New Trader F Aqs

New Trader FAQs
Experienced Traders and Market Pros Answer the Questions New Traders Ask Most Frequently
Presented by John Forman

Author - The Essentials of Trading
New Trader FAQs
Presented by John Forman
New Trader FAQs Experienced Traders and Market Pros Answer the Questions New Traders Ask Most Frequently by John Forman
Anduril Ventures 11 Holyoke Street, Quincy, MA 02171 USA
Copyright 2010 by John Forman
All rights reserved. No part of this document or the related files may be reproduced or transmitted in any form, by any means (electronic, photocopying, recording, or otherwise) without the prior written permission of the publisher.
Please note that much of this publication is based on personal experience and are the personal opinions of the individuals answering the questions. Although the author and publisher have made every reasonable attempt to achieve complete accuracy of the content, they assume no responsibility for errors or omissions. You should use this information as you see fit, and at your own risk.
For information, address editor@newtraderfaqs.com
Cover illustration Copyright iStockphoto.com/H-Gall Cover design Copyright 2010 by John Forman
Acknowledgements
There is no way this book could have become anywhere near the resource that it is for new traders without the participation and support of all its contributors. Along with answering the array of questions, they have been extremely helpful with their comments and feedback on how to make this the best tool it could be. These are folks busy with their own trading and work who did not need to give of their time, but have done so anyway. Thanks to Diane Southland for picking up the red pen at least metaphorically speaking and pointing out the numerous typos, grammatical errors, and otherwise messed up prose in the draft. And of course, thanks to the various friends, family, and coworkers with whom the project has been discussed and to whom the elements of it have been shown for all their input and support.
Table of Contents
Preface .. 9 About the Author/Editor . 11 Contributor Bios ... 13
Section I Starting Points How is trading different from investing? . 26 Why should I trade and not just invest? . 31
Section II - The Big 10 How much money can I make trading? .. 38 When do I know Im ready to start live trading? . 46 What books should a new trader read? .. 50 Should I quit my job and trade full-time? . 57 Only professional traders make money, right? . 62 Do I have to accept some big losses in the beginning? . 63 How long does it take to make a stable trading income? . 65 How do I start trading? . 67 How difficult is it to trade? . 69 What percentage of people who succeed in trading? .. 72
Section III - Trading Education Is it worth spending money on educational resources? . 78 If you know so much, why dont you just trade? . 86 How do I avoid scammers? ... 92
Section IV - Markets & Instruments What is the best market to trade? .. 96 Whats the safest market? ...... 98 What should I trade? .. 99 Is forex trading a scam? ..... 101 Is it better to trade spot forex or currency futures? .... 111 Should I avoid trading over the holidays? .... 114
Section V Trading Mechanics What is leverage and margin in trading? . 118 How much money do I need to start trading? . 119 Is live trading different than demo trading? ................. 122 Whats the difference between stop and limit orders? 127 Where does the money I make trading come from? ...... 128 Do I have to pay taxes on my trading gains? ...... 131
Section VI Market Analysis What is technical and fundamental analysis? .. 134 Which type of market analysis is better? ............ 136 Whats the best technical indicator? ..... 138 Why didnt the market rise on the positive news? .. 140 What is Support and Resistance? .. 141 How are discretionary and system traders different? 145 What timeframe charts should I look at? ... 146 What charting package and/or data feed should I use? 149
Section VII - Trading Systems
How can I create a good trading plan? ...... 152 How do you backtest a system? ...... 159 Where should I put my stop? ... 163 Should I buy this system? ................ 165
Section VIII - Trader Psychology How important is psychology in trading success? ..... 170 How can I overcome my fear of pulling the trigger? ...... 180 Why cant I follow my trading system? ................... 183 Why isn't everyone trading in the same direction? . 186
Section IX - Brokers Whats the best broker? ... 192 How should I select a good broker? . 193 Is my broker trading against me? . 194 Is my broker running my stops? . 196
Section X Trading Jobs How do I get a job trading? ..... 198 What types of trading jobs are there? ....... 200 What is a proprietary trading firm (prop shop)? ....... 202 Whats better, an MBA or a CFA? ......... 205 What kind of program should I do at school? .... 207
Appendix: The Library The books mentioned in the FAQ ..... 209
Preface
Anyone who has spent a decent amount of time on a trading forum website, or in any other arena where new traders ask questions, can attest to the fact that some questions get asked over and over. The exact wording might change, and there may be variations based on current developments in the markets and what's popular, but they are basically the same question recycled. They get asked repeatedly for a couple of reasons. One is because they are the questions most of us ponder at some point in our trading development. The other is that in a big forum it can be difficult to find the answers and let's face it, in some cases because folks are just too lazy to search. Of course, when a new trader asks one of those questions what they will get can be entirely uncertain. Yes, in many cases the helpful senior forum members will politely and succinctly answer the question, though there is always the wondering in the new trader's mind as to the background and credentials of the one offering up the answer. That's the good side of things. Too often the newbie is faced with sarcastic and/or totally useless responses. This book is an answer to that situation. It provides new traders with a set of responses to their questions that are non-judgmental and non-sarcastic and contained in a single, easy to use reference. Maybe it will help keep those senior trading forum members from being so snarky. The answers to the new trader frequently asked questions (FAQs) come from experienced traders and market professionals whose credentials are laid out in the contributor biographies which follow. It's an impressive group intentionally selected to represent a diverse set of market experience and personal perspectives, and with demonstrated abilities to explain subjects in a clear, useful manner. Almost all of the contributors are currently active traders and/or money managers. Many of them have authored at least one trading book, and a few have multiple titles to their name. Many are active bloggers, and a number of them can be found on the conference and expo circuit. In other words, these are folks who know what they are talking about and how to communicate it to new traders.
Now, having said that, the reader must realize that much of what follows in the answers to the FAQs is based on contributor opinions. As such, there are sometimes going to be opposing viewpoints expressed, both between contributors and between what is in this book and what is expressed in other places. This is inevitable when bringing together people who have different backgrounds and points of view. That's the point of this book, though. It is intended to let the new trader hear things from multiple viewpoints as they themselves come at the markets and trading from different perspectives. The contributors are listed alphabetically in the Bio section along with a list of the questions they have answered for crossreferencing purposes. It will be observed that some contributors were quite prolific in posting answers while others not as much. There was no set requirement for participation and each individual was allowed to answer the questions which they felt most comfortable answering. Please note, the answers posted for each of the questions are in order of receipt from the contributor. The reader should not take the fact that one contributor's answer is listed before another's to indicate any relative value assignment. Caveats and disclaimers out of the way, enjoy the book. You will no doubt come away much more knowledgeable than where you begin. Enjoy!
Have a question not answered here? Send it to questions@newtraderfaqs.com. If it's a common one, it and answers to it could get included in the next edition of this book.
About the Author/Editor

John Forman Professional Market Analyst, Trader, Educator, Blogger, Author www.TheEssentialsOfTrading.com John Forman, the editor of this book and contributor of answers to most of the questions, is a 20+ year veteran trader and professional market analyst. He started trading stocks following the Crash of 1987 and has since also traded forex, indices, fixed income, and commodities - pretty much anything an individual is likely to trade. As an analyst he has provided real-time commentary and trading advice for institutional fixed income and foreign exchange traders, with additional stints covering equities, and even the energy market. John has authored literally dozens of trading magazine articles for publications around the world over the years. He has contributed content to numerous web sites, and was Content Editor for the Trade2Win trader community website. Johns done a number of live seminar events, and has spent considerable time in the university classroom teaching trading to college students and helping develop related course materials. Closely related to his classroom work, John also spent nearly a decade coaching collegiate volleyball. Johns introductory trading book, The Essentials of Trading (Wiley, 2006) came directly out of his teaching work. It reached Amazon Top Seller status shortly after its release. He has also contributed to the SFO Personal Investor Series: Psychology of Trading (W&A Publishing, 2007) and to a forthcoming book from the publishers of The Technical Analyst magazine, as well as to academic research on automated trading systems. John is currently a Senior Foreign Exchange Analyst for the IFR Markets group of Thomson Reuters.
Contributors
Bios
The Contributors
A little about the folks answering your trading questions
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Ray Barros Trader, Fund Manager, Author www.tradingsuccess.com Ray Barros is a professional trader, fund manager, author, and educator. Since he started trading twenty years ago, his track record reflects a whopping 39 percent per annum return on a compounded basis. It means a hypothetical investment of $1,000 returned about $300,000 in the 18-year period between 1990 and September 2009. Ray has been regularly featured in regional newspapers and publications like The Singapore Strait Times, The Sydney Morning Herald, Your Trading Edge Magazine, Singapore Business Times, and Smart Investor. He has also been featured on BBC (Asia), CNBC, Bloomberg, Channel News Asia and a number of Indian TV stations e.g. Channel 18 (CNBC Indian Affiliate) and UtVBloomberg.. In addition, he has given public and in-house seminars in Sydney, Singapore, Bombay, Shanghai, London, Tokyo and Taiwan. Ray is also the author of two books The Nature of Trends and The Ray Wave. You can follow his blog at www.tradingsuccess.com/blog Ray's Answers How much money can I make trading? When do I know Im ready to start live trading? What books should a new trader read? Should I quit my job and trade full-time? Do I have to accept some big losses in the beginning? How long does it take to make a stable income? Is it worth spending money on educational resources? If you know so much, why dont you just trade? Whats the best indicator? How can I create a good trading plan? How important is psychology in trading success?
www.newtraderfaqs.com
Contributors
Broker X Anonymous Forex and Futures Broker Broker X started as a real estate and loan broker in California. He worked in that arena for 20 years prior to retiring. Bored with retirement, and always wanting to understand the financial markets, Broker X went to work for a commodities trading school and eventually came to work with a major firm. He initially became a futures broker, but a couple years back when the firm moved into retail forex, he made the switch. Broker Xs identity is withheld due to employer compliance issues. Broker X's Answers What is the percentage of people who succeed in trading? Is forex trading a scam? Is it better to trade spot forex or currency futures? Is my broker trading against me? Is my broker running my stops?
Kat Devlon Private Investor, Educator Founder of www.TradingGoddess.com Kat Devlon (or T.G. as she is known to many) has been an investor and swingtrader since her first purchase of Webvan stock in 1999. After taking uneducated risks that resulted in the least number of gains, she spent several years reading stock market books and studying fundamental and technical analysis, while actively investing and trading. In 2006, she founded TradingGoddess.com, which consists of entertaining and informational posts about the stock market, businesses, and investing, with a lighter, funnier edge, while preserving knowledgeable insight and up-to-date news. TradingGoddess.com includes analysis and opinions from many other stock market gurus. They contribute their experience and knowledge so that others can learn and become more profitable in Copyright 2010
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the stock market. Whether your interest is day trading, swing trading, long term investing, options, or forex, you will find helpful and valuable information about it posted on the website. Like-minded individuals and organizations that thrive on intelligent, educated, and useful information, and collaboration with a warmer, more personable approach are encouraged to stop by www.TradingGoddess.com and say hello. Kat's Answers How do I start trading? How much money do I need to start trading? Do I have to pay taxes on my trading gains? Why didnt the market rise on the posi tive news? Where should I put my stop?
Rob Hanna Professional Trader, Blogger www.quantifiableedges.com Rob Hanna is a full-time market professional. He has served as president of Hanna Capital Management, LLC since 2001. From 2003 to 2007 his column Rob Hannas Putting It All Together could be found twice a week on TradingMarkets.com. In January of 2008 Rob began Quantifiable Edges. The website, subscriber letter, and blog focus on assessing market action through indicators and history. Rob looks at price, volume, breadth and sentiment indicators. Some are well known and publicly available and others are proprietary. The frequent historical market studies he publishes in both his blog and newsletters help to provide a foundation for his market analysis and trading bias. You can follow Rob on his blog: http://quantifiableedges.blogspot.com/ Rob's Answers What is Support and Resistance? How do you backtest a system? Should I buy this system? www.newtraderfaqs.com
Contributors
Alan Oliver Trader, Author, Educator www.tradingwithgods.com Alan Oliver has been trading markets since 1989. After working for two of Australias top banks he became a successful trader and was asked to explain some of his trading techniques and strategies. His first book Trading with the Gods, which explains in simple terms the theory and use of the Fibonacci sequence, has been a top seller in his home country of Australia. Alan is on record as predicting and trading the September 11, 2001 market crash and details his analysis in his book. He has written other books on trading and Gann theory, and today still trades for his own account and assists other traders learn to become self sufficient and independent. His easy-to-follow explanations have earned huge praise amongst all levels of traders and he is regularly sought after to give seminars on trading and techniques. Alan's Answers Should I quit my job and trade full-time? How difficult is it to trade? Is forex trading a scam? Is live trading different than demo trading? Where does the money I make in the market come from?
Brent Penfold Trader, Author, Educator and Licensed Advisor www.IndexTrader.com.au Brent Penfold is a full time trader, author, educator and licensed Advisor. He began his career in 1983 as an institutional dealer with Bank America and today specializes in trading global currencies and indices. Brent is the author of the best selling books Trading the SPI and Back to Basics Trading and is profiled Copyright 2010
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in John Atkinsons book The Stock Market Wizards of Australia. His new books The Universal Principles of Successful Trading, Trading with the Hidden Dragon and Forex Trading Made Profitable are due for release by Wiley in 2010 and 2011. Brent publishes daily newsletters for active Forex and Index traders and is a popular and sought after international speaker who has presented to traders throughout the Asia Pacific region in Australia, New Zealand, Malaysia, Singapore, Hong Kong, Vietnam, Thailand, India and China. Brent is a licensed futures advisor (AFSL 225946) and holds a Master of Commerce (Finance) degree. To learn more about Brent Penfold and his services you can visit his web sites: www.IndexTrader.com.au and www.CyclePoint.com.au Brent's Answers How much money can I make trading? When do I know Im ready to start live trading? Should I quit my job and trade full-time? If you know so much, why dont you just trade? How do I avoid scammers? Is live trading different than demo trading? Whats the best technical indicator? How important is psychology in trading success?
Corey Rosenbloom, CMT Trader, Educator, Blogger Founder - Afraid to Trade www.afraidtotrade.com Corey Rosenbloom is the founder of Afraid to Trade. Corey began writing the blog to share some of his experiences and define trading strategies for the public. His posts detail his unique style of incorporating both the larger perspective of inter-market analysis with the shorter, intraday trading techniques and classical price concepts that can be employed to minimize risk and maximize opportunity. He also incorporates his insights into trading psychology and edgeoptimization tactics through daily commentary, a daily as well as www.newtraderfaqs.com
Contributors
weekly subscription service, education, and research in the field of technical analysis. Corey holds the designation of Chartered Market Technician (CMT). He uses a unique blend of confluence across non -correlated trading strategies. Having also incorporated sector rotation and inter-market analysis into his investment strategy, he switched to shorter time frame trading tactics using ETFs and futures to capture additional edge from the price action and trends. Corey's Answers How difficult is it to trade? What is technical and fundamental analysis? How can I overcome my fear of pulling the trigger?
Smita Sadana Trader, Educator, Hedge Fund Consultant www.TraderVantage.com Smita is the founder and CEO of Sunrise Capital LLC, a company focused on helping investors and traders improve their skills and profit from both bull and bear markets. Sunrise also provides consultation services to Hedge Funds. Smita has delivered a 43% compounded annual gain over the last 11 years (1998-2008). Smita actively manages a substantial portfolio, trading in stocks, options, currencies and commodities. Her success is the result of disciplined deployment of risk management techniques, technical and fundamental analysis and a thorough understanding of trader and market psychology. Smita leads trading workshops designed to help traders sharpen their own skills. She is especially passionate about helping other women get more actively involved in this field. She is an active contributor to the Emmy award-winning financial website Minyanville.com and its Premium Service for active traders, Buzz and Banter. You can learn about Smitas mentoring at https://www.tradervantage.com/resources.html Copyright 2010
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Smita's Answers How much money can I make trading? What books should a new trader read? Is it worth spending money on educational resources? If you know so much, why dont you just trade? Should I buy this system? How important is psychology in trading success?
Brett Steenbarger Institutional Trading Coach, Author, Blogger www.traderfeed.blogspot.com Brett N. Steenbarger, Ph.D. is Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. A psychologist and trading coach for hedge funds, investment banks and proprietary trading firms, Brett is the author of the much-read TraderFeed blog and several highly regarded books on trading psychology and trader development (The Psychology of Trading, Enhancing Trader Performance, and The Daily Trading Coach). He has also published numerous peerreviewed journal articles and book chapters in the field of brief therapy, including several reviews in standard reference works. Dr. Brett's Answers What is a proprietary trading firm (prop shop)?
Timothy Sykes Trader, Author - An American Hedge Fund www.timothysykes.com Timothy Sykes turned $12,415 in Bar Mitzvah gift money into $2 million trading stocks while in college, became a top-ranked hedge fund manager, authored the bestselling book An American Hedge Fund,
Contributors
starred in the hit TV show Wall Street Warriors and is the #1ranked trader out of 30,000+ traders on Covestor.com after earning over 500% in 2 years (Nov. 2007-October 2009). You can read Tims views on stocks, the market, and other things on his blog at www.timothysykes.com. Tim's Answers How much money can I make trading? What books should a new trader read? Is it worth spending money on educational resources? If you know so much, why dont you just trade?
Billy Williams Veteran Stock and Option Trader www.stockoptionsystem.com Billy Williams is a 20 year veteran trader specializing in momentum trading with both stocks and options. He has been a contributing author to Futures Magazine. Billy ran a starting stake of about $2500 up to one large enough to provide he and his family a comfortable income. Billys commentary can be read at www.StockOptionSystem.com Billy's Answers How is trading different from investing? Why should I trade and not just invest? How much money can I make trading? What is the percentage of people who succeed in trading? Is it worth spending money on educational resources? If you know so much, why dont you just trade? What is the best market to trade? Whats the safest market? How much money do I need to start trading? Is live trading different than demo trading? Which type of market analysis is better? Whats the best technical indicator? What is Support and Resistance? What timeframe charts should I look at? Copyright 2010
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How can I create a good trading plan? How important is psychology in trading success? Why cant I follow my trading system?
Mark Wolfinger Trader, Former Market Maker, Blogger, Author www.mdwoptions.com Partner and Director of Public Relations Expiring Monthly www.expiringmonthly.com Mark D. Wolfinger grew up in Brooklyn and holds a BS degree from Brooklyn College and a PhD (chemistry) from Northwestern University. In December 1976 he headed to Chicago to become a market maker on the trading floor of the Chicago Board Options Exchange (CBOE). Over the next 23 years, he worked primarily as a market maker. As a trader on the exchange floor, he observed too many public investors adopting unprofitable strategies. That prompted him to help educate investors on how to use options His goal is to demonstrate that conservative strategies make it more likely that an individual investor can earn money from his/her investments. After leaving the CBOE in 2000, he began writing and has published three books and numerous magazine articles. As an educator, he stresses the conservative methods detailed in his newest book (The Rookies Guide to Options). He is a founding partner of Expiring Monthly: The Option Traders Journal. Mark authors a daily blog at http://blog.mdwoptions.com/Options_for_Rookies Mark's Answers How is trading different from investing? Why should I trade and not just invest? What books should a new trader read? How important is psychology in trading success? Why isn't everyone trading in the same direction?
Contributors
Financial Careers Listing and Resources www.efinancialcareers.com eFinancialCareers, a Dice Holdings, Inc. company, is the leading global career site network for professionals working in the investment banking, asset management and securities industries. The website provides financial services professionals with job opportunities, job market news and analysis, salary surveys and career advice. Recruiters and employers can post jobs targeting specific sectors within the financial services industry, both buy-side and sell-side, and can search the resume database for highly qualified and specialized professionals. eFinancialCareers has a network of co-branded career sites with industry-leading trade publications and offers local websites in 18 markets and five languages primarily across North America, Europe, the Middle East and Asia-Pacific. eFinancialCareers' Answers How do I get a job trading? What types of trading jobs are there? What is a proprietary trading firm (prop shop)? Whats better, an MBA or a CFA? What kind of program should I do at school?
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Starting Points
Section I
Starting Points
Two questions to get things started
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How is trading different from investing?
Because trading and investing both when one considers them from the perspective of the financial markets are performed in very similar fashions, they are often thought of as interchangeable. In my book, The Essentials of Trading, I followed along with this basic theme by introducing the idea that what differentiates the two is scope definition. Both trading and investing, after all, are at the most simple of levels application of capital in the pursuit of profits. If I buy XYZ stock I expect to either see the price appreciate or earn dividends perhaps both. What separates trading from investing, however, is that generally in trading one has an exit expectation. This might be in the form of a price target or in terms of how long the position will be held. Either way, the trade is seen to have a finite life. Investing, on the other hand, is more open-ended. An investor will buy a companys stock with no predefined notion of when he or she will sell, if ever. We can use examples to help demonstrate the difference. Warren Buffet is an investor. He buys companies which he sees as somehow undervalued and holds on to his positions for as long as he continues to like their prospects. He does not think in terms of a price at which he will exit the stock. George Soros is (or at least was while he was still actively running his hedge fund) a trader. His most famous trade was shorting the British Pound when he thought the currency was overvalued and ready to be withdrawn from the European Exchange Rate Mechanism. The position he took was based on a specific circumstance. Once the Pound was allowed to float freely, and quickly devalued in the market, Soros exited with a handsome profit. That meets the criteria of having a predefined exit, making it a trade, not an investment. There is another way one can define trading as set against investing, though. It has to do with the manner in which the applied capital is expected to produce a return. In trading the www.newtraderfaqs.com
Starting Points
appreciation of capital is the objective. You buy XYZ stock at 10 expecting it to go to 15 and thereby produce a capital gain. If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits. In contrast, investing looks more toward income over time. That makes income production, such as dividends and bond interest payments, the major focal point. Do investors experience capital appreciation? Sure, but unlike in trading, that is not the prime motivation. With these definitions in mind, consider what many people refer to as their single biggest investment their home. Based our second definition of investing, however, a home is generally not an investment because in most cases is does not produce any income. In fact, it produces considerable expenses in the form of mortgage interest payments, utility bills, and upkeep. If anything, a home is a trade. We buy it and hope for its value to rise over time, increasing our equity. And the fact that many people expect to move in only a few years and sell at that point makes it even more of a trade rather than an investment. (Of course owning rental property can certainly be viewed as investing, unless one is flipping it, which would definitely be more trading.) As noted earlier, for many people trading and investing seem like the same thing. The mechanics of buying and selling are basically the same. Sometimes the analysis done to make those decisions is identical as well. Its the intention and definition of objectives which separate trading and investing, though.
Its easy to recognize the similarities when comparing two different methods of using money to buy stocks or other assets. You buy, hoping to sell at a higher price at some time in the future. Investors have a much longer-term perspective than traders. But the strategies differ by more than the intended holding period. In responding to this question, Im making the assumption that the investor/trader is an intelligent person, making a rational decision. That eliminates people who buy stock because their bartender told Copyright 2010
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them it was a good idea. It also eliminates people who get caught up in hype, or TV advertisements, and jump onto a perceived bandwagon. Investors invest. That means they buy assets they perceive as being cheap now, compared to its value over an extended period of time. If its a stock, the investment represents faith that the company will prosper as time passes. Perhaps its based on the fact that the industry is in its early stages and the future is bright (think nanotechnology). Perhaps its because a specific company has demonstrated that it has the best management among all of its competitors. The reason for the investment is not relevant for the purposes of this discussion - but it surely matters to the individual who makes the investment. An investor may choose diversification and buy shares of an index fund. That demonstrates a belief that the economy is sound and will expand over the years. Its a method for owning a piece of many different businesses with the hope they will be worth more in the future than they are today. Investing is one method for battling the effects of inflation. Traders trade. They dont care what they buy and sell but they must understand the market they are trading. If that sounds foolish, it isnt. If you plan to hold a position for a minute or two (or for a couple of hours or days), does it really matter how well this company is going to perform over the next 10 years? If the trade is in soybean futures, the actual rainfall over the summer and the size of the harvest is immaterial when the position is held for five minutes. There is no need to think about future prospects when the investment is held for a very short time. The trader buys (sells short) knowing that the trade is going to be short-lived and that there will soon be a sufficient profit, or a limited loss. In fact, the trader almost always has a profit target, as well as a stop-loss point, in mind when making the initial trade. To me, the primary difference between trading and investing is the reason behind the buy or sell decision. Investors look for quality and see a brighter future. Of course, short-sellers are investors also, and they see a less than optimistic future. Traders see a chart pattern that stimulates them. Or perhaps they see an established or developing trend in the price (not the quality) of the asset. They trade based only on price and are hoping to take a quick profit. Of www.newtraderfaqs.com
Starting Points
course, quick is not a well-defined term, and can refer to a few seconds to a few hours. Traders seldom hold positions overnight. Investors invest based on quality (sell short the garbage). Traders trade based on price.
At first blush, investing or investors are synonymous with a longterm horizon where a position is taken and held for as long as the long-term prospects are positive. Trading is almost entirely a function of price and is synonymous with a short-term time period from several minutes to several years. How long a position is likely to be held is a function of trade/risk management as well as the sustainability of the trend. Investing is almost entirely based on the value of the investment when compared to the future value of that investment. This risk/reward analysis of a companys prospects in relation to its present value versus its ability to rise in value over the long -term while maintaining a competitive advantage in its market (if its a stock) or projected value based on supply/demand (i.e. copper, currencies, etc.). Where price is almost entirely based on the buying/selling during trading is where trends are of fundamental consideration. Trends are to trading what food and air are to human life - they are responsible for survival. Trends offer the greatest risk/reward scenario for trading than any other method and as such they are the most fundamental component to profitable trading. Once price has been defined by the trend that they are undergoing then it becomes a matter of entry, trade management, risk control, and profit-taking. Investors are more willing to undergo the fluctuations in their equity because they are of the mindset that over the long-term and if there prospects stay positive that they will prosper in the end. Copyright 2010
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Traders, conversely, exit at the moment the trend in price is ending regardless of the long-term prospects content that if the prospects remain positive then the trend will resume and, at which time, they will enter the renewed trend again.
Starting Points
Why should I trade and not just invest?
You shouldnt. Ok. That answer is probably too short and lacks an explanation. Trading is a job. Trading is work. Trading requires specific skills. Just as not everyone can be a professional athlete or movie star, not everyone is cut out to be a trader. In fact, the majority are not well-suited to a profession that requires intense concentration, discipline, and the ability to skillfully manage money. It is, however, an honorable profession, and if you are interested in becoming a trader, its worth your time to discover if you have what it takes. Professional trading involves much more than sitting at your computer and finding something to buy, as you do when making purchases as an investor. Traders are not looking for long-term situations. Thus, you must have a reason for believing that making a specific trade right this instant is likely to be profitable. This is a skill that is not easy to develop. Some cl aim that its impossibility and that and successful traders are just lucky. Well, those successful traders know better. Its possible, but you must work at developing the skills to play the game. The one aspect that people who consider trading as a career often overlook is that its crucial to learn how to manage money - and that means managing risk. This is a topic thats worthy of its own lengthy discussion. But right now, its something of which you must be made aware. Trading requires discipline. You must learn to take losses without getting emotionally involved. You must learn how to handle profits and understand when its an appropriate time to exit a winning trade. Trading requires the ability to establish a plan, and although it may make you dissatisfied at the time, it also requires that you Copyright 2010
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stick with your plan. Obviously plans can change and you are not married to a single plan for your trading lifetime, but if you decide that this time is different or Ill hold out just a little longer despite evidence that doing so is probably going to cost money, then you lack sufficient discipline to succeed. Trading is also a fun profession from the point of view that you can work from home, set your own hours, and if successful, take vacation whenever it suits you. But its serious work, and dont think that trading translates into instant riches and that you can retire in a few years. Consider that unlike regular employment, you will not be offered health insurance, paid time off, or retirement benefits. As a self-employed person, you must buy those things and pay out of your own pocket. You may have heard that trading is easy. Well it is easy. The difficult part is making money. Anyone can enter buy and sell orders, but it you do that haphazardly, or on a whim, you have no chance. Are you willing to study, practice, and work hard? Are you willing to accept the fact that few people start their careers as winners, and that even fewer succeed over the longer term? Do you have what it takes? I hope so. And if it turns out that trading is not for you, investing is also an enjoyable endeavor with less day-to-day pressure.
Maybe you shouldn't. Trading isnt for everyone and, lets face it, it's hard. There is real risk involved not to mention effort to learn the skills in order to do it right. However, if there is a part of you that speaks to the inner part of your mind that likes the challenge or the freedom to make your own intelligent decisions when it comes to your money then it is probably something that compels you to take a closer look. If you www.newtraderfaqs.com
Starting Points
watch the charts of a stock and think to yourself, how could I catch a move in that stock or how would I pick a winning investment in a stock/market like that then you instinctively understand what drives most traders to come to the markets and learn how to master trading. Investing is a passive way to collect and, hopefully, increase wealth. I am not opposed to it and I think that everyone ought to have a financial plan that puts the long-term benefits of wealth building in play. But understand that buying for the long-term is predicated one thing, time. All long-term investments are predicated on the use of time in their investment decision by a large margin and there are a lot of people that could benefit from having an intelligent approach to trading the markets themselves or by someone else (a professional fund manager). Most, if not all, financial planning strategies involve having at least a portion, usually 5% to 10%, of their money allotted for higherspeculative activities. Why? Because though these types of investments have wild swings in equity (i.e.: commodity trading funds, managed futures accounts, hedge funds, mutual funds that invest solely in technology or internet stocks, etc.) when they have a good run that more than make up for lagging returns in the bonds or blue chip stocks. Yet, if they have a bad year because they are such a small percentage of your portfolio they wont drag your returns down. This is where intelligent portfolio application helps protect you. What I recommend, based on my own experience and talking with others, is take that small percentage that is devoted to higherspeculative investments and learn to do it yourself. Look, I am not going to suggest to anyone that they cash out their 401K and begin trading the Forex or futures markets. That kind of stupidity gives me chest pains! Invest in your own education in your financial skills and then apply it. Its that simple. Let me break it down: Have a financial strategy for the long-term. Copyright 2010
New Trader FAQs

