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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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Reader Questions Answered

Tips for someone with no experience

The other day I had a note come in from a young prospective trader:

Hi John,

I have just ordered your book [easyazon-link asin=”047179063X”]The Essentials of Trading[/easyazon-link] and I look forward to it. I am an 18 year old from London who has always had an interest in trading but I’ve never pursued it.

Are there any tips that you could offer someone with absolutely no experience. For example, what to keep an eye out for in regards to FOREX stocks, books to read, papers to read etc.

I look forward to hearing back from you,

Kind Regards,

Ciaran

It’s always interesting to see younger people coming into the markets. When I wrote the book it was largely meant to be a companion text for a university trading course I was helping develop and teach. I needed something that covered general principles that I could use to work with a group of students who had a theoretical market understanding, but no real experience – basically, people like Ciaran.

In terms of advice for those just getting started, I would offer a couple of things.

Trade as small as you can get away with.
When you’re just starting out you have a lot to learn and are almost certainly going to lose money. Best to lose as little as you possibly can during this stage.

Once you have the basics down, do some real-money trading
There is a major difference between demo trading and having your actual money at risk. You need to understand the impact playing with real money will have on your trading psyche. This will inform your decisions on time frame, style, etc. For that reason, I suggest at least getting in a few live trades as early as practical to get a sense for it before going back to demo to work on systems, methodology, etc.

Be Patient
Experience makes a massive difference in trader performance, which is something that I plan on discussing in the new book I’m developing. Realize that it will take time for you to learn what you need to learn and to settle in to a good personal trading style – potentially years.

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Reader Questions Answered

Wanted: A very simple basic/layman manual

This question came in from a member of my mailing list. I thought it might be something many readers would like to see me address, so I figured I post my response here.

I would like to have a go at Currency forex trading as I am unemployed and the future is looking very bleak? for a lot of people here in the UK. I have been looking and reading a lot of information that I don’t understand at all, I was a Machine Operator so all this stuff is going straight over my head.

What I’m looking for is a very basic download based on what a trade is and how and at what point to actually place a trade all this concept I do not understand at all. If you have a very simple basic/layman manual that I could download and print off I would be very grateful, I am starting to get fed up now of reading about things that I don’t understand.

My first response to this reader is to say that looking to trading as some kind of financial savior is not a good idea. Aside from sheer blind stupid luck, there’s almost no chance of quickly generating a consistent, sustainable replacement income from trading. It takes time (months, even years) to gain the knowledge and experience to become someone who can trade for a living – and along the way there’s often meaningful losses suffered.

This actually goes for anyone looking to use trading as some kind of quick score opportunity. Way more often than not this ends badly. Like anything else, trading takes time to learn how to do well. Those after the quick buck (or pound, or euro, etc.) are really just gambling, which is no way to go about things.

Putting that stuff aside, it’s clear this person is a real trading and markets newbie. He needs foundational level information and understanding. That’s exactly the sort of person for whom I primarily wrote The Essentials of Trading. I strongly recommend it for anyone at the introductory level this person appears to be at. It starts at the most basic of levels, building on that through trading plans, market analysis, trading systems, and all of the stuff that goes into successful trading. It’s not the sort of book that will provide a specific trading strategy, but it will give you the understanding of what goes into a good one so you know how to take that next step.

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Trading Tips

Track Market Sentiment to Understand Price Cause and Effect

I’m willing to bet that a lot of newer traders are having a hard time understanding the cause and effect relationships that seem to be taking place in the markets these days. I’ve seen questions asking things like “Why did the dollar fall when the economic data was positive?”. Today”s moves by the European Central Bank (ECB) and Bank of England (BOE) probably caused some confusion as well. The ECB cut rates but the BOE held steady, yet the euro rallied sharply while the pound fell. Someone who looked only to those headlines with the view that lower rates = weaker currency would have missed what the market was really focused on – the quantitative easing.

