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Trading Tips

A rookie trader’s plan

rookie

A while back, Mark Wolfinger (a contributor to Trading FAQs) was asked by a rookie trader to comment on his trading objectives and plan. Basically, this newbie had set himself the nominal goal of making $2ooo/mo from the market trading options. At first appearance, an objective like that is nothing new, especially for those who have it in mind to reach the point where they can trade for a living. As the following question quickly made clear, however, this was a person with zero trading experience.

“Should trading be limited to strictly paper trading or is there an advantage to trading very small sizes with real money?”

I’ve already shared my views on demo vs. live trading before, so I won’t tackle that subject again here. Instead, I’ll piggyback on some of what Mark has to say in his post.

Firstly, he talks about the importance in considering what the $2000/mo objective is relative to one’s capital. As he notes, if your account is $20k then you’re talking a 10%/mo return, which is quite ambitious to say the least. And looking at things from the other side, if you’ve got $1mm then such a small objective is hardly worth the effort. You can make more with very simple investments.

The big thing in all this, though, is that if you’re a beginning trader you shouldn’t be thinking about anything above and beyond getting first to being a break-even trader. You’re going to make a whole bunch of mistakes that will cost you money. Consider that a given and you won’t be disappointed.

Once you’ve worked your way through that phase you can start focus on making any kind of consistent positive return – over whatever time frame is relevant to you. Having achieved that, you can then start scaling things up and begin to think about profit targets.

Personally, I’m not a profit target type of trader. But then I don’t trade for a living and have no desire to do so. For others, it’s a bigger consideration because they need the money to pay the bills.

Mark offers up some other good new trader advice, so definitely give his post a read.

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News & Updates

You may now call me Doc

Well, I’m not sure what the timing is in terms of when the degree is officially conferred, but effectively it’s a done deal. I’m a freshly minted PhD. 🙂

PhD

On Monday I was back in Exeter doing what they call “viva” in UK academic terms. It’s roughly equivalent to what would be referred to in the US as a doctoral defense. Basically, I met with my two examiners – one from the Exeter faculty (internal) and one from another university (external) – in this case from the University of Reading. They received copies of my thesis shortly after I submitted in in early October, reviewed it, then discussed their views on it between themselves.

By the way, the title of my thesis is:

Trader Leverage Use and Social Interaction:

The Performance Implications of Overconfidence and Social Network Participation on Retail Traders

The viva was basically me talking about the thesis with them. I was asked to do about a 5 minute summary and then we went over the full document. They asked questions about the theory that went into it and the analytic methods I used, and pointed out a handful of minor issues. I then left the room for a couple minutes as they conferred.

When I was called back in, they shook my hand and congratulated me. The official result is I’ve been awarded my doctorate subject to completion of minor corrections to the thesis. Yesterday I was provided a list of those corrections (they really are minor) by the internal examiner. I’ll get an official letter shortly with the same details. Once I’ve made the corrections, I’ll have to submit the final thesis along with a letter outlining the corrections I made to my supervisor and that will basically complete the process.

And so ends 3+ years of struggle and strain!

As I’ve talked about before, I want to turn my work – and/or an extension thereof – into a practical book for traders.

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Trader Resources

What Should I Read on my New Kindle?

Last week I finally gave in and ordered myself a Kindle from Amazon. This is something I’ve been thinking about for quite a while. I read a ton, and some of it happens on my daily commute. While that’s fine for paperbacks, it’s not so great for hard covers, especially bigger ones. Just can’t handle them in one hand while holding on to a rail with my other riding on the train (I don’t get to sit very often). Plus, in the warmer months I like to read outside, and since I live near the coast that means wind flipping pages around when reading a larger book. The Kindle helps in both those situations.

I’ve also got a bit of green thinking going on here as well. I’ve started to feel guilty about buying print books when they are so readily available in electronic format now – and often at lower prices in any case.

Now, I’ve only just got the device, and have a few print books to get through before I’m likely to be focused on a Kindle book, so I won’t have a good impression on things for a little while yet. I have begun accumulating books to read, though. Project Gutenberg is a good source for public domain books and I grabbed a couple dozen of the classics from there last night. One of them is Adam Smith’s Wealth of Nations.

What I would love to find is old trading books, which basically means early 1900s. I’ve started doing some research. If you know of any, definitely leave a comment below.

I’m also going to be developing a list of books to read and include among my trading book reviews here on this blog. If there’s a book (or books) you would like to see me write about, definitely let me know. And they need not be strictly non-fiction. There’s a fair bit of trading and markets oriented fiction out there (for example, the books by Paul Erdman). I like to read that kind of stuff, so definitely include those titles too.