Allocate for higher-risk investments as recommended by most financial planners. Invest in good trading material outlining an approach that suits you. Re-read the material over and over again while implementing it (so that it sinks in). Paper-trade. Take $500-$1,000 and open an account. Begin trading, start slow. As you achieve consistent profits increase your size as your confidence grows. Begin, to put money in your trading account versus investing higher-speculative investments as your confidence grows. As you reach your allotment for higher-speculative investments within your financial plan, stop, and you are now running your own fund for you most important clientYOURSELF.
Even if you never trade, you will make better decisions with your money that is invested by other fund managers than someone who doesnt have the skill. I remember seeing a shift in the stock leadership in April 08 and falling off. Housing and banking began to shift and my wife and I made the decision to shift our money away from these sectors and then, eventually, the general market as a whole. This helped us avoid huge losses by reallocating our long-term investments. As a trader, I took some short in CME and a few others but for the most post avoided the market entirely and stayed in cash. It wasnt until early 2009 that we began to get back in the market and, as a trader, I spotted the bottom in March of 2009 and made huge gains in Apple Computer and Baidu.com. This more than www.newtraderfaqs.com
Starting Points
made up for the time that we were on the sidelines while all hell was breaking loose. Do the work, apply yourself but whether you learn to trade or invest just get in the game. It's the only way to really win.
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The Big 10 The Most Frequent Questions
Section II
The Big 10
The questions most often asked
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New Trader FAQs
How much can I make trading?
The range of possible outcomes to your trading is unlimited. On the one end you could lose all your money. In fact in some markets and using certain instruments you could potentially lose more than 100% of your account balance. Thats not something likely to happen in the vast majority of cases, though. Even getting completely wiped out isnt that easy to do in many cases (options trading being an exception). Its not often that stocks go to zero and margin calls in markets like forex and futures generally prevent a trader from losing everything. It takes the application of leverage to lose more than your initial investment. Turning things to the gain side, the profit potential is quite dramatic. People have made thousands of percent gains in their accounts and portfolios. Truly stunning profits are possible. Nicolas Darvas, who was first and foremost a professional dancer, ran a low five figure account up to $2 million back in the 1950s. His tale of how he did so is documented in his aptly titled book How I Made $2,000,000 In The Stock Market. In more recent times Tim Sykes was able to perform a similar result as a high school/college student. You can read about that in An American Hedge Fund. If you really want to see what sorts of profits the markets can provide, read the Market Wizards books (Market Wizards, The New Market Wizards, Stock Market Wizards). They feature interviews of some of the great traders, investors, and money managers of recent times. Included are some names youve likely heard before and no doubt many you havent. They represent many different styles and approaches to the market. All of them are great performers in one fashion or another, though how that is measured (pure annualized return, risk adjusted returns, infrequency of losing periods, etc.) varies across the www.newtraderfaqs.com

group. The real question youre asking, though, is How much can I realistically expect to make trading? Heres the thing. No one will be able to tell you with any real confidence how much you can make in the markets. There are way too many variables. The varied performance of the Market Wizards folks demonstrates that quite clearly. What you trade matters. How you trade matters. The timeframe you trade in can make a big difference. Your risk tolerance is a major factor. Your ability to develop a good trading plan for yourself, and to apply it consistently matters a huge amount. And once you make the money, can you keep it? Its not much good to make huge trading returns only to give them all back to the market, after all. That has been the story of many, many traders. Tim Sykes, mentioned earlier, is one very public example. He basically lost all that hed made. Jesse Livermore, protagonist of Reminiscences of a Stock Operator, made and lost fortunes several times and ended up broke and broken. My advice is that as a new trader you not worry yourself about what you could make. Youre chances of doing something like doubling your money in your first year of trading are so slim as to be laughable. Focus your efforts first on learning and becoming a good, consistent trader - and on not losing too much money while youre doing so.
The monetary reward is truly unlimited in trading the markets. Jesse Livermore made over $100,000,000 in one day in 1929 when the market crashed and those were real dollars (several billion dollars by todays standards), the Turtle disciples (see Way of the Turtle and/or The Complete Turtle Trader) received tens of millions of dollars in compensation for managing multi-billion dollar Copyright 2010
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portfolios, Dan Zanger, a trader out of California who had possibly the greatest run-up in returns in trading history, turned $11,000 into $47,000,000 within just a couple of years, George Soros made over a billion dollars in a single day betting against the British pound, Warren Buffet, the Oracle of Omaha, is worth over 50+ billion dollars made from buying undervalued stocks and companies, the top 10 hedge fund managers on Wall Street all make 250+ million dollars each in annual compensation, Larry Williams, famed trader and father of actress, Michelle Williams, gained fame by turning $10,000 into just over 1.1 million dollars within a year, and there are numerous other stories of traders making an absolute killing in every tradable market. In each case every trader had a solid trading methodology within actionable rules that guided them each step in the trading decision but what is usually not made clear is that while each example shows a valid trading method, it doesnt always display the intrinsic factors that make failing traders into profitable ones or mediocre traders into great traders. Let me try to offer an example, by intrinsic factors I am calling to attention the fact that while each had a successful method/system of trading, in the decision matrix of each phase of the trade was defined by a set of rules. Most importantly, their discipline in following the rules of that method/system and not being swept up in a state of euphoria when a trade goes your way or falling into a state of depression/fear when a trade goes against you and then forgetting the rules that were in place to lock-profits, trail stops, set a stop-loss point, control risk, etc. Certainly, everyone that is drawn to the markets does so because the appeal of making a killing. And while, some do, most dont and if you dont make the effort to be aware of that then you will end up a statistic. Now, if I havent thoroughly crapped you out on the idea of being a successful trader, then get ready for some good news. Its a lot easier than most would have you believe but you have to be willing to approach it from inside/outside perspective. From the outside, be willing to invest time in understanding price action and mastering a few setups in trading one at a time while implementing a sound money management method. This will protect you and as you begin to get a feel for reading whats going www.newtraderfaqs.com

on in the market at a glance while mastering each trade setup you will begin to make more money while limiting losses and, most importantly, gaining confidence at trading the markets which is the most important intrinsic factor/quality that you can possess as a beginning trader. Next, be sure to work on yourself. By that, I mean to spend time visualizing yourself as successfully executing trades as guided by your trading plan and method. Also, make sure that you picture yourself taking hits in the markets but instead of reacting negatively, you visualize yourself taking it in stride and being proactive by moving on to the next opportunity while maintaining a state of detachment about the loss. Picture yourself in many different scenarios and then reframing how you would act as if you are one of the great trading masters and you will begin to act like one. In addition, keep in mind that most traders make success much harder than it has to be. If you have sound reasoning skills and can be aware of important distinctions (important) then you can be trader who wins in the markets consistently and profitably too. Let me offer you a quick exercise to help you determine where you are in your development as a trader. Read this story and answer honestly (its easy and, dont worry, its not a trick question): There were 6 frogs sitting on a lily pad which made the lily pad a very crowded place to hang out. One frog decided to jump off after awhile. The end. Now, how many frogs were left? If you said five then congratulations, you have the sound reasoning to be a successful trader and make a potentially unlimited income. Unfortunately, you would still be wrong and need more inward development to make a potentially unlimited income. Why? Copyright 2010
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Because the frog that decided to jump only decided to jump and not actually jump! Now, some of you are thinking Darn it, Billy, you said there were no trick questions to this exercise! In my defense, there really wasnt any effort on my part to deceive you but your minds inability to draw that critical distinction shows that you were only to willing to trick yourself and caused you to jump the gun on deducing your answer. Sound reasoning is vital in your approach to the markets but it doesnt have to be turned into rocket science which is what mediocre traders do for various reasons (usually psychological) but truly great traders draw distinctions that are absolutely critical to long term success. Keep this little parable in mind as you progress as a trader and you will find that it carries great meaning in more than one way to you as you grow more successful.
Thats the worst question you can ask . Focus on learning what strategy works best for you, how to control losses, risk management - ya know all the boring important stuff - and worry about being right/counting your profits last. The beautiful thing about trading is that gains can be practically unlimited, but the key to long-term success is by finding patterns, setups and picks that work over and over and over again. While I once turned a few thousand into a few million all within a few years, the reality is that 90% of traders lose money. So if you happen to find yourself earning any money whatsoever, understand that youre in the minority and protect your gains at all costs.
Im not sure if the question is asking: What is the theoretical maximum amount that can be made trading? If thats the question, then the answer is trading can provide an unlimited income constrained only by a traders talent, skills, opportunities provided by the market and luck. I suspect however that the question implies this question: How much money can the average trader expect to make consistently over time? If that is the question, then the answer depends upon the stage of evolution a trader has achieved. Successful trading is not all that hard in the sense that the roadmap to success has been clearly mapped out. All you need is to consistently execute your trading rules, and risk management rules. In short, you need to master: Winning Psychology x Effective Risk Management x Written Trading Strategy with an Edge But, if this is true, why is it that 80 to 90% of newbies fail to make the grade? One of the main reasons in my view are the unrealistic expectations that newbies have of how long it will take them to master the trading profession. Medicine, law, architecture, all take anywhere from 5 to 7 years to master. Yet in trading, newbies expect to be profitable after reading a book or attending one seminar. How much money can I make trading? If you have never made money, the first objective is to break even. I suspect that this will take you anywhere from 12 to 24 months. Once you achieve that, you can then look to returning somewhere between 5 to 10% on capital. Once you do that consistently, then the amount of money you can make will be a function of your risk profile, skills and talent. I believe that the discipline and average skill, a trader can make somewhere between 20 to 25% ROI consistently over time. Larger Copyright 2010
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returns are possible but these are accompanied by a higher risk of ruin.
My belief is that with sensible and effective trading you should be able to earn a good return on your risk capital. Most people who ask the question of how much money can I make trading are what I call emotionally disorientated. They want to open a $10,000 account and make $50,000. Now I suppose the industry should take the blame for this misconception due to the easy wealth fantasy the rainbow merchants spin. Its a complete falsehood. There is no easy wealth for the average trader. I have no doubt that very good traders can double, triple, quadruple, etc. their account but they are the exception. So unless the person asking this question can leap tall buildings Id suggest they emotionally re-orientate themselves and start asking whether its possible to earn a higher rate of return on their risk capital as say opposed to the share market? If that is the question, then certainly yes. Good traders can earn between 20% to 40% consistently on their risk capital without pushing their personal statistical risk-of-ruin above 0%. And for those traders unaware of their own personal risk-of-ruin, anything above 0% is a guarantee they will blow up their trading account. Itll only be a matter of time. (Please see my comment under When do I know Im ready to start live trading? for more information on risk-of-ruin)
Let me just say that the potential of earning money in trading, is theoretically limitless. However, most traders only think in terms of generating absolute dollars, and that ideology hinders success. Traders have to train their minds to think in terms of percentage returns.

For instance, if a trader wants to turn $100,000 into $200,000, her account would have to go up by 100%, which is an incredible feat to accomplish, especially year over year. At this juncture, the trader usually encounters what I call the Lure of 2 Ls leverage and luck and both of these can catapult into the risk of ruin. And thats the unfortunate reality for most traders they dream big, bet bigger and lose it all So, I usually advocate traders to start approaching their account goals in percentages. A 20% return, for instance in the above mentioned starting value, would mean only a gain of $20,000. This might not seem attractive in dollar terms, but ironically a 20% return is a spectacular return as it stands. And a 20% return over 20 years with no addition to that money, would cause it to grow to S3.8 million. So, my view is to use Compound Interest, that Albert Einstein called the eighth wonder of the world, instead of trying to capture lightning in a bottle on an annual basis. With such a disciplined approach, this profession can generate excellent returns.
Copyright 2010
New Trader FAQs
When do I know I'm ready to start live trading?
Let me first say that I take a slightly different view on when you should starting trading with actual money. I am a proponent of getting your feet wet in the market as soon as you have an understanding of the basics sufficient to enter orders and monitor your trades. Now, Im not saying that you should jump in with both feet and toss all your money in at this stage. Im just suggesting that you dip your toe in to get a feel for the water. The reason I make this recommendation is that live trading with actual money on the line changes things. Its very different from demo or paper trading. Just about anyone whos been through the transition will agree. Even just a little real money can make a massive difference in your brain function when you start trading. Its really amazing. Like I said, Im not suggesting going all the way in. Just do a little live trading to get a feel for what its like. That way you can do a better job of developing a good approach to your trading, one thats based on what you know its going to be like live trading. The real question, though, is at what point are you ready to make the full-time jump to live, real money trading? To that I would say as soon as you are convinced you have a trading system/method which is going to be profitable on a sustained basis and you know you will be able to stick to your trading plan. Some traders are ready to go live in a relatively short period of time. They quickly find something thats going to work for them and develop a plan they can work without all kinds of deviations. Others take longer to find the best approach for their needs. Dont try to put a timeline on it. Go at your own pace and dont compare yourself to others.

