Trader Resources

Volatility, Stops, and Other Topics

Here are a few interesting posts from my blogging peers that you may find interesting.

Vix and More wrote Thinking About Volatility. It’s part of one of a set of posts and does a very good job of laying out the different ways to think about market volatility.

Along those same lines, Brett Steenbarger recently posted Think Like the Herd, But Don’t Follow the Herd. In it he discusses the combined states of volatility and trend, and how volatile non-trending markets like the current stock market can cause traders fits.

Trader Mike posted Tight Stops and Risk/Reward Ratios. In it he answers a reader question about where he places his stops, the impact of volatility, and the implications for the risk/reward positioning of his trades. Stops are a subject I have posted about here on many occasions, such as Close stops do not lower your risk, Where do I put my stops to avoid being taken out?, and Respecting Your Stops is Easier With Better Stops.

Building confidence was the subject of my recent Afraid to Trade? Build Your Trading Confidence post. The parallet subject of dealing with your fears is the focus of Conquer the Fears Lurking in the Dark Corners of Your Mind recently posted at Zen Habits.

Trading Tips

Afraid to Trade? Build Your Trading Confidence

Confidence is a HUGE factor in trading. On the one side, the lack of it can create all kinds of anxiety and fear, over-thinking things, and not being able to pull the trigger (analysis paralysis). On the other side, too much confidence can lead to being cavalier with risk and taking poor trades. In this particular article, I’m going to focus on building confidence.

afraid-to-tradeStart Slowly
There’s no need to rush into trading. It’s really easy to get caught up in all the excitement of the financial markets, but try to avoid that. They aren’t going anywhere, after all. Give yourself time to learn and develop your skill set. A great many new traders see the dollar (or pound or euro or yen) signs and become blinded to all the rest of it, eager to get going and grab hold of their share of the winnings. It isn’t that easy. Trading is like any other activity. It takes time to get up to speed and develop the required competency.

Build a Strong Foundation
If you dive headfirst into trading without taking the time to think things through, you’re definitely more likely to be part of the majority who fail rather than the minority who succeed. I made a big deal about foundation building in The Essentials of Trading, and I harp on that repeatedly in my blog posts and other exchanges with new traders. Work your way through the process of developing your trading plan, including the best trading time frame, the optimal market, and the style of trading which best suits you. If you’ve taken the time to sort this stuff out, it will help to give you confidence in your trading as you move forward.

Practice, Practice, Practice
Athletes practice skills to gain mastery and to be able to execute them under pressure without thought. Traders should do the same thing. There are all kinds of different demo trading accounts available these days. No matter the market you trade, you should be able to find a free platform of some kind that will let you practice trading without having to risk real money in the markets. There are a lot of little things you can pick up demo trading. Some of it is the basic stuff regarding order-entry, prices, P&L calculations, and other mechanics. On top of that, though, you can also practice using your trading system or methodology to gain confidence in your ability to trade it effectively.

Go to Live Trading Early
I am a huge proponent of dipping your trading toes into the live markets as quickly as possible. That said, I’m not talking about jumping into the deep end without knowing how to swim. Once you’ve mastered the mechanics of trading using a demo account, it’s a good time to start playing for real. At this stage, however, it’s not really that much about profits and losses. It’s about your trading psychology. As just about anyone who’s ever made the transition from paper trading to the real thing will tell you, it’s not the same. When you’re money is at risk it can really change the way you think, and by extension, the way you trade. That’s why you should …

Start Small
When you make the initial move to live trading, do so with the smallest amount of money you can reasonably get away with. You are going to make mistakes. The cost of those errors can be thought of as trading tuition. You need not make that tuition bill a big one, though. A very small account means very small losses. How small an account you can get away with will vary considerably depending on the market you’re trading and how you trade it. And be sure to give yourself enough wiggle room in there to make sure a few bad trades don’t knock you out of the game.

Practice Some More
Once you’ve had a good taste of live trading, go back to the demo trading once more to really solidify your final trading action plan. Through the live trading experience you should learn what things you can and cannot handle or do in trading. Take that back to the demo trading and incorporate the new information into the way you set up your trading plan. This is just like being an athlete who using their experience in games to fine tune things during practice to get ready for the next competition. You should do the same thing as a trader.

Ease Your Way Into the Market
Working through the steps outlined so far should help you become less afraid to trade and more confident in yourself. Even still, you don’t want to go piling into the market. Take it slow. Allow your comfort and confidence in real-money trading to build gradually by starting small once more. You’re still going to make mistakes (though hopefully fewer by this point), so keep their cost down and their impact on your confidence to a minimum. You’ll also invariably take losses. That’s something you’re going to have to learn to live with. It will probably take a bit of time, but that too will be helped if the losses are small. As you feel more comfortable, gradually trade larger, working your way up to the level of risk and exposure which suits you best.

Final Thoughts
Trade Calmly and With Confidence The question is frequently asked how long it takes to get to consistent trading profitability. For some people it will happen relatively quickly while for others it will take longer. How long it will be for you will be impacted by things like the time frame you trade and your personal base risk tolerance. Don’t try to compare yourself to others. Go at your own pace. If you have the commitment to doing things the right way, to developing as a trader, and to being prudent in your actions, you will eventually get to where you can trade confidently.