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Reader Questions Answered Trading Tips

Learning to ask the right questions about your trading

I had the following note come in over the weekend. Not only does it say nice things about my book 🙂 but is also addresses some very important points.

Hi John,

I bought your book because I’ve recently started trading index futures but my inner voice said something was not quite right. I started with a $10k account and got stopped a couple of times, so I was at $9780. At that point I realized that I was missing my entries because I was too busy running my own design business along with other domestic duties. Then I came across a paragraph in your book about the amount of dedicated, uninterrupted time it takes to day trade futures. Bingo-I was glad I stopped early and kept most of my capital. My mentor never mentioned any of this. Now I’m starting over and working on setting up a trading plan that can fit me — swing trading appears to be the goal at this time. I’ve been searching high and low trying to find information on how to really set up a good trading plan and your book is the first one I’ve seen that really addresses this important issue.

Sincerely,
Michele

Firstly, I’m glad Michele recognized early that she had a problem. It would have been better had she done so while demo trading so she didn’t have to lose the money she lost, of course. I definitely encourage getting real money trading experience early on in one’s development, but that doesn’t mean demo trading doesn’t have a proper place in sorting out one’s strategy and trading plan. Fortunately, Michele didn’t have to suffered an overly hard lesson.

Secondly, it doesn’t say much good about her mentor that they failed to take into account Michele’s schedule when helping her determine a good way to take on the markets. A mentor is supposed to factor these sorts of things in. Maybe we’re talking a specific stylistic mentor here, someone who focuses on one type of methodology (like day-trading S&P futures). Even still, though, they should recognize someone who is not suited for their trading approach (see Trading Coaching and Mentoring).

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Reader Questions Answered

Penny Stocks or Forex for the new trader

I had an email come in with a set of questions from one of my newsletter subscribers yesterday.

Two weeks ago yesterday, I began my venture into learning how to day trade. Expect to start in Penny Stocks &/or Forex. Here’s my Q’s…

1. Which one do you suggest I try first, Penny Stocks or Forex? Penny Stocks I’ve studied the most already.

2. How do I open a paper account, (to practice what I’ve been studying about Penny Stocks) the same Broker I plan to open my actual trading account with later, or somewhere else?

3. I like what I see at Peter Leeds web site… the list of Brokers he recommends, (as choices for opening our 1st trading account) and system he’s developed for picking stocks he recommends to those who subscribe to his newsletter. What do you think of his expertise?

Any suggestions for helping us get started, are greatly appreciated.

Let me start with the last question first. I don’t know Mr. Leeds, nor am I familiar with his website, system for picking stocks, or his newsletter. As a result, I cannot speak to his expertise or the value of what he does.

When I am confronted with questions like this my standard response is that you need to make sure whatever product or service you’re contemplating investing your money and/or time in is what you need right now to either further your trader development or to improve the efficiency and effectiveness of your work developing trade ideas and/or managing positions. Way too much money and effort are invested into things which don’t fulfill those criteria. This is largely because the person in question hasn’t taken the time to build up their foundational knowledge and worked through the process of understanding how they need to approach the markets and their own trading. Helping them do that is the major driving focus of what I am trying to do with this site and my various educational efforts.

Getting back to the other two questions…

Penny Stocks vs. Forex
I cannot tell you penny stocks or forex is better. Both have their strengths and weaknesses. A major factor in the decision, though, is time. You won’t be able to trade penny stocks outside exchange hours, so if that is something important then you’ll have to go with forex. On the flip side, there are only a limited number of really tradable currency pairs, so if working with a broad array of potential trading vehicles is important for your strategy, then penny stocks would be the better choice.

One thing I would note here is that penny stocks tend to attract low-capital traders because of their lower cash requirements. This is not a good reason to opt for penny stocks, though, because their lower liquidity tends to mean higher bid/ask spreads than in higher-cap stocks and commissions have a higher negative impact on a smaller account than on a bigger one. You will likely find if you are a very low capitalized trader that transaction costs in forex are smaller.

If you’re new to trading, my advice is to pick one or the other. Working on learning two quite different markets when you’re trading to develop your knowledge and skills will be problematic.

Picking a demo platform
In an ideal world, you’d go with the demo platform of the broker you plan on trading through when you go live. That said, part of the demoing process is also finding a broker whose platform you like. Also, if you’re planning on doing an extended period of demo trading you may be constrained by the time limits that some demo platforms have.

