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Thanks for posting this. I wish more people would understand the risks
in trading before they get into it. I've got a few comments.
HOW TO LEARN TRADING WITHOUT GETTING KILLED
In practically any other business involving risk there are extensive
systems and structures in place that provide training, coaching,
supervision, and validation for those who eventually will take charge
of that risk. For example, if you want to be a police officer,
firefighter, or soldier you typically have to go through some form
of academy or basic training, followed by field training. In each
case you have lessons, simulation, exercises, fitness building and
supervision to provide learning while reducing the risk of getting
hurt or killed. In the end, you are supposed to be able to do your
job and still go home at the end of the day.
This seems not to be the case for trading. All you need is money and
the willingness to jump in. Could you imagine if all the training for a
cop was "well, why don't you get some gear and go out on the street
and enforce some laws for a while" or for a firefighter was "when that
bell rings, find out where the fire is and put it out." It seems
it's not much different for us traders.
The first thing I asked myself when I decided to investigate trading
was how can I learn to do this for the lowest cost and lowest risk.
I wanted to be sure to not shoot myself in the foot. So after much
reading and thinking about the subject, I came to a few guidelines
which I share in hopes that I might save some time and pain for others.
(The RT is advanced beyond this, but if you have friends it might be
worth sharing.)
1. Limit Size to Minimum
Keep your size as small as possible. There is going to be for each
market and trade a minimum practical size based on method and
transaction costs. Keep it down to this until you can prove you can
make money. In futures this should be a 1, 2, or 3 lot. No more.
In equities you should never have to go above 500 shares or a 5 lot
in options. Most of the time you should be in the 200-300 range or
2-3 options. Trading multiple contracts should only be necessary if
you have a style (like mine) that has you take partial profits on
some of your position as it moves in your favor. If you have a style
which is strictly position and/or binary (in or out, never partial)
then you can do 1 lots.
2. Only Take One Trade At A Time
It's easy to get overloaded running multiple trades. Stick to one
at a time until you're proven in your capacity to handle more than
one. Once you're in over your head and you've got too many furballs
going at the same time, you are very likely to get shot to hell and
have to bail out in a panic.
3. Record Every Action and Thought
Write down every action and thought you take or make. Before the
trade, write down what you see and why you're getting into it. Write
out your orders before you give them. I keep my notes and orders
on the same page so I can connect them later. Write out everything
like you were trying to explain it to a training officer sitting next
to you and marking your performance.
4. Pay Attention!
Boredom, distractions, and other noise in life can easily distract
the trader. I find myself sitting for long periods of time waiting
for the right trade to come along or once in a trade, sometimes
having to wait patiently for it to materialize. During this time
things can change. I can't tell you how many setups I missed because
I was busy doing other things. And I can't tell you how many times
I've had a trade come back to bite me because I took my eye off it
for some critical period of time. Trading in many ways is like
bird hunting. You sit in a blind or walk a field sometimes for hours.
Nothing seems to be happening then all of a sudden, there they are!
Then you have only seconds to take your prey before it's gone and
you've missed it.
5. Review What You Did
Closing the feedback loop is one of the most important factors in
learning anything. Every athelete needs a coach. If you're fortunate
to have a mentor in this business, then you're in a most excellent
and rare place. If you're like most of us and have to learn it on
your own, then you must learn to be your own coach. Take each trade
at the end of each day and ask these questions:
1. What happened here?
2. What did we do right and how will we do it again.
3. What did we do wrong and how will we not do it anymore.
4. Do we hold 'em or fold 'em?
5. Where and what is my risk today?
Asking these questions can be surprisingly revealing. You will eventually
flush out every weakness and discover your strengths. This will help
you avoid doing the things that get you in trouble while letting you
find your niche in the trading world. It also forces you to decide each
and every day to clean house of bad trades.
THE TRADER'S LIFECYCLE
I broke my own trading lifecycle into the following steps:
1. Trade safely without getting killed by stupid mistakes.
2. Trade regularly and be able to handle the workflow.
3. Be able to pay trading expenses.
4. Be able to make a living.
5. Continuously adapt to market changes while improving on (4).
6. Give something back by writing, teaching or other means.
Nobody jumps right from ground zero to some step other than the
first. Our friend in the example below was trying to do this. One
might ask him how long it takes to become a carpenter. Certainly
it would take more than a data feed and a book on carpentry.
Learning trading is like any other business or skill, it takes
time, effort, money. But unlike other "regular" businesses it has
the added component of risk that is more like what's found in
hazardous professions such as the military, law enforcement, or
firefighting. This is a level of risk not normally encountered
by most people and for which school doesn't prepare you. Professionals
in these fields have training on their side. Do you?
Trader Phil in Cupertino, CA
Nicholas Pishvanov wrote:
>
> This is a story about the failure of an inexperienced commodity futures
> trader. Perhaps it is not really a failure. It may be that the subject
> recognized his limitations, and decided to stop trading. With more study
> and reflection he may pick up the pieces, change his strategy and come back
> as a successful trader. Some time ago, The Washington Post carried a
> story about a carpenter in Long Island who decided to lock himself up in a
> room with his computer and get rich. I wondered how he did, and a
> follow-up story in the Aug 24 WashPost "Putting Futures in the Past"
> describes the outcome.
> I believe the outcome of his trading would have been far more successful
> had he been exposed to the commentary, advice and shared experience of our
> RealTrader's group. A side-issue is the problem of blindly relying on a
> "cookbook trading system sold by a commodity investment advisor".
> The moral of the story: Some of our more experienced traders are very
> generous with some very good advice. New or inexperienced traders, take heed.