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Reader Questions Answered

Should I Become a Chartered Market Technician?

Those looking to become professional traders or market analysts often ask questions related to education and professional credentials. Here’s one I received recently.

As an analysis for a well respected company, I want to ask you a question.

What is your opinion of the CMT (Certified Market Technician) program the Market Technicians Association has? I just signed up for the program.

I just started a new job as an equities trader, and I also have experience trading FX as well. I eventually want to become a technical analyst of some sort (equities and or FX), or a trader for a buy or sell side firm.

First of all, I should state that my membership in the Market Technicians Association (MTA) was something which made me stand out from other candidates when I was interviewing for what would eventually become my first job out of college. It was the early 1990s and technical analysis was still somewhat looked down upon in many areas of the markets. To be a college student who was that informed on the subject as to be a member of the MTA was something very unusual. In fact, when a classmate of mine attended an MTA function at the NYSE during our senior year we were the talk of the event. Everyone wanted to see “the college guys”. It was quite the surprise. 🙂

These days, technical analysis is ubiquitous. It has worked its way into a much more well respected discipline – at least in most areas. Having an MTA membership on your resume as a college graduate wouldn’t be quite so unusual as it was in my time, though it probably would demonstrate one’s commitment to potential employers about as much as it has always done.

As for the Chartered Market Technician (CMT) program (not “Certified” as the inquirer said), I have never taken part. I have worked with plenty of them over the years, but never really felt compelled to go through the program myself. Mostly, it was a feeling that I probably wasn’t going to get a whole lot out of it from an educational perspective because I had long done loads of study and research on technical methods already. The other side of it was that I didn’t really feel the need for it given my growing professional analyst experience. The jobs you’ve held (assuming you’ve done them well) will always weigh more heavily on an employer’s decision making process than a certification of some kind.

Now, if you are someone new to technical analysis, the CMT program could be a very good way to develop your knowledge and skills. Experience with the methods and techniques will always be the deciding factor, but the program can provide the educational basis for that if you don’t have it already.

One other comment. I would say that a CMT could be quite useful opening doors when trying to land an analyst position (though there aren’t actually that many employed technical analyst out there). I wouldn’t put as much stock in it for someone looking to trade. Analysts need to speak to a potentially wide array of technical views. Traders tend to be much more specialized in what they use. I’m not saying a CMT couldn’t help land an entry level trading job. I’m just saying that analysts would make a bit more use of what’s learned through the program.

Now, I know at least a few readers of this blog have gone through the CMT program or are in the process of doing so. They are going to be much more up on the subject than I am, so hopefully they will contribute their thoughts to the discussion.

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Reader Questions Answered

Professional Trading: How Long to Get There, Are Good Genes Required?

I got a set of questions from a member of my mailing list over the weekend. They bring up issues that are the source of some intense debates among traders at times.

How long does it take for someone to be a professional trader?

How is preparation to trade successfully compared to training of an Olympic medalist?

Is trading hard or easy?

Is talent required to succeed in trading like genetics in sports?

Let me take the hard/easy question first.

The actual act of trading is incredibly easy. Click a button and you can buy or sell instantly. Anyone can be taught to do that. Trading with consistent success is definitely not easily accomplished. Actually, I should say that successful trading can also be easy, but the path to get there is most definitely on the hard side for just about everyone. To relate it to sports as the questioner has done, high level athletes are often said to make the execution of some skill look easy, but we know it took many hours of dedicated training and practice to reach that point.

Now, in terms of how long it takes to become a professional trader, that depends on how much consistent work and effort is applied. I’ve heard that bank training programs intended to bring a new person up to the point where they can be depended upon to handle the firm’s (and/or its customers’) money without doing too much harm can run a year or longer. That’s usually a combination of classroom work and on-the-job training with an experienced guide. If you figure 40 hour work weeks for 50 weeks a year you’re talking about 2000 hours.

Even that might not be enough time, though. I’ve mentioned previously the idea that 10,000 hours are required to gain a high level of proficiency (see this Trader’s Narrative article). That’s five years of 40 hour weeks, which actually just about fits. I think you’d probably find that the good Wall Street traders have at least that much time on the desk in the majority of cases. There are ways to speed things up a bit, perhaps, but it’s still a lengthy and involved process. In that respect it is akin to the development of an Olympic athlete.

