When I started trading, I merely focused on what I was going to buy with all the money I planned on making. Needless to say, the money went within my first 6 months of opening an account. What happened? Well, as they say, a fool and his money are soon parted. I was a fool to think that with no experience, a big head, and little capital I had any chance of making it as a trader in the beginning. Upon my second try however, things were dramatically different. The biggest change in my trading related to the 5 questions below and how I answered them. Each person seeking for a profession in trading will answer these a bit differently. If you are a new trader, or looking to change some old habits, perhaps these questions are the first step.
1. Have you tried different time frames of trading for any length of time?
What I’m looking for here are trader time frames. I am not talking about trading the open of the day or the close of the day. I am talking about different skill sets based on how much time you have to commit to the markets. Long-term trading is keen to most people who have a job and simply want to invest part of their hard earned money to allow it to work for them. This involves looking at the markets at an average of once a week. Most long-term traders are fundamental in nature, meaning they are more concerned about the strength of the companies they invest in and not so much the day-to-day price changes. Daily traders are where most people end up on the scale if they want to look at trading as a second income. They catch CNBC every day, and look at their positions at least once a day or more, but make their decisions off of technical chart patterns involving daily data.
2. Have you tried trading different markets other than stocks (futures, forex, options) on an ongoing basis?
Okay, the majority of people who work for a living know little more about the stock market than stocks. If that’s you, that’s fine, but realize there’s a whole other world out there that revolves around and moves the stock market. There are markets around the globe that trade when we are asleep. But the markets I am talking about trade right here along side us. These are the futures and commodity markets such as Gold and Crude Oil. Other markets include foreign currency or FOREX markets. These markets trade the differences between two countries currencies, as they relate to interest rates, importing and exporting, and monetary policy, among a few other things. And then there are options, the ability to trade the prediction of the above to a certain price and a certain timeframe.
3. Have you ever traded different styles such as technical, fundamental, mechanical on an ongoing basis?
This question relates to the ones above, only because they are tied together. Long-term stock traders rely on good fundamental information for helping them make sound decisions. Short-term traders may dabble in stock options, or even futures and commodities, holding them for 1-2 weeks on average using some form of technical and fundamental analysis. FOREX traders rarely hold a trade for more than a day or two on average, and using intraday analysis, focus only on technical analysis or intraday mechanical systems.
4. Have you been trading the same way for at least a year?
This is the consistency test… Imagine if your daughter has been dating someone for a month and says she has found the love of her life? What’s your reaction to that? Think about your trading for a moment. What if you traded using fundamentals for a month because you heard Warren Buffett was a fundamental genius. A month later, your portfolio was down. You pick up the paper, and you hear about stochastics, and how it works on daily bars. You analyze a few stocks and futures, and immediately think to yourself, “This is the holy grail!” After a month of inconsistent trading, you’re pulling at the hair on your head because its not working they way it looked like it was going to on a chart. You’re watching CNBC and you see a commercial on FOREX trading. You download a free trading simulator from a forex dealer and watch the tick-by-tick price patterns. You start to look at the markets the way a person who first steps off the plane at McCarren International Airport looks at Las Vegas. You call in sick from work that day and decide you are going to trade all day using the forex dealer intraday software. By lunchtime your account is gone because the system you were trading didn’t account for a Fed move, which cleaned you out of your seed money. What is the major problem with this picture? If 50% of the marriages that start out with at least a year in courtship end in divorce, how do you think you’re going to stand in the markets when you haven’t even given a trading strategy a serious length of time in consistency?
5. Have you made major adjustments to the above after becoming dissatisfied with your results?
If your answer is NO, than perhaps you found a temporary comfort zone that’s not so comfortable anymore. Don’t wait until you have lost 80% of your account before making a change… I recently went into Abba Dabbas, a shoe store in Roswell GA, in search of some good walking shoes. Now this place is great because it has everything. But I can’t just purchase the first thing I see. I’ve got to try different pairs of shoes on, walk around in them, see how they feel. I walked in wanting a pair of Birkenstocks, and walked out with Keens. Why? Well the Keen shoes just plain felt better on my feet. Trading styles are the same way. You will find out shortly whether or not a style fits you.
Answer these questions above before you go down the journey of trading. The biggest things I would ask myself first is, what looks like fun, what can I be most profitable in, and what looks the most passionate to me as a trader? Fun is what brings us here in the first place, if it didn’t look fun, I would have never tried trading. And as much fun as it is, if I can’t get paid for it, I don’t want to do it either. Finally, passion… that’s what keeps us in this game. If it weren’t for passion, the fun would end and so would the money. Enjoy your journey into this incredible world of trading… I know I am!
Tom Gentile, co-Founder and Chief Options Strategist, Optionetics