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Trading Tips

One trading forum post, numerous trader mistakes

The following is a post I came across on a trading forum not too long ago (can’t recall which one at this point). It speaks to a couple of important topics new traders face all too often.

Just started a account of 2,000 us dollars . Before I did I played on the practice account and made a 50k account to 100k in 13 days. I was confident in winning if I started a real(live) account. My first day I made a 220 dollars roughly and 130 pips . Second day I lost 80 dollars . And today which is my third day isn’t going well . I need advice in what to look at and how to come to a good conclusion . What I look at is low and high of the day and news feeds then I buy according to info I gather .

How many mistakes can we come up with from this trader’s story?

Here’s a good start:

  1. He believed 13 days of demo results was a significant sample size upon which to base a judgement.
  2. His risk on his demo trading was much too high as indicated by the 100% gain in such a short period – unless he was just extraordinarily lucky, in which case, see #1.
  3. He may have put too much money into live trading, though I can’t say that for sure. It depends on what $2000 represents in his financial position. I’m all for getting to live trading quickly, but I’m also for doing so with as little money as you can get away with.
  4. The risk he took in live trading is likely too large as shown by an 11% gain his first day.
  5. He went into live trading without a confident plan, as indicated by his request for help with his strategy after only a couple of days of losses.

I’m sure you can come up with others, and if so, post them below in a comment.

This forum post, to my mind, is just another example of a trader who got way ahead of himself. He never took the time to really develop a plan for his trading, leaving him in that all-too-common situation of feeling the need to jump to a new idea or strategy when the current one seems to be faltering.

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News & Updates

On demo trading and trading contests

There’s a post on one of the BabyPips blogs today about how you can take demo trading more seriously so it’s a better developmental experience. There are three suggestions included:

  1. Feel the pain
  2. Treat it like an exam
  3. Join a forex trading contest

I have no idea how the exam thing is supposed to work since successful trading is a continuous process, not a discreet experience. Grading yourself in the different aspects of your trading (risk management, sticking to your plan, etc.) is certainly something you should be doing periodically, but the exam metaphor doesn’t work for me in this case.

As for the first and third alternative, they both have the same issue. How do you feel the pain when you have nothing at risk. As I noted following my academic conference trip a couple weeks back, you need the experience to be salient. Demo trading is good for learning mechanics and testing things, but cannot properly provide the same emotional/intellectual experience as live trading. That’s why I’ve so often said you need to trade real money, not paper money and totally agree with the Abnormal Returns sentiment on the subject.

As for trading contests, I’ve never been a big fan. They focus on the wrong things. On a related note, CNBC was forced to temporarily shut down its annual competition because of manipulation (see this and this).

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Reader Questions Answered Trading Tips

Over Two Years Trading and Nothing But Losses

A member of my mailing list – from New Zealand, I believe – wrote in to express his frustration as to the path his trading is taking. I offer it up because I’m sure it is something which others are going through as well.

hi john u once asked if i had any questions about trading—-how do u make money-im just starting my 3rd year, i still have lots to learn-actually im learning maybe i should give up and leave my money in the bank, 2 or 3 % is better than minus 80 % or worse– 2 months ago i joined e toro fx trading– ive already blown my real money a/c, fortunately they have a practice a/c which im also doing a great job of tanking out, i have tried everything but cant beat the system– like a chess computer every move i make has an opposite reaction, yesterday i started hedging the same trade ie buy usd/cad ,hedged with sell usd/cad hoping to catch moves both ways but still things still went haywire, sometimes the whole screen can be red but never all green sometimes i canhave two trades the same, one can be up the other down- how is that- also trades can go to the stop loss in the red but very seldom go past green 30 % and you need every trade to go past 15% to cover spread costs-anyway so much for my dream of dumping my day job– can u help– thanks –allan

My general impression from Allan’s note is that of someone without a clear idea of how to take on the market – no real trading plan.  I say this because he hasn’t presented any information at all about trading timeframes or methods or decision-making aside from evidence that he’s trading forex. I’ve I’m incorrect in that view then I hope Allan will clarify. Until then I will offer up some suggestions based on my current suspicions.

Build the Foundation
When I wrote The Essentials of Trading, and when I developed the introductory trading course by that same name my focus was on helping new traders build a strong, solid foundation from which they could go on with a much better chance of success. The core of the book and course is one’s Trading Plan. That’s the full expression of how one will take on the markets in terms of time frames, and risks, and methods, and all that.

