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Tuesday, July 1, 2008

The Low Funded Challenge Accounts: July 2008

Challenge Accounts:

Investing Account Balance: $196.12 ($0.19 RBB Dividend Payment Processing)
Stock / Futures Trading Balance: $915.61 (July Deposit processing)
Online Savings Balance: $32.30 ($0.08 Interest Payment Processing)

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 later added a small ING Savings account that has been built up to a balance of $32.30. But due to the initial investment, I once termed this the "$500 Challenge". Since we now have a cumulative total of $1,144.03 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 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. We didn't trade last month, because we are looking to get the account equity bumped up without any risk of drawdown. Our account equity is therefore bumped up by more than 10%

Now we have arrived in a new month; July, 2008. This month we're going to do the same thing. $5.00 to our ING Direct Savings account, $90.00 to the optionsXpress trading account, and $5.00 to our Sharebuilder Investing account. I've already initiated the deposit to the optionsXpress trading account, and will be performing the other transfers on the 3rd of the month.

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. With a deposit in July of $90.00 to the Stock and Futures trading account, we'll have a balance of $915.61. So with July's deposit, we'll be past step one, in Phase I of the strategy. Now, the next step will be to get the account to $1,100.00. But remember, the goal right now isn't to primarily trade these accounts. It's to get the account equity balance bumped up. The account / project is still within it's 'tiny' phase.

I will be sending $5.00 to the ING account on July 3rd, 2008 as well. This account usually takes a few days to clear. I will be sending $5.00 to the Sharebuilder account on July 3rd, 2008, and Sharebuilder is usually extremely quick about posting funds. We bought 7 shares of Bank of America last month in the Investment account. Obviously, BAC has fallen further, but the thing to note here is that we are looking at a risk: reward ratio of 1:2. BAC could go to zero. I'm looking for a stock price of $60.00 in around 3 or 4 years time. So yes, it might have a bit farther to fall. But with investing, we're not trying to pick bottoms, and we have to initiate the position at some time. We just want what we believe fundamentally to be a 'good' price to begin a DRIP strategy. What we are looking for in 3 to 8 years, is a way to accumulate a lot of shares. DRIP is the way to do that. The main goal with the investing account now, is to obtain the funds to diversify into another stock.

3) I'll be using regular investment and trade vehicles. Bonds. Stocks. ETF's. Futures Options. In July, the trade would have to look really good for me to take it. It's a basic risk / reward scenario. If I wait, for August, I'll have another $90.00 - or approximately 10% increase in the size of the account. However, I have to weigh that guarantee, with the possibility of a 10% increase in July, rather than August, which would allow me to send money in August to the Investing Account.

I love this business. The project is starting to get fun again.

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

Investing Account Balance: $201.12
Stock / Futures Trading Balance: $915.61
Online Savings Balance: $37.30

* * *

Current Balances:

Investing Account Balance: $196.12 ($0.19 RBB Dividend Payment Processing)
Stock / Futures Trading Balance: $915.61 (July Deposit processing)
Online Savings Balance: $32.30 ($0.08 Interest Payment Processing)

Total Trades: 4
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 2
Average Drawdown: $65.50
Average Loss: $79.84
Accuracy Rate: 25%
Average Reward: $179.75
Risk : Reward Ratio: 1 : 2.1
Trading Money Gain / (Loss): Down - ($59.68)

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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