When you reach the point of having a good system and plan you are able to stick to, even then its worth starting the live trading slowly. Youll be prone to making errors early in your trading development. Let that happen when you have little money at stake. Build your trading size as you build your proficiency and confidence.
That depends on what you mean by start live trading. If you mean: start with all that I have, then I would say, when you have proven to yourself that you can consistently make money. On the other hand, with the advent of micro FX and Contracts for Difference (CFDs) accounts, I believe the novice trader should commence trading as soon as he has created his trading rules, risk management rules, and journal format. The reason I say this is with these new contracts, risk can be reduced greatly. For example: In FX, the risk for 100 pips is reduced to about US$10.00; and In CFDs, the S&P risk can be reduced to US$1.00 per point as against US$50.00 per point for E-mini futures.
By selecting these instruments, the novice trader can participate in real trading during his internship. (N. B. US citizens and residents are not allowed by law to trade CFDs). Once a trader has proven to himself that he can make money consistently, you can then turn to full-size contracts.
In my opinion youll need to complete two tasks before you commence trading. Copyright 2010
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1. Ensure your statistical risk-of-ruin is at zero percent and 2. Complete the T.E.S.T procedure. Risk-of-Ruin In my opinion I believe Risk-of-Ruin (ROR) is the most important concept in trading. Although it will have no practical value once you commence trading, I believe its the best point to place yourself before you commence trading. To my mind there is nothing else in trading more important then ROR. Everyone who trades has a statistical percentage chance of reaching their point of ruin, whether it be a 30%, 50%, 75% or 100% loss of their trading account. The trader will need to define their point of ruin. Now most traders, and I mean most, have no idea what their percentage ROR is. If you cant think for me right now what yours is then youre both clueless and ignorant and have no business trading. Full stop. Non-negotiable. Period. Pens down, hands off the key-board. Go off and calculate your ROR. If after calculating your ROR its above 0% then you have no business trading. This is because any ROR above 0%, even 1% is a guarantee youll blow you up your trading account. Itll just be a matter of time. Im amazed when traders are puzzled about why theyre lost their risk capital. They make up all sorts of excuses from being unlucky to market manipulation. How silly. They blow up simply because they were trading with a ROR above 0%. Trading and surviving is simply a numbers game. Know the numbers and half the battle is over. ROR is a big number. Learn it or become another statistic. In my opinion nothing comes close to being as important as the concept of ROR. I believe its the doorway through which real trading knowledge is gained. Note: For more information of ROR please refer to Chapter 4 The Universal Principles of Successful Trading (Wiley 2010) T.E.S.T Once you are satisfied that you have calculated your ROR correctly www.newtraderfaqs.com

at 0%, once you are satisfied that your methodology has a stable and robust positive expectancy and once you are satisfied that you have a sensible money management strategy then the second task to complete before going live is to complete the T.E.S.T procedure. Please refer to my comment under Is live trading different than demo trading? In there you will learn about my T.E.S.T procedure. Its designed to simulate real market conditions without risking real money. If after the T.E.S.T procedure your results are relatively consistent and not reliant on one or two extraordinary wins then in my opinion youll be as prepared as you can be before going live with real money. And as an aside, most people who are honest with themselves will find it almost impossible to complete each task successfully. I d ont want to rain on peoples parade or be a kill joy however I have to call it as I know it. However, if youre different, then all the best and good luck and sensible money management.
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New Trader FAQs
What books should a new trader read?
There are probably as many lists of the best trading books as there are traders. We all have different perspectives on things and read certain books at different points in our development. That leads to a variety of views on which ones are the best. All I can do is provide for you the ones that I think are the most useful based on my own experience. That said, heres my list. The Essentials of Trading is, of course, my own book. I dont include it from any sense of vanity, but because I honestly believe its a great resource for new traders. I wrote it specifically to help them develop a good, solid foundation for their trading. Its not specific to any market or timeframe or strategy, but rather focuses on the general requirements for creating long-term success in the markets. Those are things like having a solid understanding of the markets and how they work, putting together a personalized trading plan, and being able to evaluate different systems and methods. The Market Wizards books (especially Market Wizards and The New Market Wizards) should be in every traders library. They are collections of interviews done by author Jack Schwager (a trader and market analyst in his own right) with some of the most successful traders, investors, and money managers of recent times. There is loads of great stuff in these books. No. You wont find the one system that will make you a multi-millionaire in the markets. What you will find, though, is a whole array of little nuggets of wisdom from the years and years of experience these folks represent. Any time you

can learn from what someone else had been through it can shorten your own learning curve. Thats what these books let you do. How to Make Money in Stocks was one of the first books I ever read, and obviously is one just for stock market players. It was written by William ONeill, who founded Investors Business Daily. I can remember being skeptical about the title when I bought the book all those years ago. It wasnt long before I was quite happy with the investment. This book lays out a complete strategy for trading stocks - one that remains the foundation for the trading Im doing today. In my case it also introduced me to technical analysis (chart patterns), which put me on the path to becoming the professional analyst I am now. Trade Your Way to Financial Freedom was written by Van Tharp, who was featured in the first Market Wizards book. Tharp was one of the early proponents of modeling success in trading. This book incorporates a number of elements of that and trading psychology. What Ive always found to be the more valuable stuff for a new trader, though, is the discussion of expectancy and trading system performance assessment. Oh, and theres a lot of good talk about risk in the book too. When it comes to trader development, Brett Steenbarger is one of the guiding lights. His focus is on self-coaching, and Enhancing Trader Performance (see also The Psychology of Trading) is a fantastic resource in that area. Trading is like any other performance activity and Steenbarger goes to great lengths to highlight that. He does so because there are important implications for how you approach your development as a market participant. Steenbarger is a therapist by training and a trader himself. He works as a trainer for prop trading shops, so he knows what hes talking about. A Mathemetician Plays the Stock Market is a great little book that is both humorous and educational. Paulos, the author, does a great job of talking about classic financial theory and looking at things from the perspective of a mathematician and academic. He does it in a very easy to read and understandable fashion, not one which buries the reader in formulae and theories. His own Copyright 2010
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struggles in the market are also interwoven in the text, making it very open and honest. I really think college students going through finance programs would get a great deal out of this book, because it treats the subject matter much more openly, and in a much more readable fashion, than do the textbooks. Markets In Profile is a discussion by James Dalton of the Market Profile analysis and trading methodology. More than that, though, it is an intensive discussion of how the way the markets at their core play out through the way prices move. This book is a follow-up to the authors previous book, Mind Over Markets, which is a bit more mechanical regarding the Market Profile technique A very good read for anyone researching or developing trading systems is Way of the Turtle by Curtis Faith. The author was one of the original Turtles selected to learn trend trading by market legend Richard Dennis. Faith describes his own experience in the Dennis program, but also spends a lot of time talking about constructing and evaluating trading systems. Its a very practical book in that area.
Books represent an excellent source of educational material. The problem for the new trader is that there is so much that he/she wants to learn, and there are so many places where one can begin, that its difficult to have the patience to understand what you want to do - before making any trades with real money. If you have such an itch, use a paper trading account. Its not so much that this practice is essential, but it should allow to satisfy the urge to make some trades, while allowing you time to get a good understanding of what you are trying to accomplish. Trading before you are ready is equivalent to throwing money in the trash. There are many possible markets to trade. Some believe that trading is trading and it doesnt make any difference which markets you choose. I am not such a believer. I want to trade a www.newtraderfaqs.com

market I can understand, and encourage you to do the same. I want to know that if I read news articles pertaining to my trading instruments, Ill understand what the articles are discussion and perhaps have the ability to draw valid conclusions that may help my trading. Most people who come to the word of trading have been investors first. If thats true for you, then you already have an understand ing of how markets work. The concepts of bid prices and ask prices is not new to you. Supply and demand is a term with which you are already familiar. That gives you a head start. But thats all it is - a head start. Trading is very different from investing - both in the duration of any trade and the specific trade itself. Its most likely you know more about stocks than commodities or currencies, but each of you has his/her own background. If its true that stock investing is something with which you already have experience, my suggestion is to stay with the stock market. One part of the stock market is represented by derivative products, specifically, options. Thus, my recommenced reading list for new traders includes books that teach you the most basic concepts of trading stocks and options. If you plan to use technical analysis, as most traders do, then you also want a solid foundation there. I suggest these books: Stocks: A Random Walk Down Wall Street, Burton G. Malkiel. Take a look at the academic view of trading. Many of the arguments that support Modern Portfolio Theory are currently being re-evaluated and many believe the ideas in that theory are not applicable in todays markets. But theres an opportunity to understand why he academics think as they do. The Millionaire Next Door, Thomas J. Stanley. Not a stock-trading book, but information on saving money and working towards a long-term goal. In my opinion this information goes a long way towards giving a trader the proper mindset to understand that trading is a job, a means to support yourself, and not a game. * AVOID all Jim Cramer books, despite their popularity Copyright 2010
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Options: The Rookies Guide to Options, Mark D Wolfinger. Yes I wrote this book, so have a bias towards it. This book contains details not found elsewhere and was written for the sole purpose of allowing the reader to understand how options work and how to make money using them. The importance of managing risk is a constant theme. Options as a Strategic Investment. Lawrence McMillan. A classic book on options. Technical Analysis: I confess that technical analysis is not my field. But if you want to be a successful trader, do take the time to get acquainted with this field Japanese Candlestick Charting Techniques, Steve Nison. A powerful tool. The important part is to read, learn, and understand, You may encounter opposing views, which should make it clear that there is more than one way to do anything related to investing. No one has all the answers and there is no one best way to earn money as a trader.
Reminiscences of a Stock Operator Confessions of a Street Addict The Essentials of Trading Trade Like a Hedge Fund Trading For A Living The Psychology of Trading Beyond Greed and Fear How I Made $2 Million in the Stock Market Secrets Of Professional Turf Betting Extraordinary Popular Delusions & The Madness of Crowds www.newtraderfaqs.com
I would divide my list into the three categories, winning psychology, risk management, and trading plan. In the area of winning psychology is difficult to go past Brett Steenbargers The Daily Trading Coach. In my view, it is one of the most useful books of this genre. The area risk management is difficult because there are very few good books. I would recommend the new trader understand the importance of position sizing. For this reason, I suggest he read What I Learned Losing One Million Dollars by Jim Paul. While Paul does not tell us any specific position sizing methodology, this story does outline how important is the theory of position sizing. In addition, I would recommend that the new trader learn something about statistics and probability. Statistics Without Tears by Derek Rowntree is a great book. It is easy to read and the only mathematics that you need is the ability to add, subtract, multiply and divide. His other book, Probability without Tears is out of print but may be available from the library. It is not as good the first one I mentioned but nevertheless with a little effort, you will understand basic probability theory. Trading without the knowledge of statistics and probably the theory is like running on one leg. In terms of the trading plan, it is difficult to recommend a book simply because a plan is so dependent upon a traders personality. A good general text is John Formans The Essentials of Trading.
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New Trader FAQs
The bookstores are full of trading books, yet success eludes most traders. Similarly, there are programs, books, fitness clubs and coaches about weight management but many people will continue to battle with it. The answer doesnt merely lie in acquisition of knowledge but in application of knowledge. Thats why, in addition to some of the great technical books, I often recommend books on human behavior. Technical Analysis of Stock Trends Edward Magee Reminiscences of a Stock Operator Edwin Lefevre Market Wizards Jack Schwager Predictably Irrational Dan Ariely
Should I quit my job and trade fulltime?
The answer is probably no. Trading for a living requires two major things - capital and skill. In the case of skill, Im talking about having the ability to produce consistent profits. That could be from a strong mechanical system or from a good discretionary methodology. The bottom line is that you must be able produce on a steady, regular basis. Before you can seriously contemplate trading for a living you must be a proven commodity in terms of trading profitably. This isnt a confidence question. Of course you need confidence, but we humans have a tendency toward unearned confidence at times. Rather than feeling like you can trade successfully for a living, you must know you can because you have the evidence to prove it. The other requirement is capital. You need enough money to give you sufficient odds of success. How much money per month do you require to replace what you get from your job? Notice that I didnt ask about take home pay. Your job covers more then just what you deposit in your bank account. It covers taxes and benefits, maybe a retirement deposit. In the US, you may also have to consider self-employment taxes. In other words, when figuring out how much you need to make each month from trading you must consider everything, including some stuff you probably wouldnt think of right away. Oh, and you want to make sure you factor in a savings element as well. If all you ever do is make enough to cover your expenses youll never grow your trading account or personal wealth. That will leave you seriously exposed in your personal finances for emergency expenses and retirement. Copyright 2010
New Trader FAQs

Once you have a figure for what your monthly income must been, then you can back out a capital requirement based on a reasonable rate of return. Notice I said a reasonable rate of return. This is not time to be thinking big. Being conservative here is a good thing. In fact, figuring on something less than what your results suggest you should be able to achieve makes a lot of sense. And this needs to be a very consistent figure. You do not want to be in a situation where your income is on a roller coaster. That would put your budget under considerable strain. Consistency is absolutely key. So consider the scenario where you need to make $5000 per month to cover all your expenses and provide for some savings. If you can consistently make 10%/month then using 5% gives you a very good safety cushion in case of an off month or whatever. In order to make your monthly expenses on a 5% rate of return you would need $100,000 in base capital. All of the above said, youll understand why I answered no to the question at hand.
The answers question depends on a number of factors: 1. Have you enough capital to pay for your outgoings for the next two years without having to rely on income generated from your trading? 2. Have you proven to yourself that you have the ability to make money consistently from the markets? In respect of point 1, I take the view that most traders can return around 20% per annum without risk of risk of ruin. That being the case, it is essential in the early years of a trader that a trader have enough money saved to meet his daily outgoings - without having to rely on his trading. Without the saving, the pressure to produce will make it difficult for him to succeed.

In respect of point 2, unless you proven to yourself that you can make money consistently from the markets, the pressure to succeed will be so great that the likely outcome will be to fail. The knowledge that you can make money consistently will provide a buffer for those times when you are in what I call an ebb state.
The dream of most traders is to become a real market shakersomeone who can make bundles of cash in a reasonably short time frame, driving the latest and most expensive cars, living in a dream home and working whenever they feel like it. For some reasons, the stock market seems to attract this ethereal scenario of money trees waiting to be picked. It is true, some traders have made immense fortunes from this arena, but in all of my years of trading, I have yet to meet the overnight millionaire who makes money with little or no effort. In my own case, it took the best part of a decade to really understand the market, albeit with little or no assistance or mentoring, as in those days there were very few mentors who could or would assist. To become a full time trader is at least a 3 year apprenticeship, and you must be prepared for some serious tests of character along the way. You will place trades and have some wins, some losses and some break evens, finding the difference between these three outcomes is what makes or breaks a wannabe trader. Some traders will discover the difference and then go on to prepare a solid foundation of rules and requirements to ultimately become a consistent winner. Others will desperately try to devise a plan and will fail, while the final and most common outcome will be to simply give up after losing too much money and being unable to determine why. The best test of a semi professional trader is the cheque book indicator. If you have been trading part time with a smaller capital base and been making progress, you may well be ready for the final step. Copyright 2010
New Trader FAQs

Some handy points to remember: Keep your expectations real. Don't expect more than you have achieved in the past because you are spending more time at it. The returns will fluctuate and this is due to markets themselves, we can only achieve what the market is willing to concede. Don't make income targets. I have seen so many people fail because of a slow month or two, then they pressure themselves to catch up to a target or plan. If you want a target, make it that you must achieve 70% winning trades. Then the profits will follow. Consider your capital base in line with your income needs. You cant make an annual salary if you only have a minimal trading account. You should have sufficient resources to cover your expense without relying on your trading income.
No. This is a myth. You dont have to quit your job to trade. However I suppose if you wish to become a day trader then I suppose you would, although I do know some day traders who have fully automatic trade execution systems where their PC does the day trading. For most traders who trade off end-of-day bars there really is no reason for them to quit their day job. When you realize trading doesnt take much time identifying your set-up, writing orders, sending trade management instructions youll realize the challenge each day isnt trading, but keeping yourself occupied and not becoming bored! For myself I personally trade possibly the two most volatile market segments global index and currency futures. I trade a portfolio of 14 markets. For the index futures I trade the SPI, NIKKEI, TAIWAN, HANG SENG, DAX, STOXX50, FTSE, MINI-NASDAQ and EMINI SP500 futures. For currencies I trade the five main currency pairs: EUR/USD, GBP/USD, JPY/USD, CHF/USD and AUD/USD. A day would not go by without me having an order to trade in some market/s. Now Im possibly one of the most active private traders www.newtraderfaqs.com

and yet if I choose to, I could possibly work a full time job. And this is because Im a mechanical or systematic trader, my strategies are relatively simple and my order types really dont change. Im usually finished my analysis, emailed by new orders and trade management instructions by 9:00am each day. And I would imagine most discretionary traders would also complete their business of trading early in the day. Now I am assuming here that others, like me, send their orders into a broker to execute on their behalf. I dont sit in front of a monitor and execute my own trades. If that was your preference, then maybe youd need to quit your job, but it would seem a silly payoff and a very expensive way to execute orders. So in my opinion people in general do not need to quit their day jobs. However, I do have one huge proviso. If you wish to discover, research, develop and test new ideas then I suppose you would need to quit your day job since it does take time. However you would not need to quit your day job to run your business of trading. But if youre into research and development then yes. And I should say I spend most of my time researching and testing new ideas in an attempt to improve my edge.
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New Trader FAQs
Only professional traders make money, right?
Wrong! Its definitely true that professional traders have certain advantages. They often have better access to information and almost always have had the opportunity to go through a better developmental process. Professional traders also have certain disadvantages, though. They are generally trained to trade a certain very specific market (sometimes very, very narrow). For example, a professional trader might focus just on the 2s-10s Treasury yield spread. Professional usually trade much larger than an individual trader and as such cannot easily access certain markets like small cap stocks. They also generally have major restrictions in the composition of their portfolios, how much of a given security they own, etc. Individual traders have the ability to be much more nimble. They can get into markets and instruments which arent heavily traded by the big boys. That can mean greater market inefficiencies providing better profit opportunities. They also dont have to worry about all the institutional limitations and can play whatever market or instrument suits them. That said, for real trading success the individual trader must treat trading and the markets in a professional manner. By that I mean trading must be looked up in a businesslike fashion, not as a hobby.
Do I have to accept some big losses in the beginning?
No, you dont. It is certainly true that as a new trader you are going to be prone to making mistakes which will cost you money. Thats part of the learning process for pretty much all traders. Having said that, the big losses come from one of two things. One is starting with a larger account than you should. The other is not following a good risk strategy. When you first move to live trading (after spending sufficient time demo trading, of course) you should do so with as little capital as you can reasonably get away with. The less money you have at risk in the markets, the less you stand to lose when things go against you. For most traders the first goal in their trading development is to get to breakeven. That means youll probably be losing more than you win to start off until you get yourself stabilized. If thats going to be the case, then why expose $5000 to the markets if you can get away with $500? Switching over to the risk side of the equation, taking on too large a position relative to ones account balance is very often the reason for large losses by new traders. In fact, its the main reason why they blow themselves up so frequently. If you trade very small positions when you get started, any losses you take will be relatively small. Yes, the gains will also be small, but that doesnt matter. Your goal as a new trader is to develop consistent trading, not to make a killing on your first trade. Attempting to do so would be a major mistake. As you develop that consistency, you can increase both your account size and your per trade risk. Copyright 2010
New Trader FAQs
In this day of micro FX accounts (and for non-US citizens and residents) and Contracts for Difference, the answer to this question is a definitive NO! I recommend that new traders should start with a capital base of no more than US$10,000. The types of accounts available today make it easy for the trader to learn his craft without risking big losses. With a $10,000 account, a trader can risk a $10 for every hundred pips. In this way, trading risk places no financial burden or pressure upon the trader. The problem is that new traders are too anxious to make money as soon as they start trading. Their aim should be to learn their craft and prove to themselves that they can consistently make a return from the markets. Start small, know you can make money, then increase your capital base.
How long does it take to make a stable income from trading?
This question actually presumes the trader is after a stable income from their trading. Not everyone does or is in a good position to do so. While there is certainly trading for a living being done, I would contend that most traders are actually trading to build wealth rather than for steady income. Having said that, its also true that many who trade for wealth building also have a goal of eventually trading for a living. Most will never get there for any number of reasons. In some cases, the methodology they use is not suitable for producing predictable income. In many cases they are not sufficiently capitalized. In still others, they are not well suited to the timeframe or pressure of trading for a living Regardless, the answer as to how long it takes to be consistently profitable is always going to be It depends. Its kind of like asking how long it takes to learn to read. Practice is the largest requirement. Learning to trade and learning to read require a lot of actual doing to develop ones abilities. The more frequently that practice can be done the shorter the time to success. There is the theory that acquiring any new skill to the level of mastery takes about 10,000 hours of practice. That may or may not be the right number, but its useful as a baseline point for discussion. How long it takes one to reach that 10,000 hours is probably the largest part of how long it takes someone to get good at trading. That means someone who can day trade all day long is likely to develop much more quickly in terms of days/months/years than someone who can only put a few hours a week into it. Either way, its going to take time. If you put 8 hours per day into your trading its going to require 1250 days to reach that 10,000 hour mark. Its not a quick thing, which is definitely a contributing factor to why the failure rate is so high.
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New Trader FAQs

Of course there are things which can accelerate or decelerate the learning pace. Getting good guidance and/or instruction can speed things up considerably. Having complimentary skills will make developing the new skills and know-how that much quicker. Motivation is important, of course.
I think it depends on the size of the income relative to a traders capital base and whether a trader is deriving his income only from trading. The discovery of Myelin and Daniel Coyles learning model ha s reduced the amount of time necessary to master an activity. Prior to Daniel Coyles The Talent Code, Anders Ericsson suggested that it would take about 10,000 hours to master ones craft. Coyles model has significantly reduced this time; nevertheless, it goes without saying that we can expect a learning period of one or two years before we can produce a consistent return from the markets.
How do I start trading?
Read my book, The Essentials of Trading. I dont say that to be self-promoting or flip. I say that because I specifically put the book together to guide someone new to trading. There are a lot of things to consider as you get into the markets. The failure to realize that is something which trips up a lot of new traders. They jump into the markets without thinking about things like trading timeframes and risk tolerance. They have no plan. So, calm yourself. Take a few deep breaths. Push those thoughts about making it BIG in the markets aside for the time being. Then start learning what the markets all about and figuring out how best you could approach them.
Read, read, read! There are many good books on trading and investing! Read them and then read them again! Online sites like Investopedia.com can be extremely helpful in learning more about the stock market, trading terms, descriptions, and strategies. Decide what kind of trader you want to be. If you have the ability to look at a streamer and computer screen all day long, then perhaps you might want to be a day trader. If you are working during market hours, you would look to be a swing-trader or longterm investor. Learn about the company in which you want to trade/invest in! Read their annual reports, quarterly reports, and other documents on file with the Securities and Exchange Commission. Look for sound financial statements and good management skills in your company. This is generally called "Fundamental Analysis" which Copyright 2010
New Trader FAQs

looks at that information to gain insight on a company's future performance. Learn to read the company's stock chart. This analysis of stock charts is also called "Technical Analysis" or T.A. You evaluate the stock by studying statistics generated by market activity, such as past prices and volume. And there are different types of stock charts too - line charts, bar charts and candlestick charts are examples. Read up on the technical indicators of a stock chart such as Accumulation/Distribution, Bollinger Bands, and Moving Average Convergence/Divergence (MACD) for example. Look at short term, intermediate, and longer term time frame charts. One chart time frame alone can often be deceptive. The "big picture" is often telling in where your stock is headed. When you feel you are ready to trade, start small! Trade just a few stocks at a time. This way you don't have much risk involved and you can build confidence in your trading abilities over time. And, never put all your money into one stock! Diversify your portfolio! Also, deposit money into your portfolio continuously so that you have more money to work with as you become more experienced. Even small amounts deposited regularly into your account can add up over time! You should also spend extra hours a week studying up on the market, checking the performance of your stock and finding out about upcoming events, such as when the company will report earnings, which might affect the stock price.
How difficult is it to trade?
Trading is at once one of the simplest things in the world and one of the most challenging. In some ways it is a lot like blocking in volleyball. Blocking is, at its most basic, just jumping with your hands above your head. Yes, there is a little be more to the optimal mechanics, but not a great deal. Its an easy skill to execute (assuming youre tall enough or have enough of a jump to get your hands above the net when you do it). At the same time, though, being a good blocker is a challenging thing. Getting it right depends on working it into the bigger team defensive game plan and also understanding what the other team and the one hitting the ball is trying to accomplish. The success rate isnt very high in terms of actually getting blocks, so it can be very frustrating, but putting up a good block doesnt always mean actually blocking the ball down to the floor. Trading is similar. Its easy to actually execute buy and sell orders. The hard part is developing a good game plan, having the right strategy which integrates into the plan, picking the right opportunities, and not letting the failures (perceived or otherwise) detract you from sticking to the plan. That part can be as challenging as anything youve ever done. Theres a reason why a large proportion of traders fail, and its not because theres a conspiracy against them (most of the time anyway).
Trading itself is easy, probably too easy for most people and that in itself is why they don't succeed. Copyright 2010
New Trader FAQs

