Six things I wish I knew when I started trading: Part Three – Trade when the market is closed

By trading when the market is closed, I simply mean that you are setting up all your trades after the market bell.  By not trading during market hours you can be much more level headed and objective in your decision making.  Trading is a marathon not a sprint, therefore using daily charts should be enough to earn a good living with a relatively modest capital balance.

My system was set up so that you would be able to trade yet still be working 9-5 in whatever you chosen profession is.  My profession is trading, so I do use intraday exits to garner more profits, but that is a choice I can make, it’s just how I keep trading somewhat exciting, otherwise following a mechanical strategy would be too boring for me.  I can also choose to set up an exit at the open and forget about it.

So, why not just day trade, surely there is more money to be made?

I heard an unbelievable statistic recently that only 2% of traders are successful.  If this is indeed true, then most of the 98% that fail are undoubtedly day traders, trading on the intraday swings of the market.  It is the hardest way to trade and it’s too easy to let your emotions get the better of you by letting your losses run and cutting your winners short.  I know I have tried to do it more than once.  Usually, when I leave it long enough to forget why I stopped doing it before!

A tongue and cheek definition I once heard about the life and times of a day trader:

“A day trader lives by the seat of his pants, they get stressed out, get an ulcer, get married seven times and become alcoholics!”

Joking aside, stress is a killer.  Trading longer time frames lessens the stress involved in trading.  Also, don’t we trade to live not live to trade?  If your idea of financial freedom is staring at a screen for 8 hours a day then fair play to you, but mine is somewhat different.

Don’t get me wrong, I believe there are many successful day traders and day trading coaches and teachers out there, some may even be making more money than me.  So I would not be as bold to say that day trading is futile, That would be an incredibly arrogant thing to say, it’s just not for me and does not fit with my lifestyle choice.

Trading takes me 10 minutes a day and I make all the money I need and then some.  Some years will garner more than others and I accept that this is somewhat out of my control and in the hands of the market and the trending nature of my stock choices.  However, my way of trading allows my days to be my own, as they should be….now that’s freedom!

May today be a profitable day…for all of us.

John


Six things I wish I knew when I started trading: Part Two – Trade a System

For me, and again, this is my perspective and opinion, it is essential to trade a system.  While some traders count on just intuitively knowing when to buy and sell, I myself have found that the stress reduced nature of trading a mechanical trading strategy that just continually punches out profits over a series of trades is the way to go.  (Notice that I said stress reduced, if you think trading is stress free you no longer have a pulse!)

Intuitive and discretionary traders do exist, I have heard it said that it takes many years to gain useful intuition that allows for consistent profits, and maybe it’s a more profitable way to trade, I honestly don’t know.  I just never wanted to fail long enough to find my edge!

The stress of too many bad calls killed this route for me.  I remember reading an article once that talked about Wall Street professionals.  It was a compelling argument for discretionary trading, in it it said that the vast majority of professional traders do not use a mechanical trading strategy, they rely on their honed instincts and experience to trade profitably, so why would you not want to trade like the professionals?  It’s a good question!

Fact is, as I have mentioned above, it takes too long.  It reminds me of the phrase “Many are called, few are chosen”.  Few of us have the time, training opportunities or emotional literacy to sustain a constant attack that would entail learning how to trade this way.  Therefore in my humble opinion it is best to trade using a system that has proven to be profitable in the past.

In terms of developed systems, obviously we are not alone.  There must be hundreds of services out there, some good, some bad and some great.  If you’re reading this blog, you just found a great one.  Is it the best?  Probably not, but it is great.

Ultimately trading a system gives you freedom in your decision making as it makes it very black and white, which is the way I like to trade.  That is not to say that I do not delve into the grey and make a discretionary call from time to time, but I do this very rarely and it has to be for very good reason.

