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Saturday, March 1, 2008

The Low Funded Challenge Accounts: March 2008

Challenge Accounts:

Investing Account Balance: $131.46 (Dividend Payment Received the other day)

Stock / Futures Trading Balance: $664.39
Online Savings Balance: $2.06

These sub-accounts were created by me back in October 2007 as a main feature of this blog. Their purpose, as well as the purpose of many of the articles in this blog, is to assist the low-funded trader understand what principles he needs to consider when trying to get started in the markets, or if starting up again because his account has been wiped out. That as long as one enters this business with the proper principles, strategy, education and emotional discipline in hand, you can 'make it' in this business. These are actual sub-accounts at my brokerages that I own, and I will look to for growth. I will announce actual trades and investments that I perform in them, and the reasons for my decisions as a means to educate others.

In the beginning of this experiment, I placed $130.00 with Sharebuilder as a long-term investment account, and I placed $370.00 in the account for trading Futures options. I thus termed this the "$500 Challenge". Since we now have $797.88 as a cumulative total in these accounts, not $500, I will term this the "Low-Funded Challenge" instead of the "$500 Challenge". At times I will refer to them simply as the "Challenge" accounts. I later added a small ING Savings account that has $2.06 in it.

I also had three rules for the "Challenge" accounts. At the beginning of each month, I review and consider where we stand, and how those three rules impact the current months decisions. So let's do that for February.

Rules for the Challenge Account:

1) The initial investment is $500.00, to be split amongst the accounts. We did that back in October of 2007. $130 went to Sharebuilder for longer term investments, and $370 went to the Xpresstrade brokerage for futures options purchases. Xpresstrade was later bought out by "optionsXpress", therefore this is now the optionsXpress account.

2) Each month, I can contribute $100.00, that can be split amongst the accounts however I choose. In other words, I can send $30.00 to Sharebuilder, $70.00 to optionsXpress; or $100.00 to optionsXpress, and nothing to Sharebuilder, etc. We deposited $100 last month to optionsXpress, bringing our balance to $683.49. We had then one trade that went south, in which we lost about $79.00 or so. We then had one trade that went in our direction, and made us $179 or so. We received a dividend payment in our Sharebuilder account of $0.32 therefore, our balance there is currently $131.46

Now we have arrived in a new month; March. This month I'm going to do something a little different. I am going to contribute $20.00 to the optionsXpress account, $70.00 to the Sharebuilder account, and $10.00 to the ING account.

Our optionsXpress balance is currently $664.39. If an opportunity arises to my methodolgy for a trade where the risk is under the $100 that will be coming in for this month, then I will do so. I will try to keep the risk as close to $89 as humanely possible. As of todays date, I see Cotton as a possible trade, but I have to keep my eye on it and see how it shapes up. The $20.00 will be sent to optionsXpress today, March the 1st, which means it probably won't clear until about 3/6/2008, or so; bringing our account balance to $684.39 before any trades.

I will send $70.00 to the The Sharebuilder account on March the 3rd, 2008. Sharebuilder is pretty quick about clearing funds, so this will raise the balance to $201.46. Given the state of the economy and market I want to start building this account up. Why? Because I feel the market is going to be trying to find a bottom for the next 6 months to 1 year. Whenever that happens (I honestly have no idea), I want that account as funded as humanely possible so that we can start to look for great Dividend stocks to buy. The market is down about 7% for the year as I right this. That's -7%. But we're at least bringing in 3.07% interest on that money right now. Mind you, we only have $131.46. Now mind you, Stagflation is not coming. It has arrived. What do we mean?

Housing numbers continue to plummet. Unemployment is rising. The money you make on interest in a money market account now isn't keeping up with inflation. Inflation is at 4.28%. However, the commissions would eat me alive for what little shares I could purchase in the Sharebuilder account. We discussed last month that for every $45.00 stock we buy, we want at least 15 shares, or $680.00. And simply because, or when we have $650.00 in the account, does not necessarily mean that we will purchase an investment stock. Patience means that we must wait for the right opportunity. The Sharebuilder account will earn approximately 3.07% interest on the money that's in there 7 day yield, and there are no fees for either account. Which means we are earning -1.21% on that money, relative to inflation. But that account isn't planned to be using the money market yield to grow. We are beginning to add to this account for it's growth. So I figure we should start building that account up by a little, and earn a little more interest at the same time; so we are ready when it does come time to purchase long term stocks.

I will be sending $10.00 to the ING account on March the 3rd, 2008. This account usually takes a few days to clear.

3) I'll be using regular investment and trade vehicles. Bonds. Stocks. ETF's. Futures Options. In March, we are on the lookout for any Futures options trade where the risk is under $90.00 or so. The risk / reward ratio should be at least 1:2. As well, any losses we experience, we'll hold off until we can bump the account equity back up, and have it greater than when we entered the trade.

If it is one thing that I've learned, is that the next time I perform this experiment, I will start out with a higher amount than $500. Probably $1300.00. Open-mouthed

Marches Balances after contribution (before trades)

Sharebuilder Balance: $201.46

optionsXpress Balance: $684.39
ING Orange Savings Balance: $12.06

* * *

Investing Account Balance: $131.46 (Dividend Payment Received the other day)
Stock / Futures Trading Balance: $664.39
Online Savings Balance: $2.06

Total Trades and Investments: 3
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 2
Average Drawdown: $82.56
Average Loss: $82.56
Accuracy Rate: 33%
Average Reward: $179.75
Risk : Reward Ratio: 1 : 2.02

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research.

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