Trading these days is as simple as jumping online, opening an account which can be funded with your credit card, starting the online program and buying stock/futures/currencies Having the right tools doesn't make a tradesman or a professional. Personally, I would love to paint and I could go out and buy a palette, the best paint brushes, the best paints, a first class easel and so on but this wouldn't make me another Rembrandt. So why do people think trading is too easy? We have seen the gurus who make unlimited income driving flash cars living in millionaires rowand they aren 't any smarter than I am so why cant I do that? If you think its that easy, put $1000 into an account and try it. You could do that in as much time as it takes to read this article. Then, when the markets are open, try buying and selling and see how you go. Good luck. Very quickly I am sure you will find out how hard it is to be a consistent winning trader. It just isn't that easy.
One of the best books that explores this subject is Dr. Brett Steenbargers Enhancing Trader Performance. Dr. Steenbarger explains that trading is a performance discipline similar to becoming a professional athlete, actor, or musician in which a person must progress through the stages of novice to competency and then to expertise, and this progression cannot take place in six months or a year. A trader must combine his or her unique skills and talents into a disciplined method that takes advantage of the market and timeframe that best suits the personality, and that takes trial and error to uncover. Trading success is often the product of finding a unique match between your personality or individual psychology, a proven, edgewww.newtraderfaqs.com

based trading strategy, and the market environment in which you trade. Even if you master your emotions and have an edge-based strategy, the market environment changes over time and cycles through different periods of trendiness, volatility, and other characteristics (not to mention changes due to regulation). A trader must find low-risk opportunities, manage positions and risk, use a consistent money management strategy (finding a balance between risking too much which invites the risk of ruin, and not risking enough which does not allow a trader to overcome the costs associated with trading), manage the personal emotional state (balance between greed and fear), and also adapt quickly to changes in the market or timeframe. No one should expect to become a concert piano player or professional golfer overnight (or from a few months of lessons), but anyone can learn to play the piano or play a round of golf and achieve competency if you enjoy these activities. It is thus very important to set reasonable goals, sustain motivation, and have the passion to overcome the initial stumbles in the learning process and realize that becoming a trader - like any serious performance discipline - will likely take years and not months.
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New Trader FAQs
What is the percentage of people who succeed in trading?
Ive seen all kinds of different numbers, but nothing which I think could be taken as the one. Some folks say this % fail or that %. Ive heard brokers figures suggesting that something like 2/3rds of new trader accounts are closed within a year. The problem is theres no consistent way the figures are reported. For example, broker account closures may have nothing to do with trader performance and everything to do with people looking for the best broker and trying out different ones along the way. Moreover, determining what percentage of people succeed depends on how you define success? If youre talking about consistent triple digit annual rates of return then the figure is going to be a minute fraction of 1%. If youre talking about just beating the rate of inflation, the figure is much, much higher. Still, there are a lot of things which work against trading success, especially for some one new. The percentage of those who last long enough to get good at it isnt very high. But none of that really matters on an individual basis. Its best not to worry about how well or poorly others are doing. Everyone is going to perform differently for a vast number of reasons. I see too many new traders getting caught up in relative performance figures. You should focus only on your own as they are the only metrics which matter.
The accepted figures are anywhere from 5% 10 % succeed at trading anything, but this is true in any field. New businesses have this kind of success rate, as do new salespeople in the fields of Real Estate, Insurance or selling copiers, etc. It is also an accepted www.newtraderfaqs.com

belief that most new traders will blow up their accounts within the first 90 days of trading. So naturally the question that begs to be answered is Why are there so few success stories? Sadly the answer is an easy one and can be summed up in a four-letter word. What word? Work lazy, OK thats two words but the truth is it is a lack of commitment and effort plus, a lack of trading capital. Those who are willing to put in the effort and take the time to learn a trading system (heck, any system to begin with will do); and do the things a new trader needs to do to be successful at trading, they can be successful at trading or anything else for that matter. What does a new trader need to have in order to have a chance of success? First, money is most important. Far too many new traders start their trading career with too little money. They come in with the minimum amount of cash to open their trading account and most have already decided they are going to lose it. Then, to top it off, since they believe trading Forex (or anything for that matter) is easy money they take very little or to no time to learn anything about it. Shortly after they have blown up their account and put themselves through the agony of losing money and the anguish of punishing emotions they start to blame everything and everyone else for their failure (even in some cases God), except the one where the blame squarely falls on, themselves. It is absolutely fascinating to watch just how much punishment so many people are chomping at the bit to inflect upon themselves; it is almost flabbergastingly astonishing. I am not striving to dissuade you from trading Forex or anything else; but you must understand that success is not a given and everything must be in balance if you wish, in time, to be successful. Not just successful at trading but successful at anything you do in life. In school it was simple; if you were diligent in your studies, prepared for your exams, knew your material and could answer any question the teacher would throw at you in open class, you got an A. Copyright 2010
New Trader FAQs

If you were just turning in homework but did nothing else you got a C and if you did nothing at all you got a D or an F, simple. In Forex trading you either get an A or an F. There is nothing inbetween.
Through the years, Ive heard different percentages with some saying 90% to less than half succeed with probably the other half a combination of breaking even, calling it quits, or succeeding to varying degrees. The best thing I can tell you about how many succeed versus those who dont comes down to two things: commitment and approach. If you, as a novice trader, are willing to do what it takes then you are in the winning percentage of all winning traders because losing traders are not willing to do whatever it takes. Doing whatever it takes to become successful trading usually comes down to these very basic things: Willing to give yourself the time to learn the ropes. Willing to be bad at this in the beginning while having the internal fortitude and confidence that if you keep applying yourself to the basics you will get incrementally better and stay on the Path to Mastery. Understand yourself. Understand the markets. Be willing to invest in your education. Get a good education from high quality sources.
Each of these areas have trip-mines in them but fundamentally becoming successful at trading comes down to understanding yourself and the markets by educating yourself with high quality www.newtraderfaqs.com

education all the while realizing this is an investment in your vocation during which time you will have the patience, confidence, and internal fortitude to stumble forward on the Path to Mastery. Persistence and consistency are omnipotent in all things including mastery of trading. The second part is approach which is, in trading, counter-intuitive versus intuitive. What that means is that as a novice, or even an advanced trader, the approach you take will often seem straight-forward. For example, if you want to make great trades then you need to make great entries. Sounds logical, doesnt it? The problem is that over-emphasis on entries leaves you vulnerable to risk. If a novice spends his time obsessing over entries while neglecting risk control they leave themselves open to disaster, frustration, and, inevitably, quit in despair. If you observe the sequence of events, then its apparent why so many traders quit within a year. The counter-intuitive approach is to set out respecting risk and learning everything you can about risk management as well as position sizing. Its a boring topic compared to entries but if you take the counter-intuitive approach you will be rewarded often enough with a long string of successful winners while cutting your losses short as well as have a long shelf-life as a trader. Remember, find good approaches from traders who have paved the way for you and learn what you can from them either personally in coaching or seminars, listen to interviews theyve given, or books theyve written. All these are valuable investments in your education as a professional speculator and trader.
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Trading Education
Section III
Trading Education
Getting the knowledge you need
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New Trader FAQs
Is it worth spending money on trading educational resources when there's so much free stuff available?
One of the things that comes up on a fairly regular basis in the forums and other trader hang-outs I visit is discussion of free information on trading, analysis, systems, and whatever. Of course, forums are generally exactly that - sources of free information and opinion. They can be a quite valuable resource. The two ones I like a lot are Trade2Win (wide ranging) and BabyPips (forex newbies). You can find me posting as Rhody Trader there and elsewhere. Heres where I have a problem, though. New traders often ask what book(s) they should read, course(s) to take, and that sort of thing. Its a natural and advisable thing for someone just getting started to do - ask for guidance from those whove been along the path they are taking. The problem is invariably someone will say something to the effect of: Dont spend your money on that stuff. All the information and answers you need can be found for free in this forum (or site, or whatever). While Im all for being thrifty and not spending money needlessly, there are times when a small investment can pay off many times over. Notice, I used the term investment there, because when youre talking about educational material or something likely to help your improve your trading performance thats exactly how you have to look at it. And when youre talking about investing youre talking about what you get in return for what you put in. Its a two sided equation. Whats the Value? I had a conversation recently with the gentleman who was a real mentor of mine as I got started in the arena of professional market www.newtraderfaqs.com
Trading Education
analysis. He was one of the founders of the company for which I worked. We oftentimes took the same train home in the evenings, so I had lots of opportunity to tal k with him. Hes been in the markets since the 70s and has traded all kinds of different things. The interesting thing, though, is that as successful as hes been in trading and business, hes one of the biggest bargain hunters youll ever meet. I dont mean to say hes cheap, as he has no problem spending money, but he knows how to get the most value out of what hes paying. When I visited him at his office a few weeks back we got on the topic of spending and value. Its a thing that some folks understand very well, but I think most do not. Value isnt always about how much or how little money you spend on something. Oftentimes that has little, if anything, to do with the price tag. Money, after all, isnt the only thing of value you have. What about time, for example? Time Isnt Money - Its More Valuable! If a book that costs you $50 can save you 10 hours of searching for the same information across a wide array of websites, is it worth spending the money? Heck yeah! I dont know about you, but my time is precious. I need to make sure its applied in the most meaningful fashion, and flipping through websites hoping to find a little nugget here, and another one there, and yet another bit on this other site is not something I have time to waste doing. Did I always think this way? Nope. I can actually tell you exactly when it started changing for me. You see, I have done computer programming for years, though never professionally. Its something Ive used to my benefit during a number of stages along the course of my personal and professional development. I reached a point a while back, though, where I realized I was being foolish. Id been spending hours and hours learning programming techniques and developing custom website functionality to accomplish the things I wanted to do on my various website projects. I figured that by doing so I was saving myself money. I was, but the cost in time made it a poor investment. Others with more skill and experience than myself had already developed the stuff I needed. I came to realize that it made much more sense for me to just spend the money and subscribe to a service or buy some utility to serve my needs than to take the time to do it myself. Copyright 2010
New Trader FAQs

This was a light bulb sort of moment. I realized I was spending something either way. It was just a question of what I should be spending. Whats my time worth? Its hard to put an actual figure on it in most cases, but one things absolutely for sure - the less you have the more its worth! Consider this example. I can spend 20 hours on a project, or I can spend $200 to accomplish the same thing? If I value my time at $5/hour, then it makes sense to do it myself. If, on the other hand, I value my time at $100/hour, then it would be completely insane to not spend the money. Granted, there are circumstances where the value of the time spent on the project cant be equated this way (spending time with loved ones, exercise, etc.), but you get the point. Getting the Most Out of it All Its more than just being able to get an aggregated information source like a book, though. Theres also the issue of presentation and your ability to get the most out of whats provided. Certain formats and approaches are better than others. As Ive said, forums and the like can be great resources. They are an excellent way to get answers to specific questions. They are about the least efficient way to learn about a broad subject, though. The information is scattered all over the place and you have to filter through a lot of banter, opinion, and just plain incorrect stuff to get what you need. And if youre new to the subject, how do you even know how to do that filtering properly? Keep in mind that forum sites are designed for discussion. They are not designed to transmit information the way a book or seminar or video is. Its just a fact of their structure. The same can be said of many websites given the way they cross link and allow (or even encourage) the reader to bounce around without following a well intended course of learning. A well put together educational offering (and Im definitely not saying that all fit the bill) is designed to build one topic on another as it progresses, and to provide the individual with the most efficient path to learning the material. Websites are often designed to attract traffic and/or advertise something. Those two purposes are often in conflict. And Its Not Just Educational Stuff! When I speak of value and trading related things, though, Im not just talking about books and such. Im also including services and www.newtraderfaqs.com
Trading Education
other products. If theres something which can provide you the information you need to trade effectively that does so at a lower cost (monetary or otherwise) of you doing it yourself, then its a good investment. In a world where most traders are part-timers, this is especially important. I use services like Daily Graphs to help me identify good stock trading candidates because they help me quickly find the stocks which fit my criteria without having to spend loads of time looking for them myself. I didnt always think this way, as Ive said, but I just dont have a lot of time in my life to waste that way. Now I take advantages of tools and whatnot which can do thing more efficiently than I can myself, so I can focus my time on things which are going to generate more reward, in one fashion or another. Know What You Need All that said, though, theres one important thing I want to leave you with. Being able to get real value from any time or money you invest in your trading is very dependent on knowing what it is you need. It doesnt matter whether you spend five hours or $50 on acquiring information about something if its of absolutely no use to you. Thats a waste no matter how you look at it, so be conscientious and really think through what it is you need for the next stage in your trading development or to support your trading efforts effectively
At first blush, I would have to agree with premise of the question and say yes. Yes, there are a lot of free sources that you should take advantage of and you would be foolish not to. My trading career got started back to the late 80s when I first saw the movie Wall Street with Michael Douglas and a very young Charlie Sheen. That movie gave me the magic spark to begin to learn how to trade and the only resource I could think of was the public library and the library at my high school. Copyright 2010
New Trader FAQs

I might also add that it took me 10 years to find a workable system from all that information which I distilled into a workable framework to trade off of. Then it took me several years of hit and miss to work out the inner game of trading and integrate it with that trading framework not to mention that I busted up 3 trading accounts along the way. In fact, if you study a lot of legendary traders I think you will find that they all started the same way whether it was Jesse Livermore, Marty Schwartz, or William ONeil who just did a lot of research alongside trial and error. In life there are 3 primary areas that you can invest to get more leverage in whatever you are doing to get the results you want. They are: time, energy, and money. If you have more time and energy than you do money then scan through charts on any of the free charting websites, check out the library, browse the bookstores, take part in forums, etc. With the internet you have access to a universe of information about the markets that I could only dream of as an aspiring trader when I started out. But, if you want to cut your learning curve then get a mentor and invest in some solid courses by good traders that match your personality and trading goals. It will cut down on the learning curve dramatically and will help you start making money sooner. Bottom line, if you are truly committed (and make sure you do a gut check) then you do the best you can with the best you have in the moment and do better as things go along. If you do that with trading, or in life, youre a winner no matter what.
YES! This is an industry in which you get what you pay for. Just as you dont get great executions, tools and research at the cheapest online brokerages, you must invest your time and money into educational resources if you want to increase your odds at building www.newtraderfaqs.com
Trading Education
your knowledge base and your account. Thats not to say all the stuff out there is good and the most expensive materials are not necessarily the best, but if you do enough research and use common sense (dont trust anyone who says they will teach you to make millions within a few months!), you can discover resources that will help you become a better trader.
In 2009, this became a pet project for me. New discoveries in neurology on how the brain works and learns have cast new light on the role of trading education. Indeed, it has cast new light on the way our educational system works in general. In our schools and universities, the way we are taught to learn is firstly for someone to lecture and then for us to do some practical work; finally we are graded on that practical work. The discoveries in neurology show that this is not the best model. Humans learn best to the error method by identifying the gap between the desired action and the actual results. By noting the gap and taking steps to close it, the learning process is augmented and enhanced. The discoveries mean that the way we learn to trade has to change. Generally, we learn by attending a few seminars and by reading a few books. We then proceed to learn by trial and error. It is this process, I believe, that is most responsible for industrys poor success rate. If the success rate for traders is to improve, a new educational model has to be found. This model will include two elements: 1. The first function will be to teach the newbie trader to integrate intellectually the knowledge necessary for trading success. 2. The second function will be to teach the newbie trader to apply this knowledge.
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New Trader FAQs

