About

My path to stock trading was an unusual one. I was born and raised in a country where stock market culture simply does not exist, a place where almost no one keeps their money in equities, as the local market is underdeveloped and most people know nothing about publicly traded companies. I was just out of high school and a business major at the university when I was reading on a regular basis a weekly computer magazine, whose name I don’t even remember. Oddly enough, the magazine always had two pages devoted to the performance of Internet stocks. I found myself spending an exorbitant amount of time on those two pages. The U.S. stock market was in correction, so most of the stocks that were featured were down 70 to 80 percent from their peaks.

Without any experience or a well-defined approach, I opened an account and started buying Bulgarian stocks. Luck was on my side, as everything went up, every day. The only thing I disliked about the local market was the lack of transparency and the illiquidity, which caused wild ranges and huge bid-ask spreads. I wanted to learn more about the art of stock trading, and there was no one to teach me. I decided that the best place to learn about it was the United States and I moved here to study finance. Honestly, my university education did not help me at all to understand how the stock market works, but at least now I was in a place where the stock market culture was ingrained in many people’s minds.

It did not take long for me to realize how little I actually knew. I made all the trading mistakes that could be made and then some more, several times, putting my own money at risk. I could say that probably I even invented some new ways to lose money in the stock market, but I realize that this would not be true. Since financial markets exist, the same mistakes have been made for the simple reason that there are human beings involved and our nature hasn’t changed for thousands of years. We are emotional creatures who believe that everything should be symmetrical and balanced as it is in nature. Financial markets are very different from the linear world. They are a place where mean reversion is often delayed long enough to bankrupt the rational thinkers; they are a place where “once in a hundred years” events happen every five years.

I am wrong about 40 percent of the time and I still consider myself a good trader. Learning to accept losses as part of the game and cutting them short is the single most important step toward becoming consistently profitable. It sounds simple, but in reality it is extremely difficult for everybody. Why? Because we’ve been taught that giving up is for losers and we should fight until our last breath. I certainly agree that you should not give up quickly, but you should stay with something only if you can influence the end result. Let me be clear: A stock doesn’t know that you own it and it doesn’t care that you cannot afford to lose money. The market will strip your last penny if you don’t know how to manage risk. You have to understand and accept your power. You cannot move the market. You cannot tell Mr. Market where to go and how fast. This is why so many people who are successful as entrepreneurs and engineers have trouble breaking even in the capital markets. It takes a special kind of person—someone who can forget his or her ego and concentrate on what actually works. Very few people are able to reach that level and to distinguish their trading lives from their personal lives.

Trading or investing is a skill that can be learned. There are two ways to learn a new skill in general: through the school of hard knocks and through the mentorship of others who have the gift of teaching. To become a successful trader, you need to somehow implement both approaches. Nothing can replace personal experience. You can hire the best mentors in the world to teach you and purchase the most expensive equipment and trading software, but this is not going to be enough for you to build a new skill.

Skill building is governed to eternal physical laws. There are a hundred billion neurons in your brain. For every skill that you possess (e.g., speaking a language or driving a car), there is a certain combination of connections between some of your neurons. To build a new skill, you need to build a new net of connections. This is why every beginning is hard; this is why big changes do not happen overnight. You have to establish new connections, which takes hard work via repetition and visualization.

People trade their beliefs. This is why it is so hard to trade someone else’s market approach. You just don’t trust it enough. I have found out that the best way to build a solid market understanding is to devote effort to studying past winners. I meticulously study the best-performing stocks at different time frames (weekly, monthly, quarterly, and annually) and try to figure out what most of them had in common before they made their big moves. Such an approach helps me to focus on the factors that are truly driving prices.

My bio is an excerpt from my chapter in the book: The StockTwits Edge – 40 Actionable Trade Setups from Real Market Pros

 

Short description of my market approach

My equity selection approach is based on PEAD (post earnings announcement drift).

I pay attention to stocks that meet the following criteria:

1) Grow their earnings and sales at an impressive pace;

2) Have just surprised the Street’s estimates by a wide margin after a long period of being neglected in terms of price range and liquidity.

3) Breaking out to at least new 6 month high (I prefer multi-year highs);

Prices don’t change unless expectations change. Expectations change under the influence of outside event and processes which I call catalysts. The most powerful catalysts always have an element of surprise ingrained in them. The best performing stocks in any given year are the ones that manage to surprise the most often and by the highest margin. Surprises are always earnings related. When they are not related to actual earnings, they are related to expectations for future earnings.

No matter how smart you are, how ingenious your market approach is, how great your investment thesis is, unless the market agrees with you, you won’t make a cent. Hence, I pay attention to stocks that break out to major new highs – this is a proof that the market agrees with my thesis.

I define myself as a swing trader. 80% of my trades have duration of 2 to 30 days. I pay attention to sudden, catalyst driven, high volume, price expansion in stocks with solid earnings and sales growth. Such an event usually signals the starting point of a process of major re-pricing.

There should be very clear distinction between trading and investing. Long-term investing is essentially a bet on how other people’s perceptions will change over time. It is about answering the question What are the catalysts that will change market’s expectations? Trading is about capturing real time changes in sentiment and benefiting from the sweet spot of a major repricing process. You have to define yourself – are you an investor or a trader? – because the path you choose to take will impact everything you do.