By Cam White
Note: Please make sure to read the Disclaimer at the bottom of this blog
As I enter my third week of trading the markets, I've discovered that I have some pretty decent trading instincts, but there is a wealth of information I still need to learn. My plans are to treat trading the markets like a business, and not as a hobby. Here are the top 5 things I have learned thus far:
Rule #1 - Understanding My Appetite for Risk
Trading the markets must be only done with risk capital. Simply defined, risk capital is money you can afford to lose without impacting your lifestyle. It's putting that little bit of extra money outside of savings and retirement funds to work for you. Risk capital is different for everyone, so for the purposes of this blog, I'm going to assume I had a garage sale, found some money in an old, dormant account, and raised $1,000.
Now, what do I do with this risk capital? If I roll the dice and invest it all on one trade, the stress would make my brain explode. If I invested half of that amount, my heart would be racing. But if I trade 5-10 percent of my account, I am relatively calm about the decision. If I have a successful trade, I have grown my little account incrementally. If I lose less than 5-10 percent of my account on a trade, it's disappointing but not emotionally devastating. The bottom line is that I need to adjust my appetite for risk on any trade so I can accept gains and losses without getting emotional one way or the other.
Rule #2 - Invest in Education
I learn by doing research, reading books and through osmosis. Almost every weekday morning, I tune into the a free online Trading Room hosted by Infinity Futures. At 7am (Central Time) Ray Burchett talks about the overnight markets, economic news, and his views on the current state of the markets, focusing primarily on the S&P 500 futures markets. From 8-11, Rollie White trades the markets live with his own money, focusing on 6 key markets he likes to trade. Together, there is over 35 years of trading experience between these 2 speakers. As I tune into the Trading Room, I learn from their experience, and I always pick up new and useful information that I can test and apply to my trading plan. Both Rollie and Ray also take questions from listeners and are happy to answer them. While I am listening to the trading room, I scan the morning news on the markets from Investing.com, Bloomberg, CNBC and a couple of other sites.
I also learn by attending webinars. Part of my new job with TradingPub is to help schedule speakers for free weekly webinars hosted by the site. These speakers talk to every aspect of trading the markets, whether it's stocks, bonds, futures, options, Forex or other trading instruments. As I sit in on these webinars, I take notes and learn from every webinar. There are so many different approaches and strategies for trading the markets, and every successful strategy has its merits. Finally, I use the internet to research topics I am fuzzy about, and I am reading "The Complete Guide to Day Trading", by Markus Heitkoetter which is an excellent primer for the newbie trader.
Rule #3 - Always Test Strategies in Demo Mode. Never Try a New Idea in a Live Account
If trading was easy, everyone would do it and make money hand over fist. From my experience thus far, the most important thing for a newbie trader to learn is when a market is truly trending upward, downward or sideways. Once I have identified the direction of the market, then I need to develop tested trading strategies for each scenario. Practicing on a simulator allows me to test market entry and exit strategies, and gives me an opportunity to chart my results without risking real money. I am learning not go live with a trading strategy until I have demonstrated a consistent track record of success. One expert recommends testing a strategy no less than 40 times before going live. I think that's pretty sage advice.
Almost every trading platform allows you to trade in demo mode. From my previous blog posts, I have mentioned that I have started my trading journey on Nadex, primarily because of it's low entry cost. Nadex has an extensive library of free educational webinars for account holders, plus a demo account funded with $25,000 in play money. I have learned only to make tested trading strategies in my live account. I have made a few mistakes trading untested theories live, and paid the price. Lesson learned.
Rule #4 - Keep a Journal of Every Trade
To me, it is critically important to log every trade I make, both in demo mode and in my live trading account. I keep a spreadsheet and record the following information:
- Date of the trade
I learn by doing research, reading books and through osmosis. Almost every weekday morning, I tune into the a free online Trading Room hosted by Infinity Futures. At 7am (Central Time) Ray Burchett talks about the overnight markets, economic news, and his views on the current state of the markets, focusing primarily on the S&P 500 futures markets. From 8-11, Rollie White trades the markets live with his own money, focusing on 6 key markets he likes to trade. Together, there is over 35 years of trading experience between these 2 speakers. As I tune into the Trading Room, I learn from their experience, and I always pick up new and useful information that I can test and apply to my trading plan. Both Rollie and Ray also take questions from listeners and are happy to answer them. While I am listening to the trading room, I scan the morning news on the markets from Investing.com, Bloomberg, CNBC and a couple of other sites.