It seems therefore that the days of the two-day seminar as the fundamental block for teaching novice traders their craft will soon end.
Yes. Allow me to explain. Thanks to the internet, theres a lot of information on medicine and surgical procedures available. How advisable would it be to train as a doctor just by reading the free information available? Ubiquitous communication enabled by more efficient/cheaper networking technology, and given investors and traders access to educational resources but it also has a dark side. Investors have added to their financial-information bias. I define this as access to overabundant financial information that has seduced investors into thinking that they know a lot and they can keep up with everchanging landscape. But in reality, it has generated more heat than light; information is no substitute for knowledge or actionable insight. On the contrary, the free information might affect our learning in negative ways and traders might have to spend time and money unlearning those detrimental trading behaviors. The famous Asch Experiment, tries to show how perfectly normal human beings can be pressured into unusual behavior by authority figures, or by the consensus of opinion around them. (www.experimentresources.com/asch-experiment.html) In their book, Sway: The Irresistible Pull of Irrational Behavior, authors Ori Brafman and Rom Brafman talk about this as, regardless of how independent-minded and steadfast we may think we are, we are all tempted at times to align ourselves with a group. We may worry that if we voice an unpopular viewpoint others will doubt our intelligence, taste or competence. So, the free stuff might actually be causing us greater harm than good. I do believe that we need to segregate true learning from what someone aptly called as `death by information overload. www.newtraderfaqs.com
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Spending money on educational resources will definitely reduce the tuition, that traders end up paying to the school of hard-knocks (their trading mistakes) and also, shorten their learning curves.
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New Trader FAQs
If you know so much, why don't you just trade?
Spend enough time in the trading arena and you are sure to run across someone saying that those who sell systems or books or other information are only doing so because they cant make money trading themselves. You might even be guilty of thinking or expressing a view something like that yourself. Yes, I said guilty. I use that term intentionally because it represents an incorrect mindset. If you are a good trader why do you need me to fund your effort. That does not make sense but it tells me you make more money selling than you do trading I received the above via email. It was in response to an invitation I sent to my mailing list to pre-order a new course I was putting together. Its on the subject of using simple chart analysis methods to recognize market strength and weakness. This is stuff I use every day and I had been thinking for some time about recording a video (or set of) to share them. Id finally gotten around to doing just that, and was using the proceeds to support the volleyball organization I used to run. Now I included the above information about the volleyball fundraising in the email I sent about the new course, so Im not sure where this particular emailer was suggesting that I make more money selling than trading. I wasnt personally making an y money selling, so there was no comparison to be made. Basically, this person was telling me that I must be a poor trader since Im in the education business. Of course they know next to nothing about me, so they really have no basis for drawing any conclusion one way or the other. This sort of thinking is indicative of a failure to consider all the reasons why someone might get into education in the first place. Yes, there are certainly those out hocking systems and whatnot who are insincere and unscrupul ous. Thats the reality of things. Of www.newtraderfaqs.com
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course trading is hardly alone in that. There are always going to be con artists in every venue where they see the potential for profit. But thats really not the main point of this those who cant trade teach thing. Lets step back and take a look at the wider those who cant do teach thing. Its a complete crock, of course. Think about it. If no one who ever could do taught, then the bulk of our educational system would be gone. Think of all the college professors who are experts in their fields who both do and teach. If no one who ever could do shared what they do, no one would ever learn the doing! For my part, Ive been active in educational efforts of one sort or another for many years. I started coaching volleyball while still in high school. I was talking with my alma maters Finance Department chair about program adjustments as soon as I got into the professional market arena. I was certainly not getting paid for either. It would be more than a decade after I did my first volleyball coaching before I finally started getting paid for it (subminimum wage if you count the hours I was putting in). I didnt earn a penny on trading education until Wiley published my book, The Essentials of Trading, which was after I had already spent a couple of years contributing in the university classroom (not being paid) by presenting much the same material to college students as ended up in the book. And if you think Ive made a lot of money off my book you are sorely mistaken. I love helping people learn, develop, and reach their potential. Thats why I spent so many years getting paid very little to coach volleyball full-time. Its why I spend much of my spare time thinking about ways I can help people with their trading and investing. Its very rewarding. I fully expect to be an educator on some level or another for as long as I live, regardless of my level of wealth. There are definitely other people out there like myself. Im certainly not alone, so lets try not to be so cynical about things. And other motivations aside, do we begrudge people for making a secondary income? If you have a job and you trade on top of that, its the same thing. Youre doing something additional to improve your financial situation. Its a bit hypocritical to cast aspersions on folks who pursue an income from selling trading educational material. If they are putting out complete crap or its dangerous, then criticism is certainly fine and justified. If, however, they are providing at least as much value to those who are purchasing their Copyright 2010
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products as they are receiving from them, then whats the problem?
I teach, write, and instruct for very selfish reasons.it makes me a better trader. Every time I sit down to write or talk on the phone with someone I have to know my subject inside and out, up and down, and backwards and forwards. Sure, I love to teach, talk about the markets, and I make some money on my instructional material, but nothing compares with deepening my understanding of the markets and taking my trading to another level. The really cool thing is not only the better I teach or instruct the better trader I become, but also the better trader I become the better the teacher it makes me. The two dynamics reinforce one another. James Patterson, the best-selling author of the Alex Cross series and a New York Times bestseller, still works his job at an ad agency even though he is a prolific author of crime fiction/drama and movies have been made of his books. Al Gore taught journalism at Columbia University while campaigning for the environment and sitting on the Board of Directors for Google. Many CEOs and business leaders teach at local community colleges even though they run gigantic organizations. Life is meant to be abundant and have lots of variety so though I love trading I hate sitting in front of the monitor all day and, in fact, even my trading style reflects that. So, if you think you have to give up everything to trade I think you would agree that no amount of money can make up for an imbalanced life of such narrow focus.
Trading can be very lucrative, but trading profits are by no means guaranteed nor do they increase steadily with more time and effort. In fact, my greatest trading gains have some suddenly, when I was experienced, knowledgeable and quick enough to take advantage of ideal opportunities. Teaching others is not only more www.newtraderfaqs.com
Trading Education
fulfilling, but the income derived from it does increase quite steadily and is based on how much effort you put in and how successful you are as a trading teacher. I encourage all successful traders to share their knowledge and experience through books, blogs, DVDs and seminars because good information is difficult to come by in such a sham industry filled with frauds and marketers. The beautiful thing about my business model as a trading coach is that I just have to pass on the lessons that took me a decade to learn, thus saving my students time and money.
If you have been trading and teaching long enough, you will strike this question. No doubt there are some teachers that are in the game for the money. In some respects, we can say that for most of not all teachers money will be a motivation at some level. But at least for me, it is not the main motivation. I teach because Im good at it and because ultimately I want to leave a legacy. Think about this: few would have heard of Bernard Baruch. Yet in my view, he is one of the best traders of all time. On the other hand, many more would have heard of WD Gann. The reason why Gann is better known is because he made an attempt to leave for future generations is ideas on trading. This is my chief reason for teaching. There are others: 1. The friends I make. 2. The stimulation received from teaching makes me better trader and 3. Often my best and most novel ideas come from questions raised from the students. The western world has achieved its dramatic progress over the centuries because successive generations of built on the work of previous generations. This can only happen if were willing to pass on our knowledge.
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New Trader FAQs
Good question and the answer is simple. To make money. Unfortunately I dont have a million dollars of risk capital to trade futures. If I did you probably wouldnt see me. Id keep to myself in my little corner just chipping away doing my own thing happily trading away. Nobody would know me. My audited results for the last 8 years have been a CARR of 28%. If I had a million dollars of risk capital I could comfortably make between $200,000 to $300,000 a year, pull out $150,000 to support my family and still leave money in my trading account to allow it to grow. And you wouldnt see or hear of me. But unfortunately I dont have a million dollars in risk capital so I run my advisory and educational business to complement my income. As I said its a good question with a simple answer. To make money. However: I will say this. I do enjoy getting out of the house I do enjoy teaching I do enjoy making money for others through may advisory business I do enjoy presenting I do enjoy meeting people so Ill have to see how I feel in the future when my account gets up to a million dollars to see how I feel about it. But at the moment I do it to make money so that it allows me to keep my risk capital and trading profits in my trading account.
I actually do trade! I have traded for a living since 1995 but over the past few years, I have started sharing my experiences and knowledge for a cause and as a tribute. A few years ago, I went through a terrible personal tragedy that made me question the basic premise of my self-chosen profession trading for a living. My father was a victim of a robbery- he was killed for a small amount of money. This totally turned my world upside down. Dont get me wrong, I love trading, the markets, the returns and the constant challenges they bring, but I started wondering, What is the social value of a good trader? My sisters, one is a doctor, the other one an engineer, both have jobs with social impact, and how could my profession make a real www.newtraderfaqs.com
Trading Education
difference in peoples lives and not simply strive to make money and chase higher returns. I decided to channel that feeling of restlessness into a mission of helping people more responsibly manage their money. I wanted to influence how people think about money, and to use the power of financial education in achieving their dreams, rather than haphazard buying and selling what the popular financial media highlighted as the story-du-jour. Secondly, my mother (who also passed away in an auto accident) always believed that women can do anything she was one of those women. She got her Doctorate degree in the 1960s when women were still not as active in the workforce. So, when I found myself trading, after a double Masters in Economics, I thought sharing my knowledge would be a great tribute to her and to women all over the world. Theres no one who teaches individual investors to manage their money well. Main stream Wall Street chases commissions and many popular trading educators have hidden agendas I have learned a lot of lessons the hard way, as most traders do. The path to where I am today has been absolutely incredible, strewn with two of the historically worst bear markets in a single decade and its been led to an unbelievable amount of learning about the market in a short time. So, I have become passionate about passing on that learning and helping others learn through my experience. I have started doing this at many levels from appearing in school sessions in front of kids and teach them the value of money, to mentoring individual traders and investors. I believe more traders, should be more vocal and share what the markets have taught them, with the world. After all, the purpose of life is to not merely make money, but find meaning as well. As Chuck Palahniuk aptly said, the goal isnt to live forever; the goal is to create something that will.
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New Trader FAQs
How do I avoid scammers?
I would focus on three things to avoid being scammed. First, dont allow yourself to get caught up in the hype of prospective performance. Weve all heard the mantra that fear and greed rule the market. Well, when it comes to trading services and systems and such, its more the greed part that dominates. Were provided claims or evidence of fantastic results, triggering our desire to see that kind of performance ourselves. As soon as we start thinking about the potential our resistance drops and we become more susceptible to the sales pitch. Second, know what you need and be focused. A great deal of money is wasted by new traders chasing after every system or book or course they come across thinking its the one that will finally unlock the secrets to wealth. Developing as a trader is like developing in any other area of life. When youre new you need to learn the basics. Once you have those taken care of you start expanding on that foundation, probably with at least somewhat of a specialization. In trading that could mean opting for swing trading, selecting technical analysis, picking forex as your market of choice, etc. The more you learn the better youll be able to make determinations on what you need to learn next to keep moving you along the path. And you need to stay on that path, not bounce from one path to another, because if you do youll never get anywhere. Youll just have a lighter wallet. Third, research the vendor When you buy a car you spend time researching models and manufacturers and dealers to find the right car for the right price with
Trading Education
the right support. You do that with all kinds of purchases if you care at all about not wasting money and getting what youve paid for from your purchase. Do the same thing with trading. Find out about whos making the offer or developed the material. Generally speaking, folks whove been around for a while are much less likely to be scammers than those who have just entered the market. Of course there are no guarantees. If, however, you keep the focus off all the money you could make and on what your particular needs are at that point in time, you are much more likely to come away with what you need and not just give your money away for nothing.
Ask for evidence that they actually trade. Ask for a copy of their real time results. Ask if you can talk to their broker. Simple.
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Markets & Instruments
Section IV
Looking at what youre trading
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What is the best market to trade?
There is no such thing as a best market. Every market has its advantages and disadvantages. The stock market is the most popular market. Its something thats easy for most people to conceptualize. Trading in stocks is trading in ownership of something, if only fractional. When people think trading they generally think stocks first. But stock trading has its limitations in some regards and can be overwhelming in others. The second most popular market has become forex. From the perspective of the retail trader (the average individual), this is a new market, one which only really developed in about the last decade. It offers the advantage of being a low capital requirement entry market, and of course offering 24-hour action. Forex is a complex market, though, which makes is more challenging in many ways than other markets. The fixed income market is the one for bonds and other interest rate driven securities. A lot of people equate that to conservative investing, but the fact of the matter is that the fixed income market is highly tradable, especially through futures on government securities like Treasury Bonds, Gilts, and Bunds. Fixed Income, though, is a market very much dominated by institutions and big players. Thats too bad because it can be a very interesting market. Commodities have grabbed the spotlight in recent years thanks to some major price increases - volatility in general, really. People understand commodities. Its an easy market to see the supply/demand dynamic, which isnt always the case in other markets. This is a market which goes through major cycles, though. What we are seeing now is akin in many ways to the action of the 1970s. For long periods, though, the volatility and participation was relatively low. Until recently, futures was really the only way to trade commodities. Now we have ETFs and other www.newtraderfaqs.com

alternative vehicles which make things a bit less scary given how quickly prices can move at times. The bottom line is the best market is the one that fits best your personality and interests. Ive personally been a professional analyst in all of them, traded them all, and enjoyed doing so. For the most part I stick with the stock market and forex, though, because they are easy for me to track.
The best market is the one that matches the profile of the best instrument that can be exploited by your trading method and maximized by that method for the highest profit with the least risk. Trend followers tend to like the currency markets, trading systems that maximize season patterns in the grain commodity markets, stock pickers that invest in value stocks will look for stocks trading below their fundamental valuations, momentum stock traders will look for high-earning stock leaders moving the general market higher, market timers will pick and choose key areas where they will go long or short the indices, option traders have the greatest versatility when trading because of the way they can structure trades to be either directional or non-directional trades, and there are many others. To gain victory over the markets it is more important to understand what you are truly wanting from the markets. Alot of people say money but if you can get an aspiring trader to spend more time and contemplate their values and inner motivations you find that people often trade for other reasons such as respect, sense of accomplishing something difficult, appear intelligent, etc. You have to spend some time understanding your own motivations so that you can begin there as a starting point and build upon that. Then, match your personality and tolerance for risk with a market and style of trading. Once you can reconcile that and mesh those key areas together and find a degree of harmony then you give yourself every advantage to fulfill your goals in trading. Copyright 2010
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What's the safest market?
The one that you understand. Even better, understanding the markets themselves enlarge the degree of safety. The most seminal aspect of trading the markets is understanding that the markets are a collective of human psychology that is expressed in the form of trends, price patterns, trade setups, price/volume relationships, etc. By understanding the affects of crowd psychology and their dynamic within the markets you are armed with what I consider to be the Ultimate Edge in trading. Mechanical trading systems and methods can fall in and out of favor as well as fluctuate in performance but the one constant in the market is human behavior itself. Trading systems/methods have changed over the years but human behavior has not. Once you understand this at a fundamental level and approach the market in an objective fashion armed with an understanding of the dynamic within the market itself and along with the psychological mindset of a winning trader then you are on the path of mastery.
What should I trade?
Thats not something anyone can tell you. Its something you need to decide for yourself. Most people end up falling into the stock market by default as thats the market most folks first thinking of when trading is discussed. Its a pretty straightforward market for most people to understand. Partial ownership of a company makes sense. Price increases and decreases based on rising or falling earnings is something easy to conceptualize. And it doesnt hurt that stock market quotes are found just about everywhere these days. The second most popular market for individual traders these days is foreign exchange (forex). This is trading in the relationship between pairs of currencies. Its become a very popular market because of the ease of access and lower barriers to entry, meaning low costs and small accounts. Also, the leverage available makes spectacular gains (and losses) possible and 24-hour trading attract many to the market. Forex is a complex market, though. Leverage isnt something a lot of traders understand and the fact that it is a market of relationships rather than individual elements can make it hard to understand for someone just coming in. Its also a market which can be roiled by a wide array of events, news, and data. Then theres the futures market where you can pretty much trade just about anything you can think of trading. Originally, the futures market was just focused on commodities (some references still refer to it as the commodities market, in fact), but in the 1970s and 1980s the market started expanding rapidly into financial products like currencies, fixed income, and stock market indices. Futures, though, arent for everyone. Its a leveraged market like forex. It also has higher barriers for entry than some other markets because of the fixed contracts involved. Copyright 2010
New Trader FAQs

The bottom line is that you need to look at the aspects of the various markets and find the one that suits you best. That means the one that fits your interests, your willingness to employ leverage, and your capital resources.
Is forex trading a scam?
Ive been involved in the forex market as a trader and/or analyst for more than a decade now. While there are always going to be those (in any area) who operate in a less than ethical fashion, the majority are above board. As such, no, forex is not a scam. The primary argument folks who make the scam claim put forward is that fact that forex brokers take the other side of your position in their market making actions. They thus conclude that said brokers are trading against you. First of all, not all forex brokers are market makers. Some are ECNs. They simply pass your orders through into the market like a stock market broker does. Since they dont act as market makers and take no positions they do not earn the spread, so they make their money from commissions instead. Oh, and by the way, not all stock market transactions are straightpass-throughs to the exchange either. Some brokers act as market makers in certain stocks, so if you trade those stocks through them they are doing the exact same thing as the non-ECN forex brokers do. I dont think anyone ever calls that a scam. Further, the whole basis of the interbank market - and all OTC markets - is transactions between buyers and sellers and market makers. In interbank forex, the banks are the market makers, both with and amongst each other and with the funds and companies that are their customers. On top of that, there are market makers in all markets. They are the ones who provide steadily liquidity by always being ready to provide a quote and take the other side of a trade. Without them the markets would operate much less smoothly. As a rule, market makers in all markets look simply to make the spread over and over and over again. They dont generally look to take positions, but rather to be net neutral.
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New Trader FAQs

Forex brokers who act as market makers operate in basically the same fashion. They are just offsetting customer longs and shorts against one and other. Do they sometimes have an overbalance? Sure. In such cases they have internal processes which determine whether they keep the exposure or whether they offset in the market. Different brokers handle things different ways in that regard. One of the other arguments scam claimers make about forex brokers is that they run peoples stops. Guess what? That gripe has been in the markets for years - all markets. For traders in the futures pits are supposedly notorious for that kind of action. Heres the thing, though. The markets and market makers exist to facilitate transaction flow and make their money from it. They are going to do whatever makes sense to increase that flow. That periodically could include running stops. That sort of action, though, is a bit easier in the futures pits than in the widely dispersed forex market. Brokers and dealers generally keep their prices tightly in line because if they dont they can lose business. As such, stop running is not something easily accomplished. It would take a highly coordinated effort among a wide array of market makers to do that kind of thing. In most cases, the claims of stop running coming from forex traders is nothing more than people getting burned by putting their stops too close to the market and getting taken out by normal volatility. The question I would ask for anyone who is making a claim of forex being a scam is whether they can demonstrate a trading system with a meaningful track record of success and that they followed said system as designed. A lot of traders spend a relatively short period of time in demo trading and make good returns with no real proven method, then find that things are very different when it comes to real money. This is more about the trader than the broker. The idea that your broker looks at your specific open positions out of the many thousands of trades that might be open at a given time among all their customers - and make decisions based on it is egotistical and self-centered in the extreme.

If you really have a problem with market making forex brokers then trade through an ECN.
In any economic times, one thing remains static: World trade will always exist and there will be a need for a producer in one country to receive payment for his goods from a buyer in another country. The global market requires currency conversions every day, and now that this has been opened up to all market participants, currency trading far exceeds the volume of other tradeable markets. Currency trading has some very favourable features: It can be very highly leveraged, it trades 24 hours a day and it cant be suspended or delisted like a stock can. Currency trading lends itself to any time frame or strategy that a trader may develop, and as the largest and still growing trading forum in the world today, currencies will become even more popular in time. There is a valid criticism that currency trading, or forex as it is known, doesn't have a controlling exchange and indeed there are different forex markets. If you take the time to investigate forex trading, you may well find that this is an exciting arena to become involved in. I look at the currency trading for a particular country around 6am of the weekday morning, this seems to attract a lot of attention as the local traders look to the overnight events in relation to the effect that the previous night trading may have on their domestic currency. Tread carefully and warily, but don't dismiss forex as a potential market.
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New Trader FAQs
FX being a scam it is more a matter of perspective than anything else, since the questions gravitates to perceptions of market makers and how some operate. It should be of no surprise to anyone that since the market maker is providing liquidity for the market they expect to profit handsomely for their effort. Unfortunately, some market makers fix their platforms the way some casinos fix their roulette wheels. Market makers get paid by receiving all or part of the bid and ask spread. If they have a bank or banks as liquidity providers they all split the spread; also, the market maker is taking the opposite side or (put another way) offsetting the trade. Therefore, when a trader places an order against a market maker and wins, the market maker loses. Needless to say market makers are not in business to lose money and in many cases market makers will do devious things to ensure they win. Like with the mafia Its not personal, its business yet to the novice Forex trader some of the things a market maker can do is shocking; in many cases a new traders perspective of the world can radically change. I think the real question that is How can you tell if you are trading against a dishonest or unethical broker/market maker? Once again I have to mention it is a matter of perspective. A market maker has one objective, to siphon every penny from your trading account into theirs. They believe this is their right since they are putting up their money to create liquidity and in many cases the technology for the online platform as well. That can be a huge expenditure of cash and they want a return on their investment (ROI). This is not a good thing nor is it a bad thing; it is an is thing, if you understand what I mean. You can also look at it as kind of a high-stakes poker game; you want to take the market makers money, right? Well, guess what? The market maker wants yours as well so the only question is who will win? Now I want you to think about something for a minute or two, in fact I want you to imagine yourself as a market maker; Ill tell you what, I dont want to spoil whats coming so I will re-ask this question in a few minutes www.newtraderfaqs.com

Problems do ensue for the new Forex trader, if they fall for the siren song of a non-regulated or lightly regulated market maker; since some are in my humble opinion blatantly unscrupulous and flat-out dishonest. OK crooks then. They first deceive and then trick new traders into giving them all their money. Once the account has been sucked dry they then cast their net to find another nave trader to gut and eat; no lets change that image, to me they are more like vampires not fishermen. Fishermen only catch and eat or sell fish, for the fish its over pretty quick, no pain. Greedy vampire market makers suck their prey dry in every aspect of life; emotionally, financially, physically, mentally, self-esteem and respect, all the while putting the novice trader through an excruciating hell. This continues until the novice gives up and with a final hurrah blows up their account. How do you separate the sheep from the goats or the saints from the aints? Clearly I know of these people and I am going to share with you how you can spot these people before they have a chance to hurt you; so you can protect yourself. It takes a few days of trading with them but soon after you will know If you have already opened an account with one, you can still at least pull out your remaining fortune and go to where you should have been all along. I will start out with a list of terms, then what they mean and how they work for the foreign market maker and against you. But first I need to share with you how they suck you in How do market makers attract customers? They go after the greed in human beings, how? Automotive dealers advertise with a Loss Leader, which is a low end car p riced at breakeven or even below (hence the loss) to attract and draw customers to the lot. What about market makers? They will offer incredibly low spreads showing how fair they are. So low as to be incredible like zero pip spreads (so, they are providing a free service to humanity?) Ask yourself this question, How can anyone offer a zero pip spread? Does that make any kind of sense to you? If you invested millions dollars to create a Copyright 2010
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platform and a market are you going to operate it for free and never get paid, not even for you initial investment? Who is going to believe such a story, you, me or some dummy novice trader that believes everything he or she is told by whosoever speaks to him/her? The overriding fact is most new traders have absolutely no clue or idea of what they are getting into. They do know how easy it is to become a trader and there are market makers offering her/him $1,200 BONUS to open an account and fund it. Most newbies however would rather listen to a salesperson than investigate. Once you look at and read the fine print that bonus (bogus) deal becomes clear; the fact is, a trader needs to trade 1,200 (mini 10,000 unit contracts) contracts to get the full balance bonus. What a DEAL! Market makers know new traders do not last that long because of their gullibility and over confidence; market makers are willing to give up a pip on the front to get a much larger return on the back. What return you may ask nothing less than your entire trading account. Sounds great to the greedy gullible novice newbies that do not bother to read further If you are one of these take my advice and run far from trading since it is not for you, trading is only for adults who have the patience and persistence to make Forex trading work for them. The way they do this is by reading and studying. If you are mature enough for this it is OK, but if not, come back when you grow up mentally and emotionally; please do not take offense, you are just not ready, yet. Please understand I do not want just anyone trading because they have been convinced by some market makers salesperson how simple and easy it is to make money trading Forex. This missive applies especially to new traders that have absolutely no interest in learning Forex. To those I will say welcome to Forex and now goodbye; go instead to Las Vegas and have some fun with your money. If and when the attitude of a potential trader changes if ever that would be the time for them to return. Are there any tests or questions a trader can ask or look for when shopping for a broker. There are indeed, below I have listed the main categories to look at and what you are looking for. www.newtraderfaqs.com

The Tricks market makers can use to glom your money: Stop popping/hunting or running stops Requotes Slippage Manipulating data on their platform o o Price Shading Price Suppression
Platform crashes against winning traders/trades
These are some of the more obvious Tricks an unscrupulous market maker will use to cheat you or perhaps I should say, To augment their profits against you; their victim, uh, client. OK, if I want to be nice I will say disingenuous as opposed to lying since many of their salespeople, for the most part, are unaware of the true factsand will sell what they are told, in my humble opinion (they dont bother to read or study either). Stop popping/hunting/running How can you tell? Simplicity itself, when you see one market exploding in either direction but none of the others are affected or acting the same way, chances are great that is your market maker looking to achieve quick profits. How does it work? Stop popping, running stops or stop hunting is a favorite tool of any devious market maker understand They own and/or control the platform, they know how much money you have in your account, they know where your stops are, they know where your limits are and they can see where all the other stops and limits of all their opposing traders are as well. Guess what? When they see a market that has very few stops they can drive the market and go after every stop they know is there; every pop is money in the bank for them get it? What a great way to take your clients money. The market maker gets the spread AND the losses from their traders. Their trading clients however do not have those Copyright 2010
New Trader FAQs

advantages; so in a very real sense the new trader is fighting blind against a foe many foolishly believe is their friend that can see in all spectrums. Have you ever seen that and wondered what happened? Now you know what and now you know why. Slippage What is it? This term means the price you get is not the price you want and it rarely works in your favor. Let us say our market is at 100 and you want to sell to exit your trade; so you click sell @ market, but the price you get is 102 and even though you were expecting to sell at 100 you can see you have sold at a price that is not good for you. This is the market maker nibbling at your account. If you see this you know you are dealing with a bogus market maker. Any market maker that has slippage is going to have a very believable tale to tell; when you find a particularly inventive market maker story I would appreciate it if you would send it to me. The best story I ever heard why slippage happens came from a guy that works for a foreign market maker whom I shall call G. G told me that slippage was inevitable and gave me an example: If you are trading the USD/JPY pair you trade it in yen, when the platform exits the trade it must reconvert the Yen into dollars and that takes time, hence slippage. I relayed this story to another broker who broke out laughing and stated No they didnt! but I had it on tape, yes they did. With an ECN platform there is no slippage even when you trade the USD/JPY but I can see how a novice could buy into this BS; since they really wouldnt have a clue, unless they did their due diligence or research. Since most do not like to read they believe such fables and as a result wind up losing their hard earned money. Whenever you have slippage in Forex you have free money going to the market maker/bank, end of story. I have never heard of a market makers platform where there was no slippage, it is rather like looking for chickens teeth Requotes What are they? www.newtraderfaqs.com

