Want to Be a Trader?

Saturday, February 26, 2005 | 09:55 AM

Another good RM column from Swing Trader author Alan Farley; Here's an excerpt:

"Ready to take the plunge and try your hand at the trading game? If so, you have a lot of work to do. This is an obsessive discipline that rewards its enthusiasts in many ways beyond cold, hard cash. But you'll also discover it's the toughest thing you've ever done. What's the best path to success for new traders, and how can they shorten the learning curve? I've put together this checklist to address many of the tasks required to get set up and ready to go."

Commit capital. Figure out how much cash you need to put into your trading account. This should be discretionary capital you can lose without a major disruption to your lifestyle. Trading is harder than it looks, and the odds you'll succeed are a lot lower than you think.

Pick a trading strategy. Then learn it inside and out. I like swing trading because it holds positions longer than daytrading, without the slow crawl of investing. But the markets will accommodate a wide variety of tactics, so find the method that matches your personality and lifestyle.

Choose a trading style. Decide whether to pursue a discretionary or systems trading style. Discretionary traders watch the markets and pick their entries through real-time analysis. Systems traders build automatic rules and backtest them to see how they perform in different conditions.

Experiment with different ideas.
You won't be locked into your initial trading strategy for life, so experiment with a broad variety of ideas as your knowledge and experience grow. Sooner or later, the market will tell you what works best, given your unique circumstances.

Find a good broker. A good broker means the difference between lost opportunities and substantial profits. Most new traders need to choose between a classic discount broker and a direct-access broker that offers execution through electronic communication networks (ECNs).

Perform a reality check. Ask yourself if you have the ability or desire to watch the real-time markets during the trading day. Those who want to follow every tick do better with direct-access brokers, while end-of-day traders with responsibilities outside the markets will find that a discount broker meets their needs.

Get an education. Now you're all set up and ready to go. This is where the trouble starts, because it's easy to enter positions without a trading plan that works. So take a giant step back and get an education in technical analysis before you make your first trade.

Read some books. Three classic trading books to start with are Trading for a Living by Dr. Alexander Elder; Technical Analysis of Stock Trends by Edwards and Magee; and Technical Analysis of the Financial Markets by John Murphy.

Buy some software. You don't have to spend a fortune to watch the markets. There are free alternatives provided by your broker, as well as inexpensive charting programs that won't empty your wallet. Two solid choices for budget-minded traders are StockCharts.com and Medved QuoteTracker.

Learn to lose gracefully. Trading isn't the same discipline as technical analysis, and it will take longer to master than all of those charts and patterns. It also requires real-life experiences with cold, hard cash. And many of these will be painful and costly.

Avoid paper trading. There's no substitute for placing your own capital at risk. Many educators tell students they should paper-trade before taking real market positions. I don't agree with this at all. Simulated trading doesn't show how the markets really operate, and it also builds false confidence.

Trade small.
The trick is to keep position size very low for a long time while you learn how the markets operate. In fact, it's best to take positions of 100 shares or less for at least the first year. This way you'll experience many profits and losses, but control the emotional swings that can undermine your growth.

Use only limit orders. You choose your entry price in advance with this strategy, but you risk getting shut out of the trade. It's a far better approach for newbies than a market order that carries you into a position at the best price available at the time.

Do your homework. Think about why you want to own a stock, or sell it short at a particular price level. This is the first step to mastering the market. New traders get filled at the worst possible prices when they use market orders. This happens because they're chasing stocks around mindlessly, buying many highs and selling many lows.

Forget making money. Learn how to trade well, and don't worry about making money. This is tough, because greed is an overriding influence in the decision to trade. But the markets aren't printing money despite what you may believe. And they won't reward your efforts until you learn how to manage positions effectively.

Respect your opponent. Newbies get so blinded by the potential rewards that they forget the substantial risks. The market is a giant chessboard in which your opponent shows no mercy, so you have to be up to your game at all times. It's all about discipline, and the only way to get into the groove is by forgetting about the goal entirely.

Lower the noise level. Trading isn't a group sport. Avoid the chat rooms and stock boards at all costs, because it's your money at risk, not theirs. Successful traders develop their own market approach, then apply it religiously each day. This takes a lot of time, because the market is a complicated animal indeed.

Yet another example of uncommonly good common sense advice . .  .


So You Think You Want to Be a Trader?
Alan Farley
RealMoney.com, 2/10/2005 11:00 AM EST

Saturday, February 26, 2005 | 09:55 AM | Permalink | Comments (0) | TrackBack (0)
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