You’ve finally decided to get into the stock market… as a short-term trader, maybe even a day trader. What can go wrong?
You’ve done your homework, read every book, visited every website that matched the words “stock market” and “trading” in the same sentence. Hmm,”… make millions trading the stock market… the secret to wealth,” it read. Seems legit.
You’re still hearing an annoying little voice carrying on about losing money or some such thing. It’s left you carrying a pinch of apprehension. Okay, in all honesty, you’re pretty sure this may be equal to the outcomes that usually follow: “Here. Hold my beer. Watch this.”
Maybe it’s just one of those unsown wild oats that’s surfaced at this mature age. Maybe it’s something you have to get out of your system, since you’ve been an avid investor and market student for decades.
Damn the apprehension – full cautious speed ahead.
You’ve concluded that your desire to make money has become more important than your fear of losing money. This, you’ve come to appreciate, is the most significant aspect of trading that a beginner must accept. You understand that being in the stock market is about risk and reward. Whether you’re a short-term trader or a long-term buy and hold investor, you understand and accept risk.
You’ve had stock mutual funds in the past that you held, passively, for the long-term. You held them because your broker reminded you of the long-term with every significant pullback or correction the market experienced. It’s something they must teach in stockbroker school: always tell the client he’s in it for the long-term when his stock is down; consider asking him to double up, after all, if he liked it at $50.00 he’s got to love it at $40.
There’s the rub. Mutual funds or broker picks are passive investments. Pretty much hands off since you rely on the fund manager or the broker. That was okay when you didn’t know anything. But now, after you’ve read libraries of books, as far as you’re concerned, this trading thing is doable.
Trading for a living, the concept, conjures up vivid dreams of success and easy money. This sounds easier than the forty-five minute commute to your cubicle with unsavory coworkers, and an even more unsavory boss. No nightmares in sight.
You’ve visited a bazillion websites on trading and determined that half are a wasteland, a quarter are ‘get-rich-quick’ hype promising only riches with no mention of risk, and a quarter are overflowing with information.
The topic of trading, once discovered, is akin to Howard Carter’s opening of Tutankhamen’s tomb… a treasure trove not of gold, but information, tons of it, some as valuable as gold: economic philosophies, technical jargon, strategies, chart reading analysis, indicator usage, tips on stocks, brokers, commodities, futures, market news, explanation of options, stock picks, strategies, definitions, bonds, currencies, interest rates, precious metals, money, banking, money management, economic sectors and industries as well as something called rotation, the Federal Reserve, trading exchanges, order entry, stop-loss, how to trade, what to trade, blah, blah, and….. blah. And what in the name of holy farm animals is a stop-loss?
You’ve refrained from telling anyone of your intent, not wanting to be ridiculed or discouraged. You’ve considered this market thing for years now. You’ve visited millions of self-improvement sites and concluded that Anthony Robbins et al are right… your attitude will determine your altitude.
It’s crunch time and suddenly you realize you don’t know where to actually start. After all that time web surfing, reading into ungodly late hours, and you’re not even sure which broker you’d use.
Here some things that you don’t want to ignore:
First, don’t decide now what type of trader you’ll be at this point. You may say you want to day trade only to find out three or six months from now that swing trading or even longer term investing is what you really want. My advice: this isn’t a race, allow yourself to EVOLVE into a trader type that fits your style, temperament, and risk tolerance.
Second, pick a well-known online broker such as www.thinkorswim.com, www.optionsexpress.com, or www.interactivebrokers.com. Commissions do matter, but so does service and quick trade execution. The brokers I’ve mentioned here have more bells and whistles than you’ll ever use, but you can experiment with a lot of ‘what-if’ scenarios.
Third, how much money are you working with? Accounts under 25K have day trade limitations. That won’t stop you from day trading since you are still allowed three day trades in a five business day period. There are specific rules for smaller account sizes.
Fourth, familiarize yourself thoroughly with the broker’s trading platform now, before you ever take a trade. In the heat of battle is not the time to learn how to operate the machinery that can save your life, in this case your trading account.
Fifth, the best way to familiarize yourself with that trading platform is to paper trade. No, you don’t make any money but you don’t lose any either. The purpose of paper trading is not so much to see how much money you can make as a trader. The reason you paper trade is to learn the platform, market behavior, chart reading, order entry, and strategies. Play with it for weeks then wipe the slate clean and start paper trading again with the goal of making money in the paper account. Ask yourself why professionals in any endeavor practice, practice, practice. They don’t want, nor can they afford, to make mistakes in the real game.
Sixth, get a handful of USEFUL websites regarding the markets and trading. Sites like marketwatch.com, Bloomberg.com, Finviz.com, finance.yahoo.com, google.com/finance, barrons.com, or briefing.com. These are just a few of the hundreds of fine sites available. Depending on your trading style (day/swing/investor) each site offers you information you need, some education, and links to other credible sites.
Seventh, you’re a rookie, a newbie, a beginner… get a stock market trading coach. If the coach is any good he/she will work from your existing knowledge base and walk you through the realities of trading. Why would you even think of stepping into shark waters without knowing something about shark environment, shark behavior, shark feeding habits, and how to avoid them? Michael Jordan listened to coaches, you never saw shark bite marks on him.
Here’s the problem when not using a trading coach or mentor: If you follow a popular guru or newsletter, your tendency will be to accept their trade recommendation deferring to their expertise and experience. So far so good. If the trade works out, trust me, you will invariably exclaim how brilliant you are. If the trade doesn’t work out, you lose money, you will blame the guru as sure as I’m hitting the keyboard here. The net result: you’ve learned nothing, you’re frustrated, perhaps you give up on trading.
The well-known adage in the industry is that YOU take responsibility for your own trades… win, lose, or draw. Through even small successes comes confidence. You must appreciate that even losses teach you something. In that light one might say, “I never lose in trading. Either I win or I learn.”
Did you learn something useful, a nugget of new knowledge, even if you didn’t win? For that matter, did you learn something meaningful if you won? There’s nothing wrong with following gurus if you understand, appreciate, and agree with their rationale. The only way you can do that is to have enough knowledge to agree or disagree with the guru’s analysis. You will learn to trust yourself, to trust that little voice. Yes, the same voice that was once annoying.
Trading becomes easier, not harder, with knowledge and experience.
Once we know, we can’t unknow, but everything we don’t know might as well be a secret. And that’s the point, there are no secrets. There is only knowledge or lack of knowledge in this business. Predator and prey. In this business, ignorance is not bliss.