I was a panelist on PTR tonight, so I thought why not use the down time to talk about some of the things that I have seen in the last 2 years. I haven't been a full-time trader for as long as many of the panelists. What I noticed was that whether you have been doing this for 2 days or 20 years, we all have the same problems in common.
Below are some of the things I think that new traders deal with in becoming a sucessful trader and will hopefully help them avoid that painful explosion. At least early in your career.
The Blow Up
As a day trader, if you keep your risk parameters in check a blow up is much less likely for you as a new trader. You might bleed out by a thousand cuts, but not a 'blow up' in a blaze of failed glory.
I can attest to a few things that will almost guarantee you a glorious blow up.
1) Trading w/ too much leverage
2) Trading w/ over confidence
3) Long-term trades / trades that turn into 'investments'
4) Making huge concentrated trades, all or nothing scenarios
The big blow ups are some combo of those items, every new trader makes atleast one of these mistakes.
For example, you can open a futures account for $5000 or less, trade with $500 margins or less. This is the recipe for a blow up, if put into the wrong hands.
Take that same scenario, but give it to someone that understands the risks involved and how to manage them. I think the likelihood of a blow up decreases substantially.
You must remain as calm as possible once you get into a trade, there is no room for emotion in decision making.
Have a trading plan that ensures your targets and risks are known, making each trade comfortable for your risk profile.
You don’t need to glue yourself to the chart, remaining calm is just as important to wait for a trade to setup according to your system.
Keep it simple, don’t search for trades. You will see a trade setup when it happens.
Know Your Markets
It is also very helpful to know your markets; every market has a ‘personality’ that you need to understand.
I trade futures, so I don’t have to scan 100 stocks a day. I have to become a master of my market choice. I need to know how fast it can move. I need to know the average spread. I need to know the average bid/ask size. I need to know how it trades and what moves it. I need to connect with it on an almost 'zen' level.
Trading is meant to be a boring methodical business. Gambling is what you should do for excitement at the bookie.
Risk rules are no good without knowledge of how things actually work.
Trouble for new traders is all the overload of crap on the internet where people do not know what they need to know in the first place. It's like finding a needle in a haystack and you do not even know what a haystack looks like.
Stocktwits, Twitter, or any mass overload of information does you no good. It’s the same as having so many indicators on your chart that you can’t see the price action. I hate the statement ‘only price pays’, but price action is the purest form of any indicator.
How do you know that the guy saying "BUY XXX !! BOOOM!!!" isn't a guy that just opened an account at Ameritrade with $5000 and discovered social media.
Only you are responsible for your trades, wins, and losses. NEVER follow the pack blindly.
I recently read this post from an experienced trader:
“I remember the feeling of change that came over me as I evolved from ‘looking for a trade’ to ‘waiting for the trade to come to me.’ When I do make a mistake, I can almost always attribute it to impatience on my part to trade and thus forcing myself to take a position rather than simply waiting to hear from the market itself.”
Unfortunately, it didn’t stick with me until after the fact. So read it again.