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Trading, like anything in life, requires some work. You find what works for you and stick to it. I like to say trading is like running a marathon, it is a very long road, but one you will finish if the preparation is done. A sprinter finishes quickly and gets instant gratification for their efforts. Trading doesn’t work that way. There are no short cuts or ways to get around defining a plan that works for you. The days of stock brokers making all your financial decisions are gone with the dinosaurs. Technology has brought controlling your own financial destiny into any household with a PC and internet connection. However, that destiny will be disastrous if the proper learning curve isn’t followed. Like with a marathon, the race is a single day, but the training is the discipline and hard work leading up to that day that can take many months.
Trading requires reading, studying, back testing, and focus for months before you actually understand the market; then probably many more months before you make a trade. The beauty of technology is you can simulate trading to find a tried and true system for yourself.I started trading in 1997 when everyone was talking about the stock market like the buzz around real estate now. I wanted to leave corporate America and be a Mom, but that was a little slow paced for me. I had an interest in the market so I started my research journey. I found very little information or help, online trading was still in its infancy with limited resources. I stayed up half the night reading trading books to my sleepless infant son and studied endlessly. My style of trading and knowledge has evolved over the years because you never stop learning. Each day with the market is new and a different puzzle to complete. What has changed the most is information available and that why I chose this topic. To provide a road map and narrow a trader’s focus, understanding what is basic and necessary is needed and not readily available.
There is technical analysis, fundamentals, long term, short term, and much much more. Combining styles is also an option, but generally you are either an investor or a trader. From that point you are either a technical trader or a fundamentalist. Either style works and can fit your needs. But know which you are and what your plan is. I personally trade off technical analysis. The charts lead me and I follow. LISTEN to the market and never think you know more than the market, the market never lies and price never deceives. It is what it is, nothing more and nothing less.
I also like to trade off shorter time frames. Therefore I am not an investor and do not hold things for months let alone years. That fits my risk tolerances and financial goals. Each person has to define that for themselves. Once you define your style you have several alternatives of what to trade: stocks, options, stock index futures, commodities, forex, and single stock futures. Each exchange offers general descriptions and education materials on each. A good overview can help guide you to find your interest and what you will aspire to learn in depth. Then once you get one thing under your belt you can transfer your knowledge to other trading instruments.
The biggest part of trading is when to get in and out. I talked about learning to read the chart. Well the entry and exit come from that very thing. Timing the market is not easy. But timing a piece of the market is doable. The main objective should be measuring the risk and reward that you are comfortable with because you will NOT win every trade. You may only win ever 1 of 3. But with proper management you will come out ahead. It is said that you can lose 60% of the time and still make money if you manage things properly. I am not a fan of that thinking and do not play into that. If you are only right 40% of the time you need to study more and refine the process. Get use to not picking tops and bottoms and learn to take your piece. Pieces add up to the homerun and require less risk. Overall you will win and never take the big draw downs on your portfolio.
Using stop losses on every trade is the way to define risk. Know before you enter a trade what you are willing to risk. But more importantly what does the setup you are about to take require you risk. If it is not within your comfort zone you pass on the trade. The great thing about the market is there are plenty of setups. I love to say…I would rather be OUT of a trade wishing I was in, than IN a trade wishing I was out. Been there and done that! “Hope” is not a style of trading or in the money management part of trading. So don’t rely on it to make money.
Knowing when to sit and when to trade is a key to success. Knowing that some days are not your day and there is no playing catch up and taking huge risks to try to recover the losses. Knowing when to just walk away is the sign of a real trader. Come back fresh and ready to pull the trigger on the right setups. Panic sets in when you are losing or a trade goes against you. Don’t let it and remember you have a plan and that plan is set in place BEFORE you enter. Take the emotion out of it. No cheating because you will cheat yourself out of success if you do. Keep a log if you need the discipline. Write down the trade and the stop you will use PRIOR to entering. It will help you long term to develop good trading habits.
The final thing about learning I will talk about is FEAR. This is real money and the unknown is scary. Worse yet you may have heard horror stories or been a horror story yourself. The ONLY way to overcome that fear is to have confidence in your ability to succeed. This will come from proper knowledge and finding that tried and true system that works for you. Set your rules and do not deviate from them. Practice by paper trading or simulator trading until you see that you are capable of trading successfully. Do not let anxiety to “go make money” and “get this started” take over your brain. If you were not a runner and did no exercise at all would you go sign up to run a marathon? Would you skip med school and become a doctor? NO you would not. So why would you not take the proper time to get yourself educated to trade? With educating yourself you get the fear under control and then just have fun with the market and let the rest go.
Trading should be fun and that does not need to be interpreted as easy. Trading is not easy but if you take the proper steps to prepare it is achievable. I wish you all the best of luck in preparing for your marathon! I would also like to thank the Falkin Investing Organization for the opportunity to write for them this month.