The Relationship Between Data/Events and Price Action is Not Fixed or Logical
I’m not about to spend this post talking about the ins and outs of currency rates and central bank policies. That’s a discussion for another venue. The point I want to make is that new traders often take things very literally when it comes to data and news. Good data means better prices. Bad data means lower prices. While this is sometimes the case, often it isn’t, which I know can be very confusing. Sometimes even experienced professionals do really know why the market is moving a certain way. Logic doesn”t always seem to apply to the way the market reacts to things, and those reactions can vary, so while positive figures today could be taken bullishly, tomorrow they might be bearish.

Keep foremost in your mind that the market is an anticipatory mechanism. The press loves to say that stocks lead the economy by 6-9 months. It works that way on a more micro day-to-day level as well.

Markets are Foward Looking
Think about the trading or investing process. It is basically one where someone makes a positioning decision based on expected prospects for the future. That could be a rate cut by the central bank, quarterly earnings for a company, a merger, a new drug getting approved, a projection coming from a technical pattern break, or any one of a thousand other things. All of them involve a look into the future in some fashion or another.

The market basically aggregates the forecasts of participants. That means if the majority of players and/or positions reflect a view that the Fed is going to cut rates by 25 basis points then when the Fed cuts that much it probably won’t have a major impact on the market. If the Fed doesn’t cut, or cuts by 50bps then there is a reaction because folks have to adjust to the new information.

Keep Track of Sentiment
Of course you can never really know how everyone is positioned relative to a certain data release or news item, and there are always cross-currents between trader timeframes, existing positions, and strategies. Having a general idea of the sentiment of the market, however, can help avoid getting caught by surprise with the market doesn’t react the way logic would suggest.

Tracking sentiment, though, isn’t about following some index. It’s about listening to what people are saying about the markets and what kind of forecasts are being made for a specific data item or event, like company earnings. The more tightly forecasts are around a central point, the more likely the market will probably not react with much vigor if the data comes in at or near that point.

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Trading Tips

5 Things to Do Before Trading

I came across a post on another blog which outlines the 5 things to do before investing in stocks. For the most part they are pretty equally applicable to getting started in trading, in stocks or otherwise. Here they are.

  1. Understand your personal financial situation
  2. Understand diversification
  3. Select the right portfolio holder for you
  4. Do all the research necessary
  5. Realize that it will be a bumpy ride

Let me address them individually.

Understand your financial situation
I would actually say “financial and life” here.  Trading is part of your life, not sepeate from it. That is something you need to take into serious consideration. There is the obvious decision about how much money you can put to work in the market. On top of that you also have to think about how much time you can commit.

Understand diversification
For traders this is a bit different than for investors. Diversification in investing is attempting to keep from having all of your money negatively impacted by one set of circumstances, like a downturn in a certain sector. Because traders are in and out of positions relatively frequently, this isn’t as much of an issue. Diversification in trading is more about making sure you have sufficient trading opportunities. Generally speaking, the longer your trading timeframe the more markets and/or securities you need to play.

Select the right portfolio holder
In investing this can mean any number of things from brokers to mutual fund companies to DRIP managers. There are a number of considerations involved there. In trading it really comes down to just the broker. You need to find a broker that suits your specific needs and with which you feel comfortable. By all means seek information and feedback, but in this end this is a decision that only you can make.

Do all the research necessary
Trading is not something you can just jump into and expect to do well. It’s pretty much like any other activity worth pursuing. It takes time to get good at trading. It takes work and study and practice. At times trading will be frustrating and in the beginning it can most definitely be overwhelming with all the different markets, instruments, and ways to trade them. Realize going in that you’re going to have to put forth considerable time and effort.

Realize that it will be a bumpy ride
This one pretty much speaks for itself. There have been all kinds of adjectives used to describe trading and dozens of metaphors applied to it. While it may not make things better, going into trading with the realization that there are going to be any number of ups and downs can help make riding them out a bit easier.

Now I’m not going to say these are the five things to do before trading, but they are among the things you should do before taking the plunge.

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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.