This is another great money making trick market makers use to nickel and dime the FX trader to financial death; although, from time to time it isnt a nickel or a dime but can be lots of dollars. Suffice to say when the trader wants to enter or exit a trade the platform wont allow it. Instead the platform will reject the order forcing the trader to replace the trade with a lesser trade that always favors the market maker, this never happens on an ECN during a level one market. Level one is your typical market without any unusual events, level two is when banks and market makers pull all bids and offers off the table due to some extreme event/s. In a level two environment all platforms will give a requote, even an ECN. I know I have mentioned ECN and if you havent done your research yet you probably are unaware of what that means; or is, I will cover that later in another post. But in the meantime you can do your own due diligence or research and find out what a true ECN MT4 is and means to you. Naturally this missive comes with a caveat; many market makers now are claiming to have an ECN when in reality they do not. In fact, when you Google ECN MT4 you will see oodles that falsely make that claim. Later in this post I will share with you trick questions you can ask, to ascertain if the market makers salesperson is being disingenuous to you. To be sure you will have a lot of information now that will send up a red flag for you, slippage (they will admit to that) stop popping (they wont) and so on. Data Manipulation How is data used against you? When I traded with my second market maker I noticed something that had happened with my first market maker, it seemed to me when I was in a losing trade the pips racked up, fast. Yet when I was winning the pips came forth, slowly. Funny about that and I wondered what was going on. It seemed to me that from a psychological point of view when my trade was quickly racking up losing pips I was motivated to get out of the trade (fear) and I got impatient (greed and fear). Naturally when I was in a winning trade and the pips would come agonizingly slow. I found myself wanting to get out of losing trades fast (because the pips were moving so fast against me) and wanting to get out of winning trades fast (as the pips were coming so slow I became Copyright 2010
New Trader FAQs

fearful the market would change direction) because I wanted to keep what I had won, it took a while before I realized I was being emotionally manipulated. I was being whipsawed. Who would do such a thing? More importantly, how could they do it since markets move as they will; it never occurred to me the market makers could or even would manipulate the speed of the data. The truth finally dawned on me, they can and many do. It just makes good business sense, right? Crashing Platform on winning traders This is something I have heard more about from traders I have spoken with but it doesnt seem to be common amongst most market makers; as a tactic it seems to be that whatever market maker would use such a ploy is too infected with the sickness of greed. Kicking out successful traders It was hard for me to believe but there are market makers out there that will kick a trader out of its system if the trader is too successful. How do you find out about these guys? Go to different forums and ask the traders there. For the most part they are good people but every once in a while you can find a wolf in sheeps clothing or a market maker acting as a trader. There are websites dedicated only to market makers since they get a kickback/commission from foreign market makers and IBs. Whenever you go to any website see what they say and use this as your secret weapon.
Is it better to trade spot forex or currency futures?
People are going to disagree with me on this, but Ive always felt that trading spot forex is better than trading currency futures. Currency futures have a longer history with individual traders seeing as they go back decades to the development of the financial futures markets while spot forex is a more recent development. It is a highly regulated market. That is something which makes people feel comfortable, which is fine. Spot forex, though, offers a great deal more flexibility. There are a wider array of trade lot sizes - and even at least one broker who has no defined lots or trade size minimums. That means the smaller traders especially is much more able to trade the right size given their risk parameters. Spot forex also has a much wider array of readily tradable currency pairings. In futures its really just the majors against the US dollar which are active. In the spot market there are loads of crosses and even more regional or exotic pairs than what the futures market provides. Those who argue for futures will contend that transactions costs in futures are lower, that there are no spreads, and that there is no rollover. Not great arguments in my view. Taking them in reverse order, while there is no specific rollover or daily carry in futures, the pricing of the contract (at a discount or premium to spot) accounts for the interest rate differential. The spot and futures markets are tightly arbitraged to ensure that the effective carry of the futures is close to the spot rate. Thats why over time the spread between futures and cash narrows to zero at expiration.
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New Trader FAQs

As for there being no spread, thats just patently false. Every market has a bid/ask spread. Its just mo re visible in spot forex because its quoting is indicative not last trade based. Which one is larger depends on a number of different factors. In terms of transaction costs, futures brokers charge a commission. Depending on the type of forex broker you use you may or may not pay commissions. The ECN brokers who pass through orders charge them, while the market makers usually dont. Which brings up a related issue. A lot of folks dont like the idea that their broker is on the other side of their trades. In futures that doesnt happen since the trades go into the market. If you are using a market making or dealing desk broker they are on the other side of your trade, at least nominally. While thats the case, realize that they are aggregating all positions as a whole, which means your trade is most likely matched up against that of another of the brokers customers. The broker, therefore, is directionally neutral (though they sometimes do have small net exposures), and just looking to make the spread. If youre using an ECN broker, you are never dealing with your broker at all. They are simply passing through your order into the market to match it up against an opposing order from another trader somewhere. Its just like a futures broker does, and just like the futures broker, the ECN broker charges a commission. So from a strictly cost related basis to compare futures and spot trading you need to add up commission and spread for each alternative to see what comes up best.
It really depends on what your time frame is. If you are a day trader and are out of the market at the end of the trading day I would say spot. If on the other hand you are trading over a period of five days, weeks or even months then futures would be the way to go www.newtraderfaqs.com

The differences between the two are these in essence: Spot requires a very low margin to be committed per contract Futures requires ten times or more Spot you can get or pay the carry or rollover charges (triple on Wed or the day after a holiday) Futures do not have carry charges Spot you can go down to micros ($1,000 contract) but only through a market maker Futures the least is a micro (although many brokers will not offer them, only the mini $10,000 contract)
So as you can see there are different aspects to be considered
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New Trader FAQs
Should I avoid trading over the holidays?
Whether you should trade over the holiday period probably depends on your style of trading. It is absolutely true that volume drops off quite a bit in December as traders take time off and banks and funds put the wraps on their year. The big players often dont want to take on much risk at this point, so if they are in the markets they may be at a smaller size than would be the case earlier in the year. So what does this mean for the markets? Youd think that it would mean nothing much happens. That certainly is the case much of the time. It can get very dull, much like it can in the depths of summer when everyone is on vacation. The lack of volume, however, can also lead to serious volatility if something does happen. That can increase your risks, but it can also present opportunities. I personally took advantage of one of those December moves that was boosted by a lack of volume on the opposing side to keep the market more tame. It was a EUR/JPY trade (exchange rate between the Euro and the Yen) that I put on in early/mid-December.

You can see on the chart the arrow where I bought - at least approximately. I cant remember the exact details. From there it went nearly straight up with out much in the way of retracement, as the weekly bars show. It was really amazing, especially how the moves up actually started to build more and more as we got closer to the start of the new year. It was a classic low-volume trend. I ended up getting out of the position in early January when the return of volume took all the punch out of the rally. It was a really nice gain, especially when you consider that I actually added to it along the way at a couple of points. The point is, these types of moves can happen in low volume periods. Depending on what kind of trading you do, they could either be extremely beneficial or extremely harmful to your account balance. They dont happen very often, though. Most years youll probably be bored much of the time, so youll have to decide whether its worth the effort. One other thing to consider is your own distraction level. If the holidays are going to detract from your market focus then youre probably best not to trade. More than likely it will end badly.
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Trading Mechanics
Section V
Trading Mechanics
Getting down to the specifics
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New Trader FAQs
What is leverage and margin?
This is something that trips up a lot of new traders. Leverage is using a small amount of money to control a large position. For example, if one puts up $100 and is able to trade a $1000 position, that is using leverage. Leverage is often expressed in terms of a ratio, such at 100:1. That means for each 1 the trader puts up, he controls 100 worth of a position. Available leverage is that which is permissible. For example, in forex a broker may allow 200:1 leverage. Actual leverage or gearing is the leverage which is being used. For example, if you have a $10,000 account and trade a $100,000 position you would call that 10:1 actual leverage or 10:1 gearing, regardless of what your available leverage might be. Margin is the money you put up as part of a leveraged position. How its treated varies between markets. In the stock market leveraged trading means borrowing money from your broker to purchase additional shares. You must pay interest on that loan. In futures and forex, margin is basically a security deposit. Since in these markets you arent actually buying or selling anything (just entering agreements to do so in the future) you dont need to borrow any money. Your margin is just surety to the broker against any losses you might suffer while holding your position. In either case, if your losses reach a certain point a margin call will be triggered. That basically means either put up more cash or your position will be closed. In forex, many brokers wont even ask you for the extra money. They will just automatically exit your position at the margin call point. www.newtraderfaqs.com
Trading Mechanics
How much money do I need to start trading?
It depends firstly on the market. Markets vary in terms of the capital requirements. Futures is the market which tends to be the hardest to get into for the lightly funded trader. Thats because the contracts have fixed sizes and therefore very specific margin requirements. If you dont have at least that much, you cant trade them. And for the sake of safety youll need a bit more than just the margin requirement, otherwise one bad trade would mean you couldnt take part in the action any longer. For many of the more popular futures contracts youll want at least $5,000 in starting capital. In the stock market things are a little bit better because there are stocks of different price levels and you arent redistricted to trading a specific contract or lot size. Its the transaction costs, though, which you need to think about. Every time you buy and sell youll pay a commission. The smaller you trade, the larger the impact on your profits and losses those commissions will be on a relative basis. For example, if youre commission rate is $10 then you need to make more than $20 (commission in and out) to make a profit. More than that, you need to make enough over $20 on your winners to more than offset your losers and to provide a return that is reasonable. For that reason, small accounts in the stock market often struggle to perform. The forex market actually has the lowest funding hurdle. There is as least one broker out there who has no minimum trade size, and even those that do offer ones that are small enough for even lightly funded accounts to trade. A $100 account can easily trade $5000 or more in forex positions. And since many forex brokers dont charge commissions, you dont have the same kind of issue in terms of performance as is the case in stocks. Copyright 2010
New Trader FAQs
To be an effective beginner you should have $5,000 to $15,000 to start out with and that should only be money that is your risk capital that if in the worst case scenario where you lose everything it wont affect your standard of living at all. Plus, you should only trade that when you have put in enough time studying and papertrading. If that doesnt seem like a lot of money, well, youre right. Consider, however, that every great trader starts is with a small stake and compounds it from that point. Truth be known, if you cant learn to trade with a little then you cant learn to trade with a lot. Trading is one of those skills that grows with your capital. Often, you see aspiring money managers fresh out of the Ivy League and put at the head of huge investment funds where they implode often because the magnitude of the money they trade with overwhelms them psychologically and emotionally. I figure that's why most funds cant beat the S&P 500. Make sense? Now, take a look at a trader like Richard Dennis who started literally with a few hundred dollars and grew that into over $200,000,000! He paid his dues and his trading skill at every level grew along with his capital. Every trader could learn from his example.
There are several online brokers generally called "discount brokers" that have no minimum requirement to open an account. You are able to open and activate an account with $0. Once you are ready to begin trading, you can deposit enough funds to cover the cost of the trades that you would like to place, including commission fees.
Trading Mechanics
There are also many other online brokers that you can open an account with a minimum deposit of $500.00 or less. Sharebuilder.com, TradeKing.com, Etrade.com, Scottrade.com, and optionsXpress.com are some of these online brokers. With these zero to nominal amounts to open an account, even children should have an account so that they can learn at an early age all about trading and investing in the stock market!
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New Trader FAQs
Is live trading different than demo trading?
Yes and No. From a purely mechanical perspective, demo trading is generally the same as live trading. Most brokers use the same price feeds in their practice platforms as they do in their live ones, so that will match up. Of course there are likely to be some little differences with the actual executions for the simple reason that a demo platform isnt part of the real market, so your orders and trades dont actually impact the market at all and will always be filled. The biggest difference between live and demo trading is generally between your ears and in your gut. There can be a massive psychological impact to trading real money, even if its just a small amount. If you think about it, really its just common sense. When you lose money in your demo account theres no pain. Different story in live trading. No matter how much you try to trade your demo account exactly as you intend to trade with real money, it will never be exactly the same. Theres always going to be a bit more tension, especially when you make those first few trades.
The difference between demo trading and live trading is much like what a jet pilot goes through initially. A new pilot candidate will show up to flight school and learn all the inner workings of a jet, receive flight training, gain knowledge of the latest technological attributes of both the jet they will be www.newtraderfaqs.com
Trading Mechanics
piloting as well as the jets enemy counterpart, conduct flight training under supervised conditions, become familiar with the operation of the jets weapon systems, etc. Then, the day comes when war is declared and there is no more training missions but only real live combat against a formidable enemy. If your that pilot on that day when you first take off for your real live combat mission you may find that you have a touch of fear that can be felt deep in your gut, that you breathe a little deeper and faster, that your vision becomes sharper as you scan your radar for signs of the enemy or at the cloud formations around your squadron, that your reaction time is quicker than normal, and so forth. Like the jet pilot in that scenario, you will find that once you actually have something at risk, and you are trading the market in real time, you too will realize youre in new territory. And, also like that pilot, if you have trained yourself well and in truly realistic circumstances with the best tools to give you the highest probability to succeed as well as protect yourself against the unexpected then you will find yourself a successful trader where it counts.in real-time trading.
There is no substitute for real money on the table experiences. As aspiring traders, we have to develop our trading strategy or plan, and this may take some time to achieve. We have to determine the market/s we wish to trade, then plan our trades accordingly. How long do you wish to hold the trade? Are you going to set a profit target, or let the trade run as long as the profit increases. What time frame are you looking at? Daily, weekly, hourly Once these questions are answered, you should then proceed to paper trade your plan. That is, take trades on an imaginary capital account which shouldn't be any larger than you will be doing with real money. Follow your results and if you are completely honest with yourself you will soon discover holes in your plan. Copyright 2010
New Trader FAQs

Continue to work to your plan until you are happy with the results. The acid test comes when real money is applied to your analysis. No amount of testing or paper trading can prepare any new trader for the anxiety of watching your trading account increase or decrease day to day. I have seen many traders discover new personal traits when real money is on the line which just wasn't evident when practicing trading. I only have one solution for this: Whenever you start a trade, you must have a stop loss figure in mind before you put the order into the market. Capital protection is vital to success, and you must protect your capital with a stop loss order in case the market doesn't do what you expect. Then, you must promise yourself not to remove or withdraw the trade unless your stop loss is touched. Personally, in my early days I had taken trades out of the system with a resultant loss before the stop loss figure was reached, congratulating myself for not losing too much money. Of course, the trade fell a little further before it rebounded to become a winning trade without me making any profit. Did it hit my stop? NO! Make it a golden rule never to remove a trade unless your stop is hit. Some traders may also consider a stop and reverse policy and this may also pay dividends but needs to be carefully tested.
Yes. Theyre chalk and cheese. In the old days traders were encouraged to paper trade before going live. Im always suspicious of people who encourage others to paper trade. Ive never meet a full time trader who has thought it a worthwhile exercise. And I can only imagine the people who do encourage others to paper trade do not trade themselves. If they were actual traders theyd know what a waste of time it is and what false and dangerous confidence it can give a new trader.
Trading Mechanics
And today, with electronic trading platforms, traders now have access to demo accounts to trade before going live. These demo accounts have now become the new substitute to paper trading. Now although demo trading is an improvement on paper trading in my opinion it still has little value to prepare a person for real trading. Like paper trading, demo trading does not simulate real market conditions. Demo trading only provides a safe and controlled environment for the trader to play. To jump between trade set-ups, to change trade plans, to test filters, to do what it takes to record a positive result. It allows too many degrees of freedom to simulate the harsh realty of real time trading. Its too easy to start again in a demo account if you didnt like the last trade. The trader wil l think up all sorts of excuses as to why they wouldnt take such a trade again so it would be ok to start all over again with a new demo account. And they repeat this illusion of control until they manage to survive a period of demo trading. Only to go live with disastrous results! What traders need to do is play trade under conditions that reflect real market conditions without risking money. I call it play as nothing can really simulate real time trading, nothing. So even the best simulation can only be playing and traders need to accept this. However there are good ways to play and there are bad ways to play such as paper trading or trading with a demo account. In my opinion thats playing badly. My suggestion to people wishing to road test their strategy without real money is to follow my T.E.S.T procedure. T.E.S.T is an acronym for Thirty Emailed Simulated Trades. Traders need to find a trading partner they respect and who does not live under their own roof. The trading partner will become a virtual broker. The trader will need to email their trading partner their orders each morning before the markets open identifying the market/s, setup condition/s, entry level/s, stop level/s and any exit instruction/s if applicable. They need to email a professional order to their partner - one that a broker would be able to follow without having to refer back to the trader. Copyright 2010
New Trader FAQs

The partner will print off the order and record the results depending on what the market did for the day. The partner can only accept instructions to alter an order via email before the market event happens, so everything is time stamped, and every entry, stop and exit is be recorded correctly. For open positions the trader must email the trade management instructions to their partner before the markets open the next day. Essentially the partner becomes a virtual broker. After 30 trades the partner will then return the emails with their result recorded to the trader and if the results are positive, without being reliant on a couple of outstanding trades, then the trader may be ready to go live. Now my T.E.S.T procedure is the best I know for helping traders experience real time trading. As soon as they hit that email send button there can be no going back. Certainly if they wish to cancel the order then they will need to send a Recall email to their partner. However, once the email goes out there is no turning back. The market will do what it wishes to do. The partner will record the results accordingly. This T.E.S.T procedure will not be comfortable for them as they will be trading live in front of their partner, baring their soul and trading talent. It will increase their heart beat. There will be no place to hide. There will be no opportunity to casually dismiss a bad losing trade. The partner, like the market, will have a mind like a steal trap they will not forget those trades. There will be no opportunity to hit the reset button and start again the trading partner will not allow it. The partner will demand 30 emailed orders and trade execution. The trader will feel like their trading under a spot light it wont feel safe and secure like paper trading or trading a demo account in the security of your home office or dark room where no one knows what youre up. Following the T.E.S.T procedure will be hard, but then so is real time trading. Although the idea of trading is simple, its hard, hard and harder to do successfully. I hope this makes sense.
Trading Mechanics
What is the difference between a stop and a limit order?
A stop order is one which becomes a market order when the indicate price is reached. For example, if you put in a buy stop at 50, when the market reaches 50 a market order will go into effect to buy. Because the market order will get filled at whatever the available price is, there is no guarantee the trade will actually get done at 50. It could be better or worse, and potentially by a lot in a fast moving market. A limit order, on the other hand, is an or better order. If you put in a limit order to buy at 50 you will get filled at 50 or less. A limit order to sell at 100 would get filled at 100 or higher. Stop orders are good for getting in and out when you want to be sure you get a fill. There is no guarantee of a fill with a limit order. This is because while the market could hit the limit price, if the market doesnt stay there long enough, your broker may not be able to actually get you filled at your price or better. Be aware that in some cases limit and stop orders are interchangeable. This is only in electronically traded markets forex being the most prominent example.
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New Trader FAQs
Where does the money I make in the market come from?
This question can be broken down into three separate, but related ones. Question 1: Who am I trading with? The counter-party to your trade depends on whether you are trading through a broker or with a dealer. If you are trading exchange traded securities (stocks, futures, etc.) that you are probably doing so through a broker. As such, your orders are simply passed through to the exchange and matched up with another trader or investor there. You will never know who that other person or institution is. In over-the-counter markets (some stocks, forex, some fixed income, etc.) you often will be trading with a dealer, which is a person or institution in the business of making a market in what youre trading. That means they take the other side of your trade. That said, though, these dealers (market makers) are not in the business of taking positions in the market. They are trying to profit by selling at the offer (ask) price and buying at the bid over and over again. In other words, if they are buying from you they are looking to sell to someone else right away. Question 2: Does the money I keep with broker remain with the broker? This depends on what you are trading. If you trade stocks where you actually buy and sell assets, then the money for those transactions flow in and out of your account. When you buy 100 shares of Google, your broker sends the cost of that purchase to the account of the broker or institution from which the shares were purchased. You then receive the shares. www.newtraderfaqs.com
Trading Mechanics
If you are trading futures or forex, which are margin-based markets, then the money stays in your account. These markets are agreement ones. You dont actually purchase anything. The value of your account will change with the value of your position, of course, and you wont be able to take the margin money out while you have a position on. Question 3: Where does the broker get the funds to pay for the profit I make? Your broker does not pay you the profits you make. They merely move funds in and out of your account based on the transactions you make. Using the Google example above, if you purchased 100 shares at $500 your broker would take $50,000 out of your account to pay for those shares (plus commissions and fees, of course). If you then sold your Google position for $700, your broker would deposit in your account the $70,000 received for those shares from the purchaser of them.
Over the years I have met some traders who dont like the thought that for every winner there must be a loser. Some very religious friends of mine wont trade for that very reason, because they think they are taking money from someone else who needs it. Others refer to trading as gambling and that is something they cant abide. If John buys a stock at $1.20 and sells it to Peter for $2.00 who then on-sells it to Robert for $3.00, who loses in this situation? Nobody. Everybody wins and the world is a fabulous place. Truthfully though, this is not always the case. But is it really any different from any other capitalistic venture? The local farmer who grows his crops may sell them on to a wholesaler who then sells it on to a producer who then sells it to a retailer who then uses the crop to make a product to sell to shoppersis there any more risk involved in this delivery chain than in trading markets? Not really, as any of the delivery chain Copyright 2010
New Trader FAQs

