Learning How to Trade: Part 1

Published by Bryce Foster on

 

Intro

The following are all points that must be hammered into the skull of a new trader.  Looking at them now, many seem so elementary they might not be worth posting. But let’s remember the lack of information we all had upon starting and not to mention misinformation.  For those that are looking for more advanced/specific content stayed tuned! If you’re brand new and considering trading as a means of income read on.

I do not trade full time for an income.  I trade part time and am barely profitable.  The skillsets to break even and then make a little bit (after commissions etc.) took me years of learning.  I have a long way to go, but at the same time have learned a lot of lesson that can benefit new traders right away.  The difference between profitable traders writing online and breakeven traders online is often honesty :).  Remember that before you shell out 5k for a trading course to someone who likely only makes money selling course…

You will not make money your first year

You are not a special flower.  Trading is likely to be the most difficult thing you will take on in your life, and no one truly makes money from day one.  If you are profitable right away it will be due to luck and not ability. This is a hugely important concept to internalize.

You should not quit your job to become a trader

This is a question often asked by those without a realistic understanding of what magnitude of income is possible through trading.  If you can consistently make 20% percent or high annually, you are among the best traders in the entire world, who by the way are brilliant and have been practicing for years and years.  That being said, if you are brand new and have $5000 dollars to your account… enough said if you do the math.

Capital requirements for full time income

See the above point.  If you truly want to make a run at trading professionally, it’s likely you’ll need several hundred thousand in funds to do it safely and ‘comfortably’.  Yes people have done it with less, but they are often lucky and outliers not the rule. The truth is the vast majority lose over half their starting capital and give up after a year or so.  That’s the statistical reality you will be competing against.

link to trading options with limited capital.

Commissions matter a lot

With the size that you will be trading (very very small)  commissions make a huge impact on your bottom line. $9 trades in your E-Trade account will not cut it, if you plan to make more than 2 trades a week, it’s time to step up to a brokerage tailored towards active traders.  I’ll review the brokers I’ve used in another post.

You’re probably trading too big

The rule of thumb for active traders should be never to risk more than 2% of your total account on a single trade.  A lot of traders will say 1% for new traders. So that means if you have 10k in your account, you can’t lose more than $200 per trade.  This will be an important point when we discuss position sizing, product selection later on.

Don’t spend much (if any) time trading a demo account

Demo accounts are not the same as live accounts for several crucial reasons.  The first reason is that the execution you get on demo will always be better than the real market.  This is mostly because it’s hard to program ‘realistic’ demo execution and it benefits the brokers for you to be more profitable in demo anyways.  The second and more important reason is that with no money at stake, you get no experience dealing with the psychological warfare that is risking your own money to profit.  There is no substitute for this, you have to trade live. Just make sure you are trading as small as possible with real money and you can learn without destroying your account.

Futures are not for beginners

Most people want to trade the E-Mini S&P Futures contract when they first start out.  This is one of the most competitive contracts on the planet and there’s no need to cut your teeth trading it.  It moves quickly, has a large tick size (loses are bigger) and has a ton of highly sophisticated professionals trading it.  If you want to trade indexes, I recommend the ETFs like SPY that track the futures contracts but are significantly less leveraged.  Remember as you’re learning you want to pick a product to trade that won’t sit you with big losses quickly. Stick with stocks and ETFs when you are just getting started.

Most new traders take at least a year to finally accept the above truths, and that’s OK.  My hope is that you’ll internalize these quickly and get yourself out of the common beginner traps right away.  We’ll get into each point more next week, starting with choosing a proper broker, and what markets to trade.

 

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