Saturday, August 11, 2007

To all those starting out

We’ve written about this subject before but we get asked about this topic so often that we thought we’d broach it again.

There are days we can’t find absolutely anything to trade. No set-ups, no opportunities, just nothing. Other traders like us (break-out traders) usually find themselves in a similar situation. But then on that same day there are thousands of traders who find lots of opportunities, many who have great days and even some who have their best day ever. We’ve always said – there are literally thousands of different ways to make money in the stock market, pick one, and respect others. We love break-out trading; for us, it’s perfect, stress level is low (since the numbers come from the night before there’s no real-time pressure to find candidates), there are strict rules to function within (thus less emotional and small draw-downs) and circumscribed risk parameters (to avoid blow-ups). However, we know that some people find it too boring and prefer to find dozens or hundreds of intraday opportunities (scalpers) and who make a very good living from it. Others make their living swing-trading. Others swear by futures. In the end all that counts is whether you can earn a living from trading, that is, whether you can make consistent money from trading.

So how do you find a system that will make you consistent money? The only real answer is trial and error. Start small (give yourself a lot of room for error) and ask yourself what attracts you. Do you prefer to trade actively and make consistent scalps, taking fast money? (And yes, scalpers can make a hell of a lot of money: like anything else, profits add up very fast if you’re a good). If so, then just start reading about the subject, go to blogs where successful scalpers share their techniques: Richard and his host of writers have excellent information and videos at Move the Market.

Do you prefer to do your homework from the night (via daily charts) before or at least combine that with intraday scans? Then go read about how Jamie, Ugly, Tyro, TraderMike, Dave at StockTickr, and Bubs trade.

Do you prefer swing-trading? Spend some time with Chris Perruna, Kirk Report, Market Speculator, Taz Trader, Knight Trader, DownTown Trader, Stock Bee, Pinoy Trader, and Bull Trader.

Most likely none of these sites will give you exactly what you are looking for but they will give you different ideas about the different kinds of trading systems out there. See what attracts you (for example, you might love to add a bunch of technical indicators to your charts, or you might love to trade with paint bars) and then research it some more via books and forums. Should you join a service or subscribe to a newsletter? Possibly, as long as it is inexpensive, it might be a good way to expose you to different systems (for example if you want to do futures, then signing up for a service for a few months to learn from the moderators wouldn’t be a bad idea, as long as they charge a reasonable fee, which to us is anything under $100 a month). But do not sign up for the $5000 options course, or pay $800 a month for a service, or $2000 for a set of CDs. That money could be much better spent learning in the market itself.

Then slowly get your feet wet by starting with very small positions while at the same time keeping meticulous notes on your trades (StockTickr would come in very handy at this point). You will start to learn very fast at this point, (while still possibly losing money – that’s normal. Very few people start making money right from the start). You’ll learn what you can handle, and most importantly, what you can’t. From there it’s a slow learning curve ahead and with the right amount of discipline and work, in our opinion, trading is just like any other job, and most people can make a living out of it if they put in the hours, the sweat, and the blood (with the exception of people who just don’t have the temperament for it, be it lack of discipline, or no control over their emotions, even though we would argue that even these people could change if they wanted to enough).

You might blow through your initial account but slowly your consistency will improve and maybe a year after that you'll start eeking out some profits and be on your way to becoming a professional trader (and if you don't want to call yourself a trader, just call yourself a market liquidity provider). Within the first years there will be times when you feel depressed, unlucky, when you will question yourself, that's all normal and part of the process. Stay grounded, man up, and good luck.