members may or may not make a profit on their end of the bargain. Perhaps the wheat farmer grows wheat in a bumper year when prices are low due to an abundance of wheat, or the baker makes the bread but has to discount his prices due to fierce competitionyet people don't consider baking a gambling profession. It is essential for companies to raise money to operate a business, and this is done adequately by selling shares in the future profits of the company. Indeed, it is said democracy relies on a healthy stock market. For some, the stock markets and other trading arenas will be a fabulous place to make profit, others will try and some will lose. This is no different than any other industry on the planet, the trader who prepares, studies and works hard will have a much better chance to succeed. Markets do exist because traders measure risk to reward and expect to win. Money simply changes hands between traders who buy and sell. Its no more complicated than that.
Trading Mechanics
Do I have to pay taxes on my trading gains?
It depends on where you live and what you trade. In the U.S. you are almost certainly going to be subject to taxes on your trading profits (and able to write at least some of the losses off against income). How much that is will depend on what youre trading and potentially how long you hold your positions. In places like the U.K. there is spreadbetting, which is considered gambling rather than trading, and income from it is not taxable. The bottom line is that you should research your countrys taxation laws, probably before you even get started trading real money. Some of the rules may impact what and how you end up trading. And of course seeking assistance from a professional with knowledge of these matters isnt a bad idea.
In the U.S. you do. There are two types of capital gains taxes: long term and short term. Long term capital gains are taxes on the gains you make on a stock that you have held for at least one year. These taxes are a maximum of 15%. Short term capital gains are taxes on stocks that are held for less than a year. The short term capital gains tax is 25% or higher depending on your tax bracket. In my opinion, when possible, its in your best interest to hold a stock for at least one year.
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Market Analysis
Section VI
Market Analysis
Picking the Trades
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New Trader FAQs
What is technical analysis and what is fundamental analysis?
Technical analysis is generally viewed as the use of historical price information to project future price movements. That is a fairly simple definition. A better one would be to call technical analysis the study of patterns of human behavior in the financial markets. It looks at the patterns our actions in the market create and attempts to use them to develop a view of likely future price movement. Fundamental analysis attempts to determine value. For example, a trader would use fundamental analysis to come up with a reasonable value for a company based on their earnings prospects, balance sheet, and other things. The trader then looks at the stock price to see if the stock is over, under, or fairly valued.
In his book Technical Analysis Explained, Martin Pring defined technical analysis as the art of identifying a trend reversal at the earliest stage and then riding that trend (trading or investing in the direction of the trend) until the weight of the evidence has confirmed the trend has reversed. Those who use technical analysis are called technicians or chartists, and study price and volume mainly to discern the current phase of a market cycle, the direction of a prevailing trend, the strength or weakening of that trend, and then find support or resistance levels to enter low-risk positions based on price charts of different timeframes. A chartist might use indicators which are derived from price, and compare those indicators to price itself to determine whether the indicators - such as moving averages, trend lines, or oscillators www.newtraderfaqs.com
Market Analysis
confirm the trend or disconfirm the trend, and whether the indicators are signaling an entry or exit signal, or forming a known price pattern (such as the popular head and shoulders or flag). Fundamental analysis also seeks to determine trends of earnings, sales, revenue and other information designed to assess the future strength or weakness in a stock price based on the companys balance sheets and financial information with little regard to the past price chart of a stock.
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New Trader FAQs
Which type of market analysis is better?
This is a subject which generates a great many heated debates. The answer is always going to be The one with which you feel the most comfortable. Timeframe tends to have a major part to play here. Fundamental analysis is about the broad macro trends which impact the market. These are the things that determine the longrun direction of the market, but ones which can only really change slowly. That being the case, applying fundamentals is generally best done in longer timeframes. As one gets to shorter timeframes, technical analysis starts to take on greater importance. This is not to say that technical analysis cannot or should not be applied by long-term traders. Rather the point is that since the market doesnt always follow the fundamentals in the shorter term, it is important to focus on the price action if that is the perspective of your trading. Thats the realm of technical analysis. Of course one can combine the two as well. Theres nothing that says you must employ one technique and not the other, especially if your timeframe is in a middling area.
There are so many methods of analyzing the markets that the most important thing you do is to find one that fits both your personality and approach to the markets.
Market Analysis
Warren Buffet is obviously the greatest example of fundamental analysis in that he finds businesses that he understands and then buys either the stock or the entire company at attractive prices that are below what he perceives their real value. Martin Schwartz, famed trader featured in the Market Wizards book and author of Pit Bull: Lessons from Wall Streets Champion Day Trader says he tried to become successful at trading with fundamental analysis but didnt get rich until he became a technician. Robert Prechter told Anthony Robbins during an interview that after six months of using Elliot Wave analysis he was shocked that no one else could see the markets like he did after becoming proficient with R.N. Elliots Wave theory. So, I think you can see the value in finding an approach that you are comfortable with because they all have their merit. However, dont keep jumping back and forth between the different methods from the mindset that with each new method you will find the Holy Grail which is really just a myth. Used properly, any analysis method will give you an edge provided you use it within the context of a good trading plan. I do think you would be well served by understanding how to draw trend lines on different time frames in order to be able to define the trend according to Dow theory (understanding long-term, intermediate-term, and short-term trends) as well as basic chart patterns such as channels, double-bottoms, cup-and-handle formations, etc. Once you have an understanding and foundation of these basic tools you can begin to use more advanced analysis methods.
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New Trader FAQs
What is the best technical indicator?
There is no best indicator. Never let anyone suggest otherwise. Each indicator you come across will have been designed for a particular purpose. Some are used to identify trends. Others are used to determine overbought or oversold conditions. Others are for momentum. And so on. Determining what indicator to use requires knowing how youll be approaching the market. Its also worth noting that there are a great many traders who couldnt be bothered with indicators at all. They sometimes call themselves dark siders.
There is no best indicator, period. History is full of great traders using nothing but price action to evaluate the markets and trade positions. That's not to say that indicators dont have there place as there are a universe of indicators that reveal everything from momentum, volume, volatility, trend identification, etc. But the use of indicators is often secondary when making a decision as to whether to trade or not. This can be a confusing subject for beginning traders as there is an entire industry built around creating and producing the latest, greatest indicator that is touted to be the next Holy Grail in trading. This often appeals to an aspiring traders basest desires such as power, greed, sloth, etc. Its a marketing ploy, plain and simple. www.newtraderfaqs.com
Market Analysis
All of the greats, from Jesse Livermore to the traders featured in the book, Market Wizards, use price action as the primary tool to trade the markets successfully and so should you. Put in the time studying chart patterns, defining trends on different time periods, how to define FTDs (Follow Thru Days featured in How To Make Money In Stocks by William ONeil), and how price reacts to volume. These skills are evergreen in that they will serve you for the rest of your trading career and the more adept at reading price action the greater your potential in trading the markets.
This depends on the traders personality. Some traders trade best without indicators. In my case for example, I do not use the normal gamut, for example, the RSI, MACD, moving averages etc. Others, could not trade without them. Consequently, the best indicator is the one that best suits your personality. But whatever you use, make sure that you thoroughly understand its construction, its optimum use, and its weaknesses. Too many traders tend to use indicators without the understanding of their construction or their strengths and weaknesses. It is my belief however, that there is one indicator that all traders could use and benefit from: an understanding of traditional statistical and probability theory. Trading is a probability game but notwithstanding its nature, most traders do not have even a basic knowledge of statistics and probability theory. This is like running in 100m sprint with only one leg.
Price.
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New Trader FAQs
Why didn't the market rise on the positive/fall on the negative news?
This is one of the most confusing things about the markets for new traders. They expect prices to move in reaction to news events higher when the news is positive, lower when its negative. The problem is that markets sometimes do that, sometimes they dont. What you need to keep in mind is that the markets are a discounting, forward looking mechanism. The current market price represents in large part the markets expectations for the future. Thats why the market reactions can be unexpected. If IBM has earnings coming out and everyone is expecting them to be good, then whos left to buy the stock when the earnings do in fact come in good? Similarly, if the market is looking for the unemployment rates to move up by 0.2% and is positioned for that, then whats going to cause a reaction? Nothing. This is why so-called news trading can be so tricky. On any given day a positive company earnings report could lead to a strong rally, no reaction at all, or even a sell-off. Which way it goes depends on who the market is positioned before-hand and how close the action number is to expectations.
This is a question that is asked at least once by everyone in the stock market! The market moves in mysterious ways, yes indeed! More often than not however, the reason is because the positive news was already "priced in" or "baked in". This means that many traders bought the stock at the beginning of the anticipated event, watched as others bought stock and the stock price increased and climbed higher, and then sold their stock when the event or positive news was released.
Market Analysis
What is support and resistance?
Support & Resistance is when price has a reaction at a key level that price has been before. This reaction often causes the immediate trend to change course once it touches this key level of price. For example, lets say ABC stock is in an uptrend and after hitting $60 a share Big Shot Investor decides ABC is overbought and then shorts ABC stock at $60 a share. Big Shot times it right and ABC begins to trend downward to around $0 a share. However, once it hits $40 a share it gets the attention of Buffet Disciple Investor and he begins to buy it $40 a share. Buffet Disciple also manages to time his trade right and, after a few days, ABC begins to trend upward to the $50 price level where Big Shot first shorted it. After 20 days or longer, ABC rises to $50 a share but Big Shot is convinced that the stock is overbought and/or overvalued at $50 and begins to short more at which time his friends also begin to short the stock with him. This added pressure begins to push ABC down again as their is resistance at the $50 level. Again, after 20 days or so, price trends down to the $40 mark where Buffet Disciple first bought the stock. Buffet Disciple is convinced that the stock is a great buy at $40 since he believes it is undervalued at that level and is trending upward in the long term so he buys more to add to his position while his friends join him in buying more ABC stock at the $40 level. This upward pressure at this level supports ABC stock at the $40 level and it begins to trend upward again. Support & Resistance levels like this are formed at the long-term, intermediate-term, and short-term time periods everyday in all markets. Copyright 2010
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Price levels are like Newtons second law which states that an object tends to stay in motion till acted on by an outside force. Price will bounce off one level to another level causes a reaction to price which results in it changing its direction. Not until there is sufficient outside force to break through these levels in a convincing fashion will price stop fluctuating between key levels of support and resistance. This makes S&R a very reliable trading approach in all markets. There are also enhancements that can be used to further enhance S&R such as using moving averages. Using the 200-day SMA, you can use as a filter to pick your S&R setups. If price is trading above the 200-day SMA then you want to focus on longs with particular attention being on the SMA itself to be sure it is trending upwards. Then, you mark declines in price that are visited by price declines again that are separated by at least 20 days or more apart to confirm a real support point. Inversely, use the same approach for finding resistance levels in price action. I have successfully traded both options and stocks using this approach with great success.
Support and resistance can be viewed many ways by traders employing different techniques. At its core support is an area on a chart below the current price where buyers are likely to step into the market if the price drops that low. This will keep the price from continuing to drop and will often lead to a bounce. Resistance is the same except that it represents an area above the current price where sellers are likely to arrive and either halt the advance or cause price to pull back. There are many different ways to identify possible areas of support and resistance on a chart. Below are a few of the more popular. To keep the discussion simple Ill talk in terms of support. All of these methods apply just as well when considering resistance.
Market Analysis
1. Price support Often an area where price has stopped declining and has reversed back up in the past will act as a support area. Those people that missed the bottom last time but wanted a position may look to enter a position when presented a 2nd chance near a previous low. Also short sellers may see it as a 2nd opportunity to cover at a good price. 2. Moving Average Support As a security works its way higher it may pull back to a moving average on several occasions during its rise. Well watched moving averages tend to act as support points. Common ones include a 10, 20, 50, or 200 period moving average. It is often good to see that the same moving average has already acted as support during the current uptrend. The more times it bounces off a moving average the more people will begin to recognize it as a support area and the more likely it is to work in the future. 3. Trend line support Like moving averages, trend lines are often tested multiple times as an uptrend unfolds. Also like moving averages I like to see the trend line tested multiple times before considering a good candidate for support. 4. Prior resistance When price breaks through a resistance area, future tests of that resistance will often act as support. So whether it is an area of price resistance, a moving average, or a trend line, it doesnt matter. Once broken to the upside it may now act as a support level on a future pullback. 5. Fibonacci levels Some traders use Fibonacci numbers to calculate likely price retracement or extension levels. These tend to work best when several Fibonacci levels are overlapping in a close area. When using support and resistance levels to trade it is important to look for different kinds of support and resistance setting up. A simple moving average on its own serves much less chance of acting as a support level than if it also is very close to a trend line and swing low price support level. The more kinds of support or resistance that line up in a certain area, the more traders are going to notice it and the better the chance of that area actually acting as a support/resistance level. It also means that breaks of that level Copyright 2010
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are more likely to invoke powerful follow-through reactions as people rush to sell (or short) the breaking of support.
Market Analysis
What is the difference between a discretionary and a system trader?
A system trader is one who employs very specific and quantifiable rules for all parts of their trading. That means their entry and exit rules are very clear and concise - generally based on some technical analysis methods (indicators, etc.). The rules for position sizing are also included as part of the system. There are a couple of major appeals to system trading. One is the idea of a money machine - an automated process by which profits can be extracted from the market. The other is the idea of removing human emotion from the equation by having a very rigid method for trading requiring no thought. Discretionary trading, on the other hand, doesnt have the same rigidity of system trading. This is not to say discretionary traders dont have a system or trading rules. Quite the contrary. Its just that the discretionary rules arent so easily described in a programmatic fashion and trading decisions are often more on the basis of a traders experience. Because discretionary trading relies not on what a computer says, but rather on the decision-making of an individual, it is subject to the emotional influences that system traders seek to bypass. This may seem to imply that it is a less effective method, but that isnt necessarily the case. It is often said that a good discretionary trader will beat a system trader in the long run because he will have the flexibility to adapt to changing market circumstances, which rigid systems cannot easily do. Heres the thing, though. Discretionary trading at a successful level comes from experience. There arent too many folks who can just up and start trading in the market profitably from a discretionary standpoint, yet many try exactly that. New traders are generally better off starting from a system perspective.
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New Trader FAQs
What timeframe charts should I look at for my trading?
Most of the time when this question comes up its from a trader thinking about things the wrong way around. You want to first figure out what timeframe of trades you want to be taking. For example, are you after day trades where your holding periods are minutes to hours? Are you looking for swing trades that could be held for days, or perhaps weeks? Or are you looking for position trades that are held for weeks or months at a time? When you know the answer to that you have a starting point. The next step in the chain is generally taking a look at the methodology youre using. If youre system produces trades that tend to cover a fairly consistent number of bars, you can take those bar counts and back out what that means for a chart timeframe youd want to match up with the trade holding period youre looking at. For example, if your system tends toward trades that last 8-10 bars and you want to day trade, then youre probably going to want to use 15 or 30 minute charts, maybe even less if you want a high trade frequency. If youre thinking position trade then youd want a weekly chart. Be aware that different markets have different numbers of periods. Forex is a 24-hour market, so it has that many hourly bars each day. Stocks on the NYSE, for example, only have 7. Commodities can have even fewer. That means the holding period for a system using hourly bars in stocks is probably be going to be different from in forex or commodities. No matter what, you will probably want to do some testing to see what holding periods you get with different chart timeframes so you dont find yourself having a problem like overnight holds for a system thats supposed to be day traded.
Market Analysis
It is absolutely fundamental that you first decide what your temperament is in regards to what kind of time frame is compatible with your personality. If you like excitement and possess the cool discipline of a day trader but do shift work at the steel mill you might want to rethink your trading strategy. There are a lot of considerations to take in when choosing the time period to trade off of but always ask yourself Is this realistic? There is no shame in having to step back and re-evaluate your plan of attack. Personally, I wanted it so bad that I often drove myself hard at trading even when I had another business where I worked 90 hours a week. It was tough and I had some real breakthrough success at times with trading but I also had some gut-wrenching losses because I made faulty judgment due to fatigue. I should have taken a break but I crossed the line between being engaged with the market to being compulsive. Fortunately, I recovered and learned from my lessons and Ive become a better trader for it. I would hope that you fair better by learning from my poor example of matching unrealistic expectation versus current responsibilities as well as not tailoring a better approach with regards to time frames. That said, you must also keep in mind that while there are several time frames to take into consideration you must first understand the Forest from the Trees Concept used in conjunction with Larger Timeframe/Dominant Trend approach. If youre a swing trader like I am and trade off the daily charts you need to keep in mind what is happening in regards to the Weekly charts. The larger time frame is like the bigger vehicle has the right of way rule on the road. If the weekly charts trend is up then dont short the market. Simple enough. Make sure you trade in the direction of the larger trend. Once that trend is indentified then drop down to the next smaller time frame to look for setups and time your entries.
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By observing what is happening on the larger time frames and giving preference to the direction of the trend it is on and then dropping down to a smaller time frame to time your entries you allow yourself to get a bigger picture. Hence, seeing the Forest from the Trees. The smaller charts have lots of noise mostly in the forms of volatility so by being mindful of the direction of the trend on the bigger charts you can begin to hone in on more precise entries putting yourself in the position to come out ahead a winner.
Market Analysis
What charting package and/or data feed should I use?
This depends 100% on your specific needs. Your trading timeframe and the instruments you trade will probably be the two biggest determining factors in your selection. After that is the inclusion of any specific tools you require, such as screening or custom indicators, perhaps a special chart type, or the ability to do back testing. Without knowing details I cannot provide specific advice. That said, let me make a couple of comments. First, for the vast majority of traders whats offered for charting free by their brokers will more than suffice. They generally have all the most popular technical indicators for plotting. Stock brokers usually have some kind of screening/filtering application. Some of the more technologically advanced brokers have all kinds of additional gadgets and such. Before you think about spending money on something, be sure you cannot get what you need from your broker. Second, dont waste money on stuff that doesnt provide any added benefit. By that I mean dont do something like spend a lot of money on real-time quotes if you can get along perfectly well with delayed ones. I traded S&P futures quite well off delayed hourly charts for a long time because I could always check with my broker for the latest snapshot quote and I was doing primarily breakout/down type of trading. I didnt need the charts to be real -time. Its hard enough to make money trading. Dont handicap yourself any further by spending more than you need on trading tools than you must.
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Trading Systems
Section VII
Trading Systems
The plan of action
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New Trader FAQs
How can I create a good trading plan?
The question comes up from time to time from a trader whether I could provide someone with a trading system they could use, but its not that simple. Trading plans are personal things which need to be created and crafted by their users. They include several elements which require a number of assessments and decisions. I spent a good number of pages in my book, The Essentials of Trading, taking a very in-depth view of trading plans. I encourage you to give that a read for a fuller discussion that I have space for here. That said, a trading plan must encompass several key elements. Trading Objectives Market(s) and Instrument(s) traded Trading Time Frame(s) utilized Software, Hardware, and other Tools required Amount of Risk Capital put in to play Broker(s) and/or Trading Platform(s) used Risk Management strategy Trading System(s) employed Trading Routine
Everything in the plan must come from assessments of your market knowledge, time available for trading, personal finances, and risk tolerance. Once youve considered those things thoroughly, however, you can move forward pulling a solid plan together. www.newtraderfaqs.com
Trading Systems
Trading Objectives What have you determined to be your goal(s) for trading? Most of the time this can be expressed as profits (either in currency or percent return) per unit of time. For example, you might choose a goal like making $500 per month, or achieving average quarterly returns of 5%. Maybe you want to frame your objective in terms of risk adjusted return, and so set a goal based on the Sharpe Ratio or similar measures. Whatever you select, make sure you have something both definable and measurable. Do not short-change yourself by setting a goal like make money. Part of the value of a trading plan is in its ability to help in performance assessment. If no measuring sticks by which to compare actual results with planned ones are included, the whole purpose is defeated. Market(s) and Instrument(s) Will you trade options on equity indices? Are you going to use the futures market to trade in gold? Will you be trading spot forex? Maybe it is all of the above. Regardless, make sure you outline clearly your intentions in your trading plan. When getting started, it is generally best to stick with one market and/or instrument. Additional ones can be added as knowledge and comfort increase. Trading Time Frame(s) What is the time frame in which you will be trading? Are you going to be a day trader? A swing trader? A long-term trader? Again, it probably is best for the new trader to work exclusively in one time frame to gain a good understanding of operating in that manner. Software, Hardware, and Other Tools Outline the things you will use in your trading. This includes the computer system or systems, the software, the data feeds, and the internet access which will drive your trading and analysis. Make sure that you have some kind of back-up plan in place should your primary system fail during a critical time. There is nothing worse than being unable to make trades or adjust orders because your internet service is down. New (and experienced) traders can get caught up with all the fancy software and other stuff that is available. Try to avoid going overboard. Trading does not really require all that much beyond a way to enter and monitor trades and keep track of prices. As you develop your analytic techniques and methods, you may find that a Copyright 2010
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certain kind of software package, source of data, or some other tool or resource is a good addition to your trading repertoire. Be selective, though. Risk Capital This should be addressed fairly comprehensively in an assessment of your personal financial situation. During the early learning and development process, one should stick to demo accounts. Once you have a firm handle on trading and are comfortable with your trading system, then you can shift over to real money trading. Broker/Trading Platform You defined earlier what market(s) and instrument(s) you are going to trade. That dictates, to a certain degree, how you go about trading in terms of where you get your trades executed. There are a number of different options available regardless of what you plan on trading. Risk Management Strategy This is a major subject for a separate discussion unto itself, the result of which should be plugged in here. Trading System(s) Employed Another major subject for a separate discussion, the result of which should be plugged in here. Trading Routine Trading is a process. There are steps which must be completed along the way. Your routine must incorporate them. Certain things will be defined by your trading system or strategy, such as how and when market analysis is done and when orders get placed. For example, a longer-term trader might do the requisite analysis over the weekend and place the orders first thing on Monday. Other things are more general, such as when and how you record your trades for accounting purposes. This is important for tax records. It is also important in the case of disputed transactions, which do sometimes occur. Be sure to include in your trading routine the process by which you evaluate your trading. This means not only gauging how your trading system is performing based on expectations, but also how you are doing sticking to the trading plan. This is a learning tool in your development as a trader which can lead to improvements in www.newtraderfaqs.com
Trading Systems
your trading system, style, or methods. It is also a way to keep on task with your Plan. Remember how we said earlier that having a trading plan allows the trader to determine the cause of poor trading performance. Modifications The trading plan is a work in progress. That is something to keep in mind. As things change, the Trading Plan must change too. Go through the assessment process periodically, especially when you have changes in your financial or life situation. Also, as your research leads to changes in your trading system or methods, be sure to reflect those adjustments in your Trading Plan. Remember, the main purpose of the Trading Plan is to keep you on task and operating in an effective and efficient manner given your operating parameters. It is, however, only as good as you make it, and it is completely useless if it is not applied in practice.
