New to Trading?

 I don’t have any medical training whatsoever but I think tomorrow I’m going to be a surgeon.  I’ll pick up some knives tonight and open an office in the morning.

Obviously, no one would ever attempt this (even if there weren’t laws in place to stop you). However, in trading, this happens all the time. The barrier to entry is very low. All you need is a computer and a trading account. That’s it! Now you’re a “trader!” Well, obviously, it’s a little more complicated than that. My point is, even though it’s easy to become a “trader”, it must be approached like any other profession. You’ll need education and more importantly, you’ll need experience.

Getting started:

You’ll need a methodology

Keep it simple

In spite of numerous claims, NO ONE knows exactly what a market will do next. It’s an odds game at best. Simple methods can and do work—but NO methods work ALL of the time.

I follow a fairly simple trend following methodology. It works very well when the market is trending and not so well when it’s not.  This doesn’t mean its right for you. It’s just what works best for me after years of “chasing rainbows.” This brings us to our next point.

Study It

Study methods historically. Make sure you look at them in both good times and bad. I’m often approached by those who have discovered a “new methodology.” They’ll send me countless examples of how well it would have worked based on historical charts. However, when they go to implement it in the real world, they often lose money. Why? Assuming they are disciplined and using proper money management, it’s possible that they failed to observe all the times the methodology did not work. The historical big winners tended to “jump out” at them but the multiple small losing trades went un-noticed.

Make sure you can implement it

Once you do find something, make sure you can implement it.  If you have a busy career, don’t attempt to day trade.

If you’re smart, I have some bad news

If you’re an Engineer, a Lawyer, a Doctor, or any other highly educated or skilled professional, I have some bad news: It’s going to take a little longer. Your profession was likely approached with a high degree of logic. Therefore, you’ll probably assume that markets are no different. However, often there is no logic. Markets trade off the emotions of the participants.

You’ll Need To Understand Psychology

Know yourself

The battle is often from within. Finding a methodology is (fairly) easy. Having the discipline to implement it is not. Once your money is “on the line” things become much more stressful. If a trade isn’t working out right away, you might be inclined to “pull the plug.” You then watch in agony as the market takes off without you. On the flip side, you might be inclined to stay with a losing position long after your methodology would have exited. You’ll then watch in agony as your loses grow and grow. 

It’s beyond the scope of this article to cover all the psychological pitfalls you’ll face as a trader. Therefore, make sure you study trader’s psychology as hard as you study your charts.

You’ll only be smarter in the future.

This is the one thing I can guarantee.  I promise you that years from now (or even months or days!) you’ll look at some of the trades you made today and think “What in the heck was I thinking?!!”  Therefore, start small and build. Trade at a size that’s almost meaningless. You should be able to get stopped out numerous times and not have it impact your psyche and more importantly, your lifestyle.  This brings us to our next point: Money Management.

You’ll Need A Money Management Plan

Understand the importance of money management

Even if your methodology has a longer-term edge, shorter-term you must realize that any trade can be a loser. Let me repeat: There is a risk of loss in EVERY trade.

Proper money management will make the psychological aspect of trading much easier. If you’re trading at a small size, then any given trade in and of itself shouldn’t be of any consequence.

Early in your career, you’ll make mistakes from both inexperience and emotions. The good news is, keeping risks in line with cover a multitude of sins. Remember, if you lose all your chips, you can’t play any more.  Proper money management will help keep you in the game long enough to get experience and catch some good hands.

You’ll Need Some Experience

You’ll Have To Experience A Variety of Markets

If you’ve only bought stocks in a bull market, you’ll need to experience a bear market. If you’ve only shorted stocks during a bear market, you’ll need to experience a bull market.  And if you’ve trade trend and have been fortunate enough to trade through a nice momentum period, you’ll need to experience a choppy sideways market. This brings us to our next point.

Be leery of initial success.

Initial success can actually be detrimental to your longer-term career. I’ve seen this happen many times. By complete accident, an individual will start trading momentum precisely as a great trending market develops. They “print” money.  This causes two problems.

First, they begin to take on excessive risk because they believe so much in themselves and their methodology.  They don’t realize that they have chanced upon great market conditions. As soon as conditions change they begin losing vast sums of money. A trader who trains new traders once told me: “I like to see them have their ass handed to them right away. This teaches them to respect risk.”

The second  problem is that they  assume their methodology no longer works. They then begin searching for the “holy grail”—some system that will lead to riches without losses. Unfortunately, this doesn’t exist. They jump from methodology to methodology. They occasionally will hit the market at the right time with the right method but this is usually short lived so their quest continues.  They give up on simple methods and began searching for the complex and arcane. What’s amazing is, those that tough it out longer-term usually find themselves returning to a more simpler methodology---often ending up right back where they started.

So am I saying it’s better to fail at first? Well, obviously initial failure doesn’t guarantee your longer-term success either. My point is an initial failure tempers your expectations and teaches you to respect risk.

In conclusion:

Approach trading as you would any other business. Get educated and get some experience. Take your time, start small and slowly build. Keep risk in line.   Know the market, know your method, and know yourself.

For more information:

See daily “Market in a Minute”

Many of the above concepts are covered in more detail in my weekly webinar—“The Week In Charts.”

Questions? Email me directly at dave@davelandry.com.

Copyright 2008 Dave Landry, www.davelandry.com