Trading Tips

A rookie trader’s plan


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.

Trading Tips

Some more forex trading tips

risk management

Mike over at The Financial Blogger recently offered up his seven tips for staying safe while trading forex. They go something like this:

– Stick with what you understand, from both a positive and negative perspective.

– Know your risk tolerance and how you emotionally handle your exposure in the markets.

– Have a clear strategy and stick to your trading plan

– Never add to a losing position

– Keep things simple

– The trend is your friend

– Control your emotions and minimize their effect on your decision-making

I can see folks taking some umbrage at the trend one. There are many who consider themselves mean reversion traders. Certainly, those types of strategies can work. The aren’t so good in trending markets, though, just as trend systems get hurt in ranging markets. That’s why having a multi-phase approach can be very beneficial.

The controlling your emotions advice is something you often here. The trouble is, it’s harder to say than do. Further, emotion is an important part of our decision-making process, whether we realize it or not. In fact, I’ve seen research which suggests we actually make decisions emotionally much more quickly than we can consciously, and as a result what we end up doing in what we think is the decision-making process is just rationalizing the decision. Something to think about.

Beyond that, Mike’s got some fairly good, if not particularly new, advice or traders – forex or otherwise.

Trading Tips

A forex trading interview

I’m finally on YouTube!

Well, at least my voice and a somewhat dated picture of me have made it there. I did an interview about forex trading yesterday with Jason Decks which he recorded and has posted. Being immersed in my PhD work, I hadn’t done an interview like this in a while, but I think it went pretty well.

The interview was mainly aimed at new and developing traders, but it does cover some broader ground, including some discussion of forex trader performance and what I’ve found in my research.

Have a listen and let me know what you think.

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,


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.

Reader Questions Answered

Budding student trader query

The following was posting on a trading forum site.

Hello all, im looking to start trading, i am going to try trading full time in July and August and then part time when i return to university in September. I have £1000 set aside to begin do you think this is adequate? I am going to take an aggressive approach and risk £300 per trade but pick my trades very carefully.

Just by way of clarification, this person is looking at stock trading.

How would you respond to this post?

Reader Questions Answered

How to tell if you’re over-trading

A trading forum poster recently asked the question “How do I know if I’m over-trading”. Over-trading is a trap many of us fall into, especially during our early developmental stages in the markets. At that point we haven’t gotten a hold on the emotional side of things quite yet (though sometimes we don’t even realize it), so feelings like greed, excitement, boredom, etc. drive us to over-trade at times.

I look at over-trading in two ways. One is trading too big. The other is trading too often.

Over-trading by trading too big
Risk management is obviously a major factor in one’s chances for trading success. Each of us needs to find the risk level which suits us and our style of trading. That may be 1%. That may be 10%. Some folks like to say you should trade just below the point where you’d have trouble sleeping at night.

A somewhat more empirical way of knowing whether you’re over-trading in terms of size is to look at the period-to-period volatility of your trading equity. And don’t just think in terms of losses. Large gains are just as indicative of trading too big as large drawdowns. If you’re account jumps 10% in a single day (assuming it isn’t because of an extraordinary market move), that’s a pretty good indication your trade(s) is/are over-sized. Sure, a 10% one-day gain sounds great, but the problem is it means you could probably just as easily take a loss that size.

Over-trading by trading too often
The issue of trading too frequently is one that can get a bit more complicated to diagnose. It’s not just a question of the number of trades you do. It’s a question of the quality of those trades. One trader could trade 100 times a week and not be over-trading while another trader could trade 5 times a week and be doing too much.

Lots of different things motivate over-trading in this fashion. I think they can mainly be resolved by asking the question “Am I looking for a trade or am I waiting for a trade?”

If you are looking for trades then you are subject to all the emotions that get you to enter positions when you probably shouldn’t. These include really dangerous mindsets such as thrill seeking and revenge trading. This puts you at risk of taking bad trades just for the sake of doing something.

What are your experiences with over-trading and how did you get yourself back on track?

The Basics Trader Resources Trading Tips

More than just basic free trading advice

In the process of preparing for the review of Hedge Fund Market Wizards I posted yesterday I went back and read some of the reviews of prior Market Wizards books. I have long been an advocate of the series, and remain so with the addition of the new book, it’s worth seeing what those who don’t agree have to say. Their arguments against one or more of the books help me produce a better review.

Now folks are going to have their own opinions. I’ve got no problem when people disagree with me. I did, however, see a couple of repeated version of the following comment that I have a problem with:

I dont understand what really gets those books so many positive reviews. Seems people dont surf internet to get some basic free trading rules like “Let your winners run”, “Cut your losers”, “Dont add to losing positions” etc etc.

Its all virtually the same FREE information spoken by different people!

That one came from a 2010 review of [easyazon-link asin=”1592803377″]The New Market Wizards[/easyazon-link]. I saw similar comments from other reviewers of the different books, so it’s not just one person’s view.

Has it never occurred to these folks that the Market Wizards books are a major (perhaps the major) source for those rules? Obviously not.

Yes, there is a great deal in these books which can be called common knowledge at this point. It wasn’t so common back when the books first started coming out. Believe me. I was a new developing trader in those days. This was eye-opening stuff.

It’s a question of context, though. Reading that you should cut your losses on some website, in a forum, on in a book about trading is one thing. Getting the same advice from someone who can tell you why and provide you with vivid examples of what happens when you don’t from their own experiences is a whole different thing.

But the Wizards books are about more than learning rules. They can also be a great way for someone trying to find their niche in the markets to get a broad survey of different ways successful traders approach and think about the markets, potentially giving the reader something they can latch on to for their own trading.