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Tuesday, April 1, 2008

The Low Funded Challenge Accounts: April 2008

Challenge Accounts:

Investing Account Balance: $201.92

Stock / Futures Trading Balance: $684.39
Online Savings Balance: $12.07

A video summary is to be found at the end of this entry.

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 money management rationals and 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 $898.38 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 $12.07 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. This account is the 'trading' account, for stocks, etf's, and futures options.

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. Last month, we deposited $10.00 to our ING Direct Savings account, $20.00 to the optionsXpress trading account, and $70.00 to our Sharebuilder Investing account. We had then a trade in Orange Juice Futures option that we cashed out in profit for about $179.50. We received a dividend payment in our Sharebuilder account of $0.46 therefore, our balance there is currently $201.92

Now we have arrived in a new month; April. This month I'm going to do switch up the deposits again. In April, I am going to contribute $50.00 to the optionsXpress trading account, $40.00 to the Sharebuilder account, and $10.00 to the ING account.

Our optionsXpress balance is currently $684.39 that I use for trading. At the current time, it's used for trading futures options. With this months deposit of $50.00 to the account, the balance will raise to $734.39. There's a reason I didn't send more than $89.00 (My usual risk per trade) to the account. If I can ever line up a house sitter, I'm leaving for vacation to Mexico for much of the month. And it's always a bad idea to be in a trade while on vacation. So I figured I would use rule #2 to bump up the other accounts a bit. The $50.00 is already on it's way to this account today, April the 1st, which means it probably won't clear until about 4/4/2008, or so; bringing our account balance to $734.39 before any trades.

I will send $40.00 to the The Sharebuilder account on April 1st, 2008. Sharebuilder is pretty quick about clearing funds, so this will raise the balance to $241.92. 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 9 months to a little over 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 for long term DRIP plays. And I need to use around $650 or so to purchase stocks, so the account needs bumped up a little. The market is down about 10.43% for the year as I right this. That's -10.43%. But we're at least bringing in 2.37% interest (Scratch that, make that 2.29%, it just reset again) on that money right now. Mind you, we only have $241.92, and stagflation has arrived. What do we mean?

With the current (yes I said current) recession and the Fed's attempts to slow it down, as well as deal with a full blown credit and solvency crisis; the money you make on interest in a money market account now isn't keeping up with inflation. CPI Core inflation (excluding food and energy) is at 4.03%. The Sharebuilder account will earn approximately 2.29% interest on the money that's in there 7 day yield, and there are no fees for either account (Mind you, before Ben started with the rate cuts, that yield was 4.48%). Which means we are earning -1.74% on that money, relative to inflation. That's right NEGATIVE 1.74%. But that account was never planned to be using the money market yield to grow. We are beginning to add to this account for it's future 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. However, the commissions would eat me alive for what little shares I could purchase in the Sharebuilder account. In addition, I believe we are still within a bear market. We discussed some time ago that to purchase a dividend stock, we would to spend around $680.00 for your basic dividend stock purchase. And simply because, or when we have $680.00 in the account, does not necessarily mean that we will purchase an investment stock. Patience means that we must wait for the right opportunity.

I will be sending $10.00 to the ING account on April 1, 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 April, after I find a house-sitter, I'll be on vacation in Mexico. So quite frankly, I'm not going to be trading a lot in April. It's always a bad idea to be caught in a trade as you are going on vacation. As I highlighted in the "strategy video", the primary goal for the project right now is not to trade. It's to follow money management principles and increase the account equity.

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

Aprils' Balances after contribution (before trades)

Investing Account Balance: $241.92
Stock / Futures Trading Balance: $734.39
Online Savings Balance: $22.07

* * *

Investing Account Balance: $201.92
Stock / Futures Trading Balance: $684.39
Online Savings Balance: $12.07

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, and tolerance for risk.

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