As for genetics or talent, I can’t say with any authority. Obviously, some minimal level of mathematical ability is required. Beyond that you start getting into the nature/nurture debate. I personally think both are required and to some degree more of one can offset less of the other.

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Trading Tips

Which to Choose: CFA or MBA

I got a question via a comment to my Trading Jobs – Making the Transition from a Non-Trading Job post which I thought presents a good follow on to my recent Picking a Good Business School post.

What is your opinion on the CFA program? Is it any good?
Will it help land a job in trading or money management (hedge fund)?

The CFA is the Chartered Financial Analyst designation. It is comparable to a CPA in terms of it being a test based certification. There are three testing levels which must be passed to become a CFA. You can learn more about it at www.cfainstitute.org.

The CFA is primarily a professional money management (think mutual fund or pension fund) type of designation. I took the first level of the exam right out of undergraduate. It’s pretty intense and covers a number of different subjects. I opted not to carry on in pursuit of the certification, however, because I really had no plan on getting into money management.

These days, the CFA and MBA are virtually interchangable. In most job postings which list a CFA requirement you will find “or MBA”. There are a few exceptions, but the either/or is something I’ve seen in most listings.

That being the case, my general view is that an MBA will serve you better than a CFA. This is a simple case of it being a wider certification, applicable in many more areas than a CFA. Considering that most people change careers multiple times in their life these days, the MBA offers more job flexibility than does the CFA. There’s also the networking that you do through the grad school process which the CFA cannot really match.

If you’re thinking in terms of trading, neither one is going to help you much more than to provide high level background and theory. They are not practical trading programs.

That’s my two cents anyway.

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Reader Questions Answered

Learning Trading from Scratch and Starting Small

Here’s a pair of questions I received recently. They are from a brand new trader and really do well to reflect the types of questions and concerns people just coming into the market almost always have.

I just started off using the FXCM Micro demo account. Since the the account is demo, and it is loaded with $5000, i trade as if it is a game and gain some profit. so after a few days time, I register a LIVE account, but with very small capital like $150 only. Trading on LIVE account has different experience, i have more fear. And I hardly gain profit due to unable to maintain the margin of slightly bigger fluctuation.

So, the questions that come across my mind is:
1) Is that possible for a person with really small capital to gain profit (or generate profit to increase the capital) from the Forex trade?
2) Can a self-taught person learn Forex from scratch without attending courses (maybe because of financial status limitation) ?

My questions might seem naive but I do hope there is some one that could enlighten me with some advice. I am really looking forward to hearing from you again.

First of all, readers will have seen me say on a number of occassions that live trading is different from demo trading. This note confirms that. It’s why I have said repeatedly that I’m in favor of new traders getting their feet wet in real-money trading (with a very small deposit) as early as possible.

As for the questions:

Can someone with a very small amount of capital make money in forex?

Absolutely. A major advantage to forex trading is that the barriers to entry are low. It’s possible to trade small positions, and with the likes of Oanda you have no minimum account balance or trade size.

Having said that, if you start with a $100 account you cannot expect to make big dollars in profits. Even if you make huge percentage gains you still won’t have made much actual cash. That being the case, your best approach is to focus on the % return and not on the actual dollars. If you do that you will get a lot more satisfaction out of your successes.

Also keep in mind the power of compounding. You can start small, but if you generate consistent gains, and make contributions to the account along the way, you can actually turn that into a decent amount over time.

The thing to be avoided, however, is trying to swing for the fences. Many small account traders think “It’s only a little amount of money. It doesn’t matter if I lose it.” Then they max out their positions and take a big loss. You’re not going to grow your account that way, and the losses can be extremely deflating.

Can a self-taught person learn Forex from scratch without attending courses?

Again, the answer is “Yes”.

I need to add in a big “but” here, though. Trading education resources like books, videos, courses and such accelerate the learning process. For example, you’re going to move much more quickly along the learning curve if you read an book explaining things like price quotes, calculating P&L, margin and leverage, and order types than if you just fumble your way along. Think about how long it takes to read a book vs. how long it takes to work through all the inevitable basic errors and misunderstandings that are bound to come up without that initial knowledge.

This early part of the learning curve is something where educational resources are most helpful. That’s why I wrote The Essentials of Trading. Once you get beyond the introductory education, experience becomes the most important driver of knowledge and expertise.

Now, having noted the value of basic education, I am not a fan of people paying huge amounts of money for it. I’ve heard of new traders spending thousands of dollars on seminars and such. That’s a massive waste is almost all cases. You should only ponder a higher expense course or program after you have a good foundation and a strong awareness of where you need to develop your know-how and skills.