I have been trading for nearly 20 years and consider any year that I do not make 100% return on my investment a bad year. But I am cautious and I do not take big risks. How can I have my cake and eat it too?

Well I have been arguing for some time that 100% returns and low risk should be the norm for a stock trader and in fact I wrote a book, “How I Quit My Job and Turned $6000 into a Half Million Trading”. And I published my broker statements to prove I really did that!

By the way it took me six years to make that half million bucks and my returns each year well exceeded 100% returns on my investment. I took about 10,000 individual trades and lived off the money I made.

What is My Secret?

So what is my secret? I will give you my secret right here. I get into to a lot of trades (diversity) and I get out of my trades in two to three days. If you follow only those rules you will see your stock trading take a quantum leap in profitability. And because you are diversified and are out of the trades in two or three days your risk will be low.

I put all my trades in 96 markets up on a website every day to prove my point, but if you do not believe the proof is in the pudding let me give you a little statistical theory here.

Serious Market Research

I am a serious market researcher and one of the things I have noticed is that a lot of market behavior follows normal distribution patterns. What does that mean?

Let us look at a common measure of market behavior, daily range. Daily range is simply the daily high minus the daily low. If a market makes a high of 66 and a low of 61 the daily range is 5.

Now let us take 100 market days and measure the daily range of a theoretical market and assume normal distribution of range for those 100 days. What we find is that 68 days have ranges of 5 or less. 95 days have ranges of 10 or less. 99 days have ranges of 15 or less. But there is one day out of the hundred with a range of 40!

Put another way: For 68 days the range is 5 or less. But for 27 days the range is between 5 and 10. And for 3 days the range is between 10 and 15. And finally on ONE day the range is between 15 and 40!

Normal Distribution and Stock Market Stops

When we trade stocks we use stops to limit our losses. If we buy 50 shares of XYZ at a price of $50 per share and we want to limit our loss to $250 we will place an order to sell our 50 shares 5 dollars below where we bought or at 45 stop. Of course if our stop is too shallow it is almost always going to get tagged and result in us always losing small amounts of money with each trade. Conversely if the stop is too deep we are going to win more but when our deep stop finally gets hit the loss may wipe out all our gains.

Using normal distribution patterns is one way we can set intelligent stops. Using the hypothetical data above we know that in two out of every three market days the range will be 5 or less. Therefore if we bought 50 shares at 50.00 we can set our stop at 45.00, limit our loss to $250 and know that on any given day we have only one chance in three of having our stops hit. If we hold our trade for only two days we have a better than even chance of getting out of the trade without our $250 stop being tagged. And being as we are NOT limiting our upside potential that means that we are going to make money even if we only win 50 % of the time.

Here is the Rub

BUT here is the rub. If we get greedy and try to hang on to the trade 5 to 10 days without setting a deeper stop it is virtually certain any profit we may have held will go to a loss. If we have one change in three of getting tagged on any given day we simply cannot hang around more than two days.

And while I have you thinking about stops, risk and length of trades let us quickly examine those who might consider “buy and hold” strategies. If you decided that you wanted to hold this trade for even 100 days you must, using the hypothetical data presented here, increase your stop from $250 to $2000 to accommodate that one outlier day with a range of 40. And there can be no assurances that you have a $2,000 upside potential to justify that risk.

Why Short Term Stock Trading Works

On the other hand with the two day approach you never risk more than $250 on any trade and you can move in and out of this market many times during the same 100 days. You can elect to get in only when the market is moving topside. And when it is moving sideways, which is usually about 85% of the time, you can go trade something else that is moving.

And that my friends, in the simplest terms that I can present here, is why short term stock trading works. Getting 100 % returns on your investment in stocks is not only possible, but it is possible with relatively little potential for significant equity draw down or risk. I have been doing this for many years and to prove my point I put my real time trades up on my web site several times a day.

The proof is in the pudding and what I have offered here is a simple statistical explanation for my success.