I’m not just talking about trading systems here. I’m talking about everything that goes into your trading – or at least should be going into your trading. If you are just getting into trading, or have been involved for a while but just can’t seem to get a handle on things, I really strongly recommend you read the book and/or go through the course. If you take it seriously and do with the recommended homework exercises along the way, it will help you develop a really solid framework for your trading. You’ll then be much better positioned to know what kind of trading techniques will make sense for you and thus will be way more effective in your ongoing study and research.

Live vs. Demo Trading
Allan mentions losing money not only in his live account, but also in the demo one too. I’ve written on the subject of live trading vs. demo trading a few times before (Live Trading Performance Not Matching Demo Trading Success, Am I Ready to Trade Live?), and I’m all for getting into the live action early on. That said, however, if you’re not making money in your demo trading account, you probably don’t have much business risking real money with the same methodology.

Is trading for me?
Of course there is the question of whether trading really is the right thing for you. Let’s face it. Not everyone is cut out for the demands of trading, in one fashion or another, or at one time or another. There’s a lot involved in successful trading. If you don’t have the time need to trade the way you’re best suited, or are going at it with the wrong mindset (like get rich quick), or have a lot of external distractions, then it’s probably better to steer clear, at least for the timebeing.

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Reader Questions Answered

Live Trading Performance Not Matching Demo Trading Success

I have long been a proponent of new traders getting their feet wet in live trading as quickly as possible after they have developed the basic trade entry and management skills (albeit on a very small scale). My reason for that is the exposure to the prospect of real loss alters the psychology of things dramatically. This email I received is a very good example of that.

There isn’t really a question as such, although I suppose it is.

Its the mental attitude I’m finding difficult to resolve when I change from demo to live. Demo accounts I’ve doubled, live accounts I’ve lost to much money.

Someone said to me in an email its a case of just thinking your still on demo, I wish it was that easy. I feel its more a case of confidence in myself and sticking to my system rules no matter whether the trade goes against me or not. That’s the hardest part I think watching while it swings against you and hoping that you have allowed enough stop loss before it swings back, timing may be an area I’ll have to look into, dropping down onto a lower time frame possibly.

I’m definitely going to disagree with the advice this person received about “just thinking your still on demo”. That’s actually the reverse of what needs to be done, to my mind. Trading like you’re still on demo probably means acting in a riskier fashion than you can do trading live. You need to take the reverse view and trade demo like you would trade live. It’s not easy, though, to be sure. Trading real money and trading phony money will always be different. Demo trading is good for learning the ropes and testing strategies, but that’s about it.

Confidence is a big part of this all, as suggested by the emailer, and I definitely recommend giving a read to the Afraid to Trade? Build Your Trading Confidence post I wrote a little while back. It offers up some advice on how to build/re-build one’s confidence. For this particular person, one part of the equation could be trading smaller so that the swings that seem to be causing the strain aren’t quite so painful.

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Trading Tips

Trade real money, not paper money

In the last chapter of The Essentials of Trading I wrote something that many people would consider flying in the face of most commonly held trading views. I said, in no uncertain terms, that you should start trading with real money as quickly as possible. The point I was making then, and continue to make when I talk to developing traders, is that you will never get a proper understanding of what trading really means until you have money at risk.

Now of course I’m not suggesting in any way that someone new to the markets dumps their life savings in to a trading account and starts buying in selling. That would be the height of folly. Risk management must always be the first consideration.

What do I mean, though, is that you can quite easily these days take a little bit of money and do some trading. I know there is at least one forex broker who will allow you to open a trading account with no minimum initial deposit and no minimum trade size. That means you can get in to real world trading without putting a large amount of capital at risk.

Why do I think this is so important?

Quite simply, paper trading is never going to give you the proper feel for what you will go through when your money is actually on the line. It doesn’t even really have to be a large amount at risk to make a meaningful change in your view of the markets. Trading with real money impacts your psychology. It’s important that you understand exactly what that impact will be as quickly as possible. That knowledge can really help you develop as a trader.

Psychology aside, getting as much trading experience as possible is something all traders should be doing. As a recent Kirk Report posts says “books, websites, seminars, etc. on trading will never replace battle-hardened experience”. Throw paper trading in to that mix. Just as in any other area of life, the more you do something, the better you will get at it.

So put a little bit of money in a real account and get trading!