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Thursday, July 31, 2008

The Low Funded Challenge Accounts: August 2008

Challenge Accounts:

Investing Account Balance: $264.82 (RBB Dividend Payment will be added tonight)
Stock / Futures Trading Balance: $986.79
Online Savings Balance: $37.30 (Interest Payment will be added tonight)

Personal Trading Thoughts: I'm eye'ing up a few Commodity Futures markets. Sugar #11 is rising, just as I had wanted. I'm still watching Live Cattle out of the corner of my eye. The setup is almost complete.

Personal Investing Thoughts: Overall, I'm just watching and waiting. Summer is here, and the stock market is generally weaker in the summer, so I'm not much of a buyer. Many years, I turn my DRIP off in the summer, and receive straight cash. But not this summer. We've been in a bear market, and the market is offering bargain prices on many stocks. Therefore, my DRIP will remain on, so that I can accumulate more shares at better prices to DCA ...

A video summary is to be found at the end of this entry on my Daily Blog.

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 or her account 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 later added a small ING Savings account that has been built up to a balance of $37.30. But due to the initial investment, I once termed this the "$500 Challenge". Since we now have a cumulative total of $1,288.91 in these accounts at the end of July, 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 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 June.

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. Therefore, rule #1 is always complete.

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 $5.00 to our ING Direct Savings account, $90.00 to the optionsXpress trading account, and $5.00 to our Sharebuilder Investing account. The main reason we split up the money the way we did? Was to to defend against any possible drawdown we might encounter in the trading account. We had a profitable win in the trading account, in addition to that rise in capital. Great. But I still have my eye on any possible drawdown that might occur.

We also have 7 shares of Bank of America (BAC) in the Investing account, with the DRIP turned on. The key for the investing account? Is to get diversified. Especially as November approaches. Therefore, I'm increasing the usual deposit to the Investing account this month, so that we can start to reach another $230 in cash, so we can diversify.

As far as Bank of America (BAC)? Well, it's still wait and see as far as XLF, or the financials are my concerned in the short term. But I didn't pick up those shares for the short term. I believe Bank of America (BAC) is easily a $60.00 stock, some years down the road. With a P/E of 15.17, a Forward P/E of 9.50 , and a EPS of 1.82 with a DRIP program? I see this as a very obvious investment play any time it gets near the $30.00 mark.

Now we have arrived in a new month; August, 2008. This month we're going to change it up a little bit. $10.00 to our ING Direct Savings account, $25.00 to the optionsXpress trading account, and $65.00 to our Sharebuilder Investing account. I'm initiating all of these transfers today, July 31, 2008, so they will be clearing the first few days of August.

If you note my project strategy video (located here), we were looking last month to get past the first step in this phase of the project, which was for the trading account to have an equity greater than $900.00. We have a balance of $986.79. So with August's deposit, we'll be on our way at least, to step two, in Phase I of the strategy. This next step will be to get the trading account balance to $1,100.00. But remember, the goal right now isn't to primarily trade that account. It's to get the account equity balance bumped up. The account / project is still within it's 'tiny' phase.

3) I'll be using regular investment and trade vehicles. Bonds. Stocks. ETF's. Futures Options. In August? I'm waiting. I might, just possibly, may engage in a Sugar #11 trade with futures options. I'm not even sure I'd do that. If I do, I'll be keeping the risk per trade below $90.00. But beyond that? The trading account is still in the tiny phase, and needs to be bumped up before I'll be trading stocks or futures contracts. Heck, we have a ways to go before I start trading outright contracts.

But we'll get there.

August Balances after Deposit from Rule #2 (before trades)

Investing Account Balance: $329.82 (This will fluctuate with the BAC stock)
Stock / Futures Trading Balance: $1,011.79
Online Savings Balance: $47.30 (Not counting tonights Interest)

* * *

Current Balances:

Investing Account Balance: $264.82 (RBB Dividend Payment will be added tonight)
Stock / Futures Trading Balance: $986.79
Online Savings Balance: $37.30 (Interest Payment will be added tonight)

Total Trades: 5
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 2
Average Drawdown: $62.40
Average Loss: $79.81
Accuracy Rate: 40%
Average Reward: $175.34
Risk : Reward Ratio: 1 : 2.2
Trading Money Gain / (Loss): Up + $111.50

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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