I also learn by attending webinars. Part of my new job with TradingPub is to help schedule speakers for free weekly webinars hosted by the site. These speakers talk to every aspect of trading the markets, whether it's stocks, bonds, futures, options, Forex or other trading instruments. As I sit in on these webinars, I take notes and learn from every webinar. There are so many different approaches and strategies for trading the markets, and every successful strategy has its merits. Finally, I use the internet to research topics I am fuzzy about, and I am reading "The Complete Guide to Day Trading", by Markus Heitkoetter which is an excellent primer for the newbie trader.
Rule #3 - Always Test Strategies in Demo Mode. Never Try a New Idea in a Live Account
If trading was easy, everyone would do it and make money hand over fist. From my experience thus far, the most important thing for a newbie trader to learn is when a market is truly trending upward, downward or sideways. Once I have identified the direction of the market, then I need to develop tested trading strategies for each scenario. Practicing on a simulator allows me to test market entry and exit strategies, and gives me an opportunity to chart my results without risking real money. I am learning not go live with a trading strategy until I have demonstrated a consistent track record of success. One expert recommends testing a strategy no less than 40 times before going live. I think that's pretty sage advice.
Almost every trading platform allows you to trade in demo mode. From my previous blog posts, I have mentioned that I have started my trading journey on Nadex, primarily because of it's low entry cost. Nadex has an extensive library of free educational webinars for account holders, plus a demo account funded with $25,000 in play money. I have learned only to make tested trading strategies in my live account. I have made a few mistakes trading untested theories live, and paid the price. Lesson learned.
Rule #4 - Keep a Journal of Every Trade
To me, it is critically important to log every trade I make, both in demo mode and in my live trading account. I keep a spreadsheet and record the following information:
- Date of the trade
- Time of day I executed the trade. Time of day I exited the trade.
- Which underlying market did I trade? Indices, commodities, currencies?
- How many contracts did I trade?
- Which underlying market did I trade? Indices, commodities, currencies?
- How many contracts did I trade?
- How much money did I have at risk? Was it in line with my risk strategy?
- Profit or loss? Did I make the right decision, stay in too long, or did I exit too early?
- What was my strategy on that trade? Why was my trade successful or not?
Reviewing my journal is a key part of my learning process. While remembering good trades is gratifying, I'm especially focused on my losses. What did I do wrong? When I go back and review what happened, I can usually spot a rookie mistake. Maybe the market really wasn't moving in the direction I thought it was. Maybe there just wasn't enough volume in the market, and I got whipsawed by a fast market reversal. Losing happens to every trader, and every loss can become a teachable moment.
Rule #5 - Take Emotions Out of Trading and Treat it Like a Business
One of the most common mistakes a newbie trader can make is revenge trading. I thought I had the perfect trade and lost. I immediately sought revenge and placed a trade in attempt to win my money back. That's an emotional trade, and it has no place in my business plan. Other mistakes include making trades based on tips from experts. Even the experts lose, and that's a trade rooted in emotional insecurity. Finally, some days aren't good trading days. If the markets aren't behaving to my plan, then I need to learn to stay in demo mode or just walk away from trading that day.
Going back to Rule #1, if I am completely comfortable with the money I have at risk, then trading should be a non-emotional experience. It's a simple business rule of applying money you are comfortable with risking to a tested strategy with a reasonably high probability of success.
- Profit or loss? Did I make the right decision, stay in too long, or did I exit too early?
- What was my strategy on that trade? Why was my trade successful or not?
Reviewing my journal is a key part of my learning process. While remembering good trades is gratifying, I'm especially focused on my losses. What did I do wrong? When I go back and review what happened, I can usually spot a rookie mistake. Maybe the market really wasn't moving in the direction I thought it was. Maybe there just wasn't enough volume in the market, and I got whipsawed by a fast market reversal. Losing happens to every trader, and every loss can become a teachable moment.
Rule #5 - Take Emotions Out of Trading and Treat it Like a Business
One of the most common mistakes a newbie trader can make is revenge trading. I thought I had the perfect trade and lost. I immediately sought revenge and placed a trade in attempt to win my money back. That's an emotional trade, and it has no place in my business plan. Other mistakes include making trades based on tips from experts. Even the experts lose, and that's a trade rooted in emotional insecurity. Finally, some days aren't good trading days. If the markets aren't behaving to my plan, then I need to learn to stay in demo mode or just walk away from trading that day.
Going back to Rule #1, if I am completely comfortable with the money I have at risk, then trading should be a non-emotional experience. It's a simple business rule of applying money you are comfortable with risking to a tested strategy with a reasonably high probability of success.
The Purpose of this Blog
Disclaimer
The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.
