Thursday, January 07, 2010

Becoming a Trader - Part 2

Yesterday's post initiated a flood of emails that I'm still addressing. I also post over at the Schwab Trading Community site (for Schwab clients) and one of the thoughtful regulars there sent me a link on the perils of day trading. The conclusions are a more than a bit sobering.

Although the perils of daytrading have been well documented elsewhere and many traders have suggested risk mitigation tactics, here's a few of my favorites:
#1. .Trade small until you get a consistently reliable methodology and success rate. This works best with brokers who offer a per share based commission and while you may not make the total return you're targeting, that's not the object. Practice makes perfect, but you have to practice what makes successful trades. Just trading willy-nilly makes no sense whatsoever and only reinforces bad trading habits, attitudes and technical set-ups.
#2. .Paper trade. Of course many traders who have had spectacular success with paper accounts have had a rude awakening when deploying real money. The brain knows the difference and reacts accordingly. So while paper trading can be a bit tricky, the important thing is to keep a journal of every trade, when you entered and why, when you exited and why. . .and then review each one, whether successful or not.
#3. .Find a local trader support group. Not someone trying to sell a $2000 seminar. Telechart (Worden Bros.), Metastock, Tradestation, IB, CME, and many others (including Forex brokers)have local user groups and/or offer periodic free seminars and workshops. These are great opportunities to network and get ideas. One nugget of trading wisdom can change your whole trading perspective and maybe even improve your bottom line. A search of meetup.com should provide a quick check for what's available in your area for non-affiliated trading groups.
#4. .Trade options. OK, I'm probably going to get some flack for this one but the capital requirements for trading options are a lot less than trading stocks and you can actually make more money trading an option equivalency than the underlying stock or ETF. This will require a lot more educational effort, and broker approval, but I know many traders who have gone the route of day trading OTM puts and calls with success.
#5. .You don't have to trade every day. Wait for the setups. VIXEN traders know that some days there may be only one good setup, while other days there may be 3, 4 or more. Never rush a trade. I'd much rather be out of a stock wishing I was in it than in a stock wishing I was out of it. It's easy to enter a trade...harder to get out. Or, as my pilot buddy says.. Anybody can take off will very little training...it's the landing part that gets hairy..especially if it's raining or foggy.
#6. .When in doubt, get out. Capital preservation is job 1.

5 comments:

David Varadi said...

Excellent post BZB, its really nice to see someone with experience and integrity reveal the sad truth. Poker is very similar, only 3% of players win, and only a fraction of those make a decent living. Day trading for the inexperienced, or uneducated is a hazardous form of gambling, and only mentorship from a professional and tons of practice will improve success rates. Most poker pros i know (and myself included when i played for 5 years)started out small exactly as you suggest, and worked our way up the limits always maintaining a healthy bankroll relative to our average bets. The pros that lasted continually kept records and worked on their game and adapted to the new playing environment.
Only someone who has been in this place in either day-trading or poker can truly appreciate the blood, sweat and tears that goes into being a consistent success. Your post- Trading a Love Story-- is a familiar tale, and the implication is that only those that truly love trading and are willing to be dedicated and not give up have a chance of succeeding.

best
dv

bzbtrader said...

Thanks David,
Your poker analogy is a great comparison. I've never been a poker player or much of a risk taker . . my dad's constant stories about the depression and his uber conservative approach to finance rubbed off on me pretty good. Many folks I meet roll their eyes in disbelief when I reveal that I daytrade and that I find it to be the utterly relaxing and non-stressful. That's just what works for me and my hat's off to you, my friend, for surviving 5 years as a poker player...a career that in my mind would rank somewhere ahead of bomb disposal for risk exposure.

old crow said...

Bob, what is your user name over at Schwab Trading Community?

bzbtrader said...

Old crow,
I post as bzbtrader.

bikerdav said...

Thanks Bzbtrader, for your timely posting of the 2 part "daytrading" life. Thanks DV for your analogy, like poker there is more to this than just technical. Like most starting out I lost much. I had to stop and examine what I was doing before it was to late! It will not change for most until they can grasp not only technicals, but their emotions. Simple things happen as one starts losing you start to risk more to make up the slide or you forget to protect your capital, etc. To get to the point of "relaxing and non-stressful" probably means Bzbtrader has not only a good handle on technicals, but emotions, so it takes both. Strive to work hard on both and enjoy success.

BD