AT THE CLOSE VIEWS FROM AN ACTIVE TRADER
Here's an informal question and answer with Sohail Asghar, president of PennyStockAction.com and a pioneer of two independent home-based activities, penny stock trading and sports investing.
How did you get interested in the markets?
In 1986 I visited Canada and saw my cousin daytrading on a regular basis. He introduced me to some others who were daytrading as a home-based activity. At that time, daytrading wasn't a popular activity in France.
What did you find exciting about active trading?
When I saw how popular daytrading was in the US and Canada and how people worked from home and handled their own capital in such a smart way, I really wanted to look into the possibilities of doing it for myself when I returned to France. I really liked that an active trader has to be in a challenging spirit vs. the stock market.
After returning to France, what steps did you take toward your daytrading venture?
I spent some years - between 1990 and 2002 - discovering, learning, and reading as much as I could about active trading strategies applied by famous traders. This knowledge, combined with additional visits to the US and using the Internet as a resource, helped me gather all the information I needed to start making active trading popular in France. I wanted to share what I learned with other people, and that was important to me.
After observing the economic, political, and employment situation in France, I knew there was a lot of interest in the idea of establishing such an independent, home-based activity. I strongly believed active trading would be the ideal solution.
Which markets do you trade?
I mainly trade the US stock markets. I have always been attracted to Wall Street rather than the French stock market (Bourse de Paris), mainly because of volatility. Active trading needs to be done in a moving market, and I found that especially to be true in the Nasdaq, although I also trade the Nyse and Amex.
You have been successful in trading penny stocks, which is something most traders consider extremely risky. What made you confident about trading them?
My interest in penny stocks only started after having already been involved in daytrading and swing trading. I was looking for something that would suit my availability time-wise. I didn't want to have to sit in front of the computer all day. I knew that penny stocks were developing in the US, so I started taking more interest in this sector. What attracted me was that penny stocks offer high volatility, which means the risk/reward ratio is higher. But with my experience from the other trading strategies, I was able to adapt sound money management, and this resulted in a reasonably high accuracy rate in my trading. I also wanted to show that it was possible to start trading with a smaller account.
What kind of money management strategies do you apply?
For daytrading, I follow Sammy Chua's advice, which is to keep a 2% stop-loss strategy in place. That's a maximum possible loss of $200 based on a $10,000 trading account.
When it comes to penny stock trading, I like AffordableStock.com's strategy, which is to keep a stop-loss at -10%. These are very basic simple rules to follow and apply. Actually, in the beginning, human nature is such that even this might sound difficult for someone to follow, but being able to do so comes with experience. And if you learn from someone who has already made mistakes in the past, you don't have to repeat those same mistakes.
Do you think there is a certain amount of capital a trader should start with?
Absolutely, and I think this is a very important aspect. It would also depend on the active trading strategy selected by the trader. For example, if someone wants to specialize in penny stock trading, then a starting capital of $5,000 would be sufficient to start with. For someone who is interested in swing trading or daytrading, they should start with at least $25,000. For forex trading, because of the leverage, they can start with less capital than a penny stock trader. Another way is to build up and use a compounding strategy.
Could you give an example of your compounding strategy?
I started my penny stock trading account with $2,500. Once the capital reached $5,000, I increased my trade size since I could buy more shares. I continued doing that every time my capital increased significantly.
So how does a penny stock trader identify stocks that are most volatile?
They would have to focus on volume, hot news, and the real-time buying and selling pressure - these factors together with technical indicators like the balance of power, time-segmented volume, relative strength, moving average, and money stream. These are sufficient tools to analyze particular penny stocks. To simplify the process, a trader could use a real-time stock trend analysis software, which could take out all the complexities of technical analysis and hence simplify their decisions by giving clear buy and sell signals.
However, there is always a learning curve involved, especially when it comes to active trading. Therefore, I would advise that aspiring traders learn from those who have achieved success and are willing to share their knowledge with novice traders.
You mean act as a mentor?
I came to know famous traders who achieved success in daytrading, swing trading, penny stock trading, futures trading, forex trading, and so on. I have a lot of respect for them and have learned a lot from them. I am talking about traders like Sammy Chua, Pascal Monmoine, Raghee Horner, and Shay Horowitz. They were my main source of inspiration and helped me in different ways to gain knowledge about trading, money management, and discipline.
Thank you, Sohail.
- Jayanthi Gopalakrishnan is Editor for Stocks & Commodities.
Originally published in the August 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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