and the patterns you traded.
Keep in mind, this is your trading journal, and you should write down whatever is going through your mind as well. Also, you don’t need to stick to these… make it your own. The whole idea here is to categorize your trades and figure out what’s working and what’s not. Once you figure that out, you cut the strategies that haven’t been working… and maximize what has been working for you.
5) Scale and Repeat
Once you’ve found what works for you… it’s time to lock in some winning streaks. That means taking those easy wins… and minimizing your downside. Again, you don’t want to just swing for the fences. If you aim for base hits… you’ll be able to remain focused and consistent… and that’s what builds small accounts.
After you’ve built your small account, you can start to scale your strategy (trading slightly larger sizes)… and in turn, you should have better returns on your capital.
Want to hear me talk about this plan and how it’s put into action? If so, check out my video replay from last night, as I go over Profit Prism and this 5-step plan into greater detail.