The above picture is a sneaky peak at a screenshot of the trading system.  It is my intention to make this system accessible via video/documentation download in early 2013.  Here at HowDoITradeStocks, we have been working really hard in coding the system into Ninjatrader.  It will visually right on the chart tell you when to get in, where to set your stop, and where to get out every day.  It will also allow you to build your own portfolio and backtest any stock for as many years as you would like in the time it takes to click on the mouse.  Proof is a powerful source for keeping us on track and helps us stick to the system going forward.  I coded this system so that no-one need follow me blind, they will be able to do it for themselves.  I would much rather teach how to fish than have anyone relying on me for years, as one day I may retire…


Six things I wish I knew when I started trading: Part One Risk Management

A famous Scottish proverb goes, “Take care of pennies and the pounds (£) will take care of themselves”.

Risk Management is something that successful traders know and starting traders wish they did know once they learn.  While a lot of beginners take on excessive risk, trying to get rich in a hurry, they are often setting themselves up for failure.   Like the flip of a coin, calling heads will always be wrong sometimes.  Here are my guidelines for risk management:

  • The successful trader knows to take small amounts of risk on each individual trade.
  • To never put himself in a position where he can blow up.
  • To seek winners that are bigger than his losers and to have a decent winning percentage.
  • Knowing that the probabilities will work in his favour.
  • To add to his equity every year, as it can compound significantly over time.

While a successful trader will likely not triple his account in a short time-frame, he will always stay in the game and make significantly more over the long haul.

There will be times when gaps happen against you, and they will hurt, sometime to the tune of +20%, fortunately even with these anomalies, if you stick to your plan, even with a big shock, you can still come out the other side on top.

There is an old adage that all gamblers eventually die broke. By definition, a compulsive gambler is always looking for “action”—to bet, even if the odds are not in his favour. Unable to control his compulsion, he will keep betting and keep losing. Good trading is the polar opposite—disciplined, cautious in its approach to risk and demonstrating a clear edge. We can rescue ourselves from the gambler’s fate by vowing to “bet” only when the odds are in our favour; by risking small amounts on each trade. The results of successful risk management are profitability and wealth accumulation, worlds apart from the gambler’s fate.

Finally, I was on a course once and the lead instructor said that “you get a large account, a Rolls Royce, Lamborghini, Leer Jet, concierge life style by mitigating risk.  Mitigating risk is the key, focus on the risk and the profits will come.”  Sound advice indeed!

May today be a profitable day…for all of us!

John


If only I knew then what I know now!

Over the next number of weeks I will be releasing a series of blogs entitled the 6 things I wish I knew when I started trading.  These are just my own thoughts and opinions to date relating to financial market success.  It doesn’t make me right or wrong, it’s just my perspective, I hope you enjoy the series.

To begin with, trading is like no other profession, it will bring out the best and the worst in us and our emotions.  From the disappointments that become a personal attack on ourselves and our own self-worth to the heights of euphoria when we take on a hunch and see it soar making us a lot of money.

It has been quite the journey for me.  The ups, the downs, the sideways moves, the confusion over what trading technique to follow from which master trader, or which book to trade from.  The list goes on…sound familiar anyone?

One thing is for sure, like all roads to success and prosperity in all fields of endeavour, persistence is key.  It is said that 90% of traders fail, but I have also heard it said that the 90% don’t fail, they simply give up, which statement do you agree with?

Therefore, even though there will be speed bumps along the way (don’t talk to me about my first sortie into the world of options, that speed bump was a lesson I’d sooner forget!)

It is imperative that we always try and improve both our psychology and techniques, like all great engineering excellence, it is not what you can add to make it better, it’s what can you take away without the loss of performance.

I have tried to keep things as simple as possible when trading, I use very few indicators.  All is driven by the price which leads me to believe that my system will be successful in any market.  All my analysis over the years has been channeled into coming up with a consistent replicable system for approaching the markets that is too good not to be shared.

I hope you enjoy the series, part one will be released next week.

May today be a profitable day for all of us…

John