> Nick Pishvanov
>
> An original copy of the story can be downloade from The Washington Post at:
> http://search.washingtonpost.com/wp-srv/WPlate/1997-08/24/058l-082497-idx.html
>
> ....................copied:.............
>
> Putting Futures in the Past
>
> Carpenter's Commodities Stint Shows How
> Amateurs Can Get Hammered
>
> By Brett D. Fromson
>
> Sunday, August 24, 1997; Page H02
> The Washington Post
>
> WATER MILL, N.Y.—In 1993, James Ewing, a carpenter living in
> the Hamptons, where many wealthy Wall Streeters go to relax,
> hit upon a scheme to get rich too.
>
> Ewing, 49, bet $30,000 of his hard-earned savings in the
> commodity futures markets -- notoriously difficult places for
> amateurs to make a buck.
>
> "I'd always dreamed about being able to support myself from
> home. So I got into a get-rich-quick mentality," said Ewing, who
> has found it harder to work as a carpenter because of increasing
> physical weakness stemming from childhood polio. "It's that
> greed, that sense of wanting to get rich quick."
>
> In the subsequent three years, he said, he lost half his stake in
> an enormously painful process that caused him many sleepless
> nights.
>
> "So I quit last year," he said. "I couldn't take it anymore. I didn't
> have the stomach for it."
>
> In an age of buoyant financial markets and mass enthusiasm for
> their wealth-creating power, Ewing's attempt to support himself
> through speculation is understandable. But his unpleasant
> experience is a cautionary tale for anyone thinking about
> speculating in the commodity futures markets.
>
> These exchanges, in Chicago and New York City, are used
> mainly by professional speculators or by farmers and companies
> that want to hedge price fluctuations in commodities they produce
> or consume.
>
> Study after study has confirmed that amateurs lose money on
> commodity futures contracts, bets that commit them to buy or
> sell a commodity such as pork bellies or copper at a set price
> within a certain time period. Investors can lose money on the bets
> and get hammered on brokerage commission as well.
>
> The federal Commodity Futures Trading Commission, which
> oversees the U.S. commodity markets, is sufficiently concerned
> about the perils for individuals that it has prepared a publication
> for the uninitiated, "Futures and Options: What You Should Know
> Before You Trade."
>
> What makes the game so risky for amateurs is that commodity
> prices whip around as wildly as tornadoes. Prices are pushed and
> pulled by unpredictable forces, such as a drought in the wheat
> fields of the Midwest or an unexpected labor strike in the copper
> mines of Peru.
>
> In addition, commodity bets are made with borrowed money -- "on
> margin," as they say in the financial markets. Putting up $1 for
> every $10 to $20 you bet is not unusual. You could buy, for
> example, a $15,000 wheat contract for about $800 to $1,600.
>
> For every 1-cent move in the price of wheat, the value of the
> contract could vary by $50. So if wheat prices rise by 10 cents,
> you would make $500. Conversely, if the price falls 10 cents, you
> would be out $500.
>
> As in Ewing's case, the amateur typically puts money into a
> margin account with a broker who holds it as collateral in case
> the bet is a loser and the customer can't come up with the money
> to cover the loss.
>
> Ewing became accustomed to "margin calls" -- requests from a
> broker for more money. For example, he lost money betting that
> lumber prices would fall. They rose. Then he lost money on silver,
> betting the price would rise. It just kept falling. He also lost a fair
> amount on pork bellies.
>
> "I lost money on everything more than once," he said.
>
> Like many players, he was relying on a "cookbook" trading
> system sold by a commodity investment adviser. Ewing used a
> program that based trade recommendations on "seasonal
> fluctuations," how commodity prices have moved during certain
> times of the year.
>
> It didn't work for him. "The method required me to make a lot of
> personal trading decisions. I didn't have the stomach for that. I
> don't trust myself to make subjective judgments," he said. "And I
> was getting eaten alive by brokerage commissions."
>
> Looking back on the unsuccessful episode, Ewing recalled the
> addictive appeal of commodity speculation.
>
> "When I stopped, at first I missed it. I had a feeling of withdrawal.
> . . . I couldn't wait to get up in the morning and turn the computer
> screen on to see what the markets were doing, even though it
> would then be a nightmare."
>
> What caused him to quit?
>
> "Basically, I ran out of the desire to gamble. I hated accepting the
> losses. It was such a dreadful experience. So I got to the point of
> not being willing to put more money on the table," Ewing said.
>
> After the initial withdrawal symptoms, he was glad to have quit.
> "In time, I felt so relieved," he said. "I was feeling good not to have
> the constant pressure of losing money and getting margin calls
> from my broker asking me to send more."
>
> A few months ago, Ewing considered trying again. A friend
> suggested that they try a new trading system devised by a
> commodities trader. Ewing said he felt momentarily confident that
> he had learned from his mistakes and could beat the market with
> a new, better system.
>
> Ewing and his friend spent two days "back-testing" the system,
> to see how it would have worked under previous market
> conditions. But in the end, Ewing decided he didn't have the
> mental toughness to play the game.
>
> "Looking back on the whole period, I come away with a heavy,
> unpleasant feeling about the whole process. Occasionally, I
> watch commodity futures markets and I remember the emotional
> state I was in, obsessed but not tough enough to handle the
> pressure. . . . It can be fascinating, but I don't want to do it
> again."
>
> @CAPTION: James Ewing in 1993, at the start of his three-year
> commodities adventure.
>
> © Copyright 1997 The Washington Post Company
>
> ---------------------------------------------------------------
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