I am sure that John and the other contributors will have a lot to say about this as I do but I want to take this opportunity to add on to some of the comments here. There are two roads to mastery in the markets: Understanding yourself and understanding the markets themselves. Understanding yourself is the most seminal concept that you have to full understand in order to do well or achieve mastery in anything. Go back and read that 10 times (seriously). Once that sinks in, I want you to understand the next few paragraphs and use it. In the book, The Einstein Factor by Win Wenger, Wenger did an exhaustive study on historys geniuses as well as peak learning performance and acceleration.
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In one of the chapters, he describes that historys great geniuses, like Einstein, were fanatic scribblers. They carried tablets with them where at any give point they would stop what they were doing and write their thoughts down. They did this whether they were in the middle of talking with someone, having dinner, or in the middle of a noisy street with cars honking and trucks blaring horns you could at any point observe them stopping what they were doing and writing their thoughts down. Why is this important? Not because writing in a table down made them great thinkers but by taking the 1% of the highest seminal thinkers and inventors there was a remarkable consistent pattern amongst all these great thinkers. It created a higher form of thinking within their minds by getting in touch with themselves and observing their thought patterns. This also caused more connections made within their brain and more neurons created to form new thought trails within the mind to make pathways for higher thought. These processes became selfreinforcing and created even higher levels of awareness. Jesse Livermore, the Great Bear of Wall Street and legendary trader, wrote crates of logbooks and journals as he began to formulate his trading approach as a kid and continue to do so till he broke through to enormous trading success. Though he went bust several times he continued to learn and evolve (sadly, Livermore was believed to suffer from chronic depression due to a chemical imbalance; an unknown syndrome of his time it eventually drove him to suicide and it believed to have contributed to the moments where his judgment as a trader was affected causing him to bust his account several times). So, by all means, formulate a good plan according to Johns book The Essentials of Trading as it outlines an effective approach but, whatever you do, keep a trading journal. Journal what you see, take note of how you feel, how much sleep you got, your thinking process leading up to a trade, how do you feel managing the trade, what are you feelings/thoughts after a position is taken, etc. Write every detail - both small and large, objective and subjective. Everything that flashes in your mind (it might be your subconscious telling you something). www.newtraderfaqs.com
Trading Systems
After a week, go back and review your entries for anything that stands out. It could be that you see a pattern or that during a loss you were able to shake it off because you had a superior attitude, an attitude that you may want to duplicate for every trade. You may find yourself compulsively trading after a big win (that was a big one for me) and that you have to take steps to step back and be more objective. If you do this you will be able to understand yourself better in relation to your trading, and maybe in life, but you will also begin to understand the markets better. The markets are made of traders/investors that often feel and react the same way as traders did 400 years ago trading Tulipfutures in Holland and will, in all likelihood, continue to do so for the next 400 years because as long as the markets are made of people the same human psychology applies.
A trading plan contains certain critical elements: A Vision: why we are trading and what do we hope to accomplish as a result of our trading success? A Set of Goals: we need a set of well formulated goals to achieve our vision. A Trading Philosophy: benchmark rules which guide our trading. For example in my case the first rule is preservation of capital. The second rule is consistent execution of my risk management and trading rules. The third and final rule is pursuit of securing returns. These rules help me distinguish between competing opportunities. For example, I will bypass the trade that may have a high reward: risk ratio but whose probability of success is low. A Set of Rules that encompass the Triad for Success: Winning Psychology x Effective Risk Management x Written Trading Methodology with an Edge. Copyright 2010
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I define winning psychology as a set of rules and tools that encourage consistent execution of the risk management and trading rules. I define effective risk management as a set of algorithms that balance risk of ruin with maximization of profitability. And I define a written trading methodology as a set of rules that tell me when to enter a trade because of probabilities of success favour me and when to exit a trade because of probabilities no longer favour me.
Trading Systems
How do you backtest a trading system?
There are several ways to back test strategies. The easiest way for many traders to both create and test out prospective systems is to use a technical analysis software package like MetaStock. These applications allow you to define the rules of your system - entry, exit, stops, position sizing, etc. - and test them against a potentially large number of securities. They also produce nice, useful statistical analysis for you to gauge a systems performance. To see examples of how that works I refer you to the system testing chapters in my book, The Essentials of Trading. If you are good with spreadsheets like Microsoft Excel you may prefer going that route. Ive done a lot of syst em testing in Excel. I like it because I can really drill down to the specifics of the systems performance and look at things in my own ways. Depending on the system it can either be done with simple in-cell formulae, or via custom macros. Excel, though, can present limitations in how much data you can reasonably handle and/or how many different instruments you can test. A third alternative for those with the skills is to do the testing programmatically. That means coding the system using some kind of programming language. Back in 1992 or 1993 when I interviewed Market Wizards author Jack Schwager I asked what one skill he would recommend traders develop. He suggested learning to program in C (the leading language of that time). Developing systems through programming definitely isnt for everyone, though.
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When testing systems the number one thing to keep in mind is that the system should be based on sound principles. If you can understand the reasons behind a systems success then you can trade that system with more confidence. You may also be better equipped to spot changes in the market that could prove unfavorable for your system. Generally a system is just a trading strategy that is mapped out in a way that it can be executed without the trader needing to make timing decisions. The success of any strategy is somewhat contingent on the market environment. Some simple examples may help to illustrate this point. If youre trading a breakout or trend following system then your system is more likely to perform well if most markets are experiencing or about to enter a period of strongly trending conditions. If the environment is choppy then a trend following system is more likely to experience whipsaws and will likely struggle to make gains. On the other hand, a system that looks to take advantage of mean reversion will perform better in choppy or oscillating market environments. But if a mean reversion system is active during a strong trend then the mean reverting system is likely to struggle. If you dont understand the principles behind your system you will have no way to be able to anticipate how market changes will affect the system. This could easily lead to you trading the system in an unfavorable way and destroying any edge that it may provide over the long run. Lets again consider the trend following system. If trader A understands how the system works and in what type of markets it thrives and what type of markets it struggles, and trader B has just seen some backtested results and has no idea why it might work, then who do you think will make more money with the system? If they both begin trading the system at the same time and that just happens to be a period where the market enters a choppy phase with very little in the way of trending moves, what will happen to the 2 traders?
Trading Systems
Trader A will have a chance to recognize that the environment isnt ripe. This would allow him to make adjustments in position sizing or perhaps he elects to stop trading the system altogether for a period while he monitors market action. He knows its a good system, but it is an unfavorable market. Therefore he can adjust and wait for the market to become favorable again. Since he understands the system he knows that it requires strong trends to be successful. Once he sees some strong breakouts and some trends starting to emerge he can crank up the allocation again and hopefully take advantage. Trader B sees his system struggle and has no idea why. In this case he may do one of several things: 1. Continue to trade it as is based on faith. Eventually this may work out, but its definitely a painful way to trade and one that could be susceptible to large drawdowns. 2. Determine the system is junk and stop trading it. He could be right, since he knows nothing about the inner workings of the system. More likely the environment is unfavorable and the system will prosper at some point in the future. Of course without knowledge about the system, that trader will not be able to recognize when things are taking a turn for the better 3. unless he monitors the performance of the system and uses the theoretical profit curve as an indicator which will help him turn it on and off. This could work, but still isnt ideal. If you dont know why it wasnt working before and dont know why it is working now, how much faith will you have that it will continue to work in the future? In the case of a trend following system, the trend may be almost over by the time the trader is convinced enough to start trading it again. He could easily get trapped in a situation where he is turning it on and off at the exact wrong times. Sohow do you backtest a system? You start with some basic edges and concoct a way to take advantage them. Understand the edges and it becomes much easier. Taking some indicators and running massive backtests on them to find the best one with the ideal setting is a recipe for disaster. You need to understand why, how and WHEN they work. Copyright 2010
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The tools used for backtesting are not important. Excel is the primary tool used by many system traders I know. I use it. I also use Tradestation. There are numerous others out there that traders can explore. Blocks, Wealthlab, and MetaStock are a few others that come to mind. Just find something that you are comfortable with and dont find overwhelming to start. Dont worry too much about the functionality of one versus the other. They all do a decent job. Once you begin testing ideas those results will lead to new ideas. Your backtesting needs will evolve and you may need to switch systems at a later time, but in the beginning there is really no way to determine which functionality will be important to you down the road. Againhow do you backtest? You take an understanding of an edge or group of edges and you use the software of your choice to confirm your ideas.
Trading Systems
Where should I put my stop?
This is a question that comes up ALOT from new traders. Of course stop in this case is an exit order which implies a market move against ones position, sometimes known as a stop loss (as opposed to a stop, which could also be used to enter a position). Heres the thing. Your exit strategy (stop loss or take profit) should be based on the same strategy you use to enter positions. By that I mean if you are trend trading, then your exits should be based on that. If you are a range trader, then your stops and take profit targets should be based on that. You generally should not employ a separately derived strategy for exiting and entering for the simple reason that you could cause conflicts between the two. Let me explain that with an example. Trend trading is an approach which focuses on attempting to identify trends near their beginning, get on, and ride them for as long as they will run. Ones entry strategy attempts to spot newly developing trends. The exit strategy employed should be one which seeks to close a position when that trend has ended. That generally means leaving a position running and not using a target for the simple reason that if one were to employ a target it could result in large profits being missed. Trend trading systems tend to generate the bulk of their returns from a relatively few very large winners. The trader who uses a target would lose those very big winners, probably ruining the performance of the system. On the other hand, one trading a range system would definitely want to use a target based on the other edge of the range being traded. As for the placement of stops, my personal view is that a stop should be put at the point where, if reached, the market has told you that the move you were expecting to happen is probably not going to, at least the way you anticipated. I do not use arbitrary
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fixed stops. Nor do I employ stop loss orders. My stop exit is placed on the basis of my overall strategy. Of course, the best as advice will always be test, test, test.
A stop or stop loss is an order placed with your online broker that will automatically close out your trade when the stock in your portfolio reaches a predetermined price. William O'Neil, publisher of Investor's Business Daily, states that you should never lose more than -8% of your position on any given trade. There are many other market gurus that have differing percentage amounts. I have never used an automatic stop loss. Volatility, market psychology, earnings, stocks that are thinly traded, "pumping" or recommendation of a stock, and other market factors play a big part in the rise and fall of a stock price. Sometimes you will see the stock price retreat to your stop level, or just below it, and then shoot to the moon! If you have an automatic stop in place, you will have sold your stock and not see the gains of that afterward increase in stock price. My rule of thumb for stop loss is - for stocks that are thinly traded or that have higher volatility, I have a manual (written or mental) stop of -13%. For all others, I use a manual (written or mental) stop of -6% to -8%.
Trading Systems
Should I buy this system?
The answer is probably No. This is not a comment on trading systems bei ng sold. Its a comment on systems developed by one trader not working for most other traders. There are a lot of moving parts when it comes to systems. In order for one to work for you it needs to be in the right market, the right timeframe, the right risk profile, and the right type of trading for your personal style. If even one of those elements is out of line with what you need then the system will be useless for you, or worse. For example, if you are someone who is naturally inclined toward trend trading, which means letting a position run for as long as it keeps moving in the right direction, you arent going to do well with a system that uses targets. It might be a very good system, capable of excellent returns, with everything else right. If, however, you are always going to struggle with the targets and wanting to hold the trades then its probably going to just cause you frustration. As I said, this isnt about suggesting that trading systems for sale should be shunned. What its really about is fi nding a system that meets your precise needs - which of course means you need to know what it is that you need. This only comes from experience and learning. Also, theres the confidence factor. In order for you to be able to effectively trade a system you need to be very comfortable with it know what its going to do in different market conditions. That means putting a system through its paces, which can be very hard to do with a system youre looking to buy before having to actually put up the money. So yes, sometimes it can be worth buying a system. Most of the time its a much better decision to work on developing your own. Not only will you end up with a system you will have more Copyright 2010
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experience and confidence with, chances are youll also learn a lot more through the process.
Without even asking about the system, my answer is an unequivocal NO. I have learned that there is no magic system, no silver bullet, no simple setup or technique that you can put into auto-pilot and rake in profits, as many websites claim. The market is a dynamic structure and static systems usually cannot keep up with changing market conditions and the only people, who make consistent money from such systems, are the people who sell them. Cars have been around for decades, yet how likely are you to buy an auto-pilot car driving system? Even in places where we have auto-pilot systems, such as airplanes, these are complemented with the expertise and experience of the pilots. Think about it. There are trillions of dollars at work in the world financial markets if there was such a sure-shot system, would it be available to new traders? I firmly believe that trading is a complex pursuit that requires managing stock and market analysis, money management techniques, market sentiment indicators and individual psychology. And in a world, where short-cuts sell well, no one ever tells you while, it is entirely possible to learn how to manage money well but like everything else, it requires dedicated learning and effort. There are no short-cuts to anyplace where you really want to go!
When considering buying a trading system there are several questions that need to be asked. Ill briefly discuss a few of the more important ones.
Trading Systems
1) What are you hoping to get out of the system? This is really the most important question. If you want to pay small money to get a black box that will autotrade your account and reap you huge profits then youre almost certain to be disappointed. If you are looking for a new trading technique, or a method that is uncorrelated to your current methods and could allow you to diversify your approach, then a trading system may work well. 2) What do you get with the system? Many trading systems are black boxes where the methodology is not revealed. Such systems are often a cause of great frustration with traders who try to follow them. Even if the system has performed well in the past it will almost certainly go through rough patches from time to time. If you are trading a black box without an understanding of what is driving the buy and sell signals then it is difficult to get a feel for whether the system is just suffering from momentary bad luck, or whether there is a design flaw, or whether a change in market character is causing the system to temporarily or permanently lose effectiveness. Id suggest focusing on systems that reveal all their logic. There are less of them but they are out there. By being able to look under the hood you can 1) Learn something about the approach, which in itself could pay for the system if it helps you to generate new and profitable ways to trade. With a black box the only way to recover your investment is to have the system make it back. 2) Better understand how to adjust the parameters or stop trading the system all together if market conditions dictate. 3) Make adjustments or customizations to the system so that it better suits your personality and trading style. 3) How hard is the system to execute? This is big consideration. If the system focuses on trading breakouts in highly illiquid securities, what are the chances you are going to get a favorable fill? What if there are several other people taking the same trade at the same time? Even if a system uses highly liquid securities, can you still execute? Does it require intraday monitoring? Will you be able to monitor it during the day? How often does it trade? If it is only once per day does the trigger occur at the close or the open? Does this work for you? Also is it a system that you could execute from a psychological standpoint? For instance, if it calls to buy extreme selloffs, would you be too scared to actually pull the trigger? Copyright 2010
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4) Is the system robust? No system will work with equal effectiveness on every security. But if the system only works on one security then there is a good chance that system was overoptimized for that security. Over-optimization often leads to unrealistic expectations and frequently what looked good in the past will not work well in the future. If a system works well across multiple securities then there is a good chance that the concepts behind the system design are sound and that the system is more likely to continue to perform well in the future. 5) Is the system vendor reputable? Ultimately you are going to need to make a leap of faith to purchase a system. If the system being offered is from a reputable vendor then there is a good chance the system was designed well. This doesnt mean it will always produce top-flight returns, but if youve seen other quality work from the vendor, or know the vendor to have a good reputation, then you stand a much better chance of getting something worthwhile. Remember, everything a vendor sells has their reputation at risk. Only buy from someone who has a reputation worth risking. Big promises from a site youve ne ver heard of or a vendor who is not willing to talk or answer questions should be viewed as warning signs. There are many good and many bad systems out there. If you want system trading to be a part of you arsenal then you may need to spend some money on systems initially. Focus on open systems that provide information and education as well as buy and sell signals. That way you will be able to take that knowledge and expand upon it over the years through your own research.
Trader Psychology
Section VIII
Trading Psychology
What that brain of yours is doing
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How important is psychology in trading success?
Your mental state and processes are important to your trading, but trader psychology probably should not be placed by itself at the top of the list. The three legs of successful trading, to my mind, are having a positive expectancy trading system (thats one which is expected to make money over a given time period), strong money management, and the ability to execute your system and stick to your money management rules. The latter is trader psychology, and its no more or less important than either of the other two legs. Think of it this way. Whats going on in your head cannot turn a losing system into a winner or a poor money management scheme in to a good one, but it can certainly kill either or both. Thats why you need to pay attention to psychology. Having said that, the mental part of trading is one of the later parts of your trader development. There is a lot of foundational stuff one needs to learn before worrying about the mental parts. It really isnt until one starts the move from paper/demo trading to real money action where things start coming to a head with trader psychology (so to speak).
A good question, and one without an obvious answer. The very question itself is open to various interpretations. If you are someone who requires perfection, and anything less is psychologically unsatisfying, then I suggest that trading is not for you. No trader is perfect and no system is flawless. When trading, losses are inevitable. Your job, as a successful trader is to manage www.newtraderfaqs.com
Trader Psychology
your risk in such a way to ensure that losses are cut short and no single loss is large enough to hurt. Another part of successful risk management is the ability to achieve your target result, take your profits, and seek out another trade. If you lack the ability to do either of the two items above, you cannot succeed as a trader. If you are afraid to take profits because the profits may keep increasing - or if you are afraid to take a loss because the market may suddenly turn around and go your way - you are psychologically unsuited to being a trader. John Forman believes psychology is an issue that can be discovered and dealt with - once you have some basic trading skills under your belt. I dont see it that way. Just as with every other profession, some people have the skills to prosper as a trader, and others do not. Its not easy to overcome psychological barriers, although trading coaches are available to help you do just that. My experience is that some people are just gamblers. The fact that they become professional traders who ought to stop gambling is not enough to get them to fall off the wagon. They take big risks too frequently. That is not the path to survival. Some wannabe traders are so risk averse that they cannot pull the trigger on a trade. And if they get that courage, the instant the trade loses a penny or two, they cannot stand it and rush to get out. That is not the path to success either. I use options to quantify and reduce risk. Its inevitable that part of the time better results would be achieved by forsaking options and targeting a bigger gain. Im happy to accept reduced profits in return for having less risk in a trade. Not everyone can see it that way. If you are a woulda, coulda, shoulda type of personality, then you are not going to be second-guessing yourself constantly and be unsatisfied as a trader. Successful people who are employed by a real world business do not jeopardize their jobs on a single venture. Trading relies on that principle. But traders are always in position to make a big bet on a single trade. Are you psychologically able to resist, no matter how certain you are that the trade will be a winner? It only takes an instant to go awry. You must have the proper outlook on riskCopyright 2010
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taking, and your psychological makeup goes a long way in determining how you will perform under stress. How important is psychology to a trader? Its crucial. Sure, people can get counseling, training, and lots of advice. But I feel there are just some aspects of a persons psychological make up that makes him/her unsuited for the trading profession.
Everything. If you dont have the mental/emotional balance and mindset for trading right then you just cant succeed. If youre asking yourself how to be sure or what can you do to make sure that you do then, congratulations, youve just shown your a winner and will do whatever it takes. Give two different people the same winning mechanical trading system and then leave them to trade it for a year then theres an overwhelming chance that they both have entirely different results. One guy can take the system and follow it to a T even when it 's going through a drawdown all the while knowing that if he stays true to the rules set forth then he will come out ahead in the end. But, the second guy, he can go to pieces being riddled with worry, anxiety, and fear which causes him to break out in cold sweats before he even has a signal to enter into a position! People are all different and each year the best and the brightest in their respective field come to the markets to stake their claim and end up leaving with busted trading accounts and asking themselves How could I lose at this?? I was so successful at practicing ___ (you fill in the blanks; law, medicine, research science, stock analyst, etc.)
Trader Psychology
Their are a lot of great books about this topic but I would recommend anything by Dr. Van K. Tharp, Dr. Brett Steenbarger, and Ariv Kiev to name a few. But, to make sure you get off to the right footing, Ill share an insight with you in that successful trading is often very counterintuitive. If you take a successful lawyer who has the admirable habits of hard work who forcefully applies himself to getting results and then put him in the markets as a trader along with those traits that I just mentioned then he is going to be in trouble. Why? Because his whole career is centered around certain character traits that are admirable in his field of expertise but trying to force the market into giving you want you results you want or working hard at hunting down trades is not just fruitless but its downright expensive. Trading is about finesse, timing, and harmony. The two greatest skills that you can have are 1) understanding the markets and 2) understanding yourself. Start with yourself and master your feelings of fear and greed as they relate to the market and find good instructors/mentors to help you understand the markets and youll be on the path to Mastery.
In my view, psychology represents 60% of the success equation. Effective risk management is 30% on the success equation. And, a written methodology represents 10% of the success equation. However, there is a multiplication sign between each of the factors so that our probability for success is only as high as the weakest link. Why is psychology 60% of the success equation? Because, it is simply the most difficult to apply. For me, the function of winning psychology in trading is to provide the environment for the Copyright 2010
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consistent execution of risk management and trading rules. Thats easy to say but hard to implement. Implementation requires: Self-awareness The ability to function under stress The ability to feel our emotions without allowing them to hijack our actions The discipline to undertake the practices that will lead the constant improvement. For example, the keeping of psychological and equity journals.
Important. But not more important than either money management or your strategy. In my opinion, psychology ranks 3rd. Now I know Ill get thrown out of the educators club for saying this as I think my thoughts on psychology has a membership of one me! Buy hey isnt there always two sides of a story? My take on it is that psychology is only important once you commence trading. In my opinion psychology appears to become a barrier to success when the subconscious mind is not satisfied that the trader knows what theyre doing. Most traders are clueless despite all the courses, seminars and workshops theyve attended, despite all the books theyre read and despite all the charting programs installed on their PCs, theyre still www.newtraderfaqs.com
Trader Psychology
100% ignorant and theyre subconscious mind knows this. And this is why it will do everything in its power to stop someone trading. Increase their heart rate, give them sweaty palms, cause them heart palpitations, make their anxious etc. And yet many who believe psychology should be used to beat up the subconscious mind will tell you to believe in your trade plan, stay the course, execute your orders when its plain to the subconscious mind that the trader does not have a competency in trading. I believe that if traders adopt a sensible money management strategy and combined it with a simple and robust trading methodology that they will commence trading with a 0% risk-ofruin (please see my comments under When do I know Im ready to start live trading? or more about risk-of-ruin). You see money management and a positive expectancy strategy are the two key weapons against risk-of-ruin (ROR). If a trader does the work to learn about how to reduce their own ROR to 0%, and do it correctly, their subconscious mind will see then doing the work. It will see the person learning that trading is simply a numbers game and it will see the person placing the odds in their favour. It will be more relax when the person starts trading. It will enable the trader to follow their trade plan since it knows the person has a trading edge and is trading with a 0% ROR. It will want the trader to make the money, its not stupid. So rather then tying up the subconscious mind in some sort of psychological straight jacket I believe the trader should listen to it! And I believe if the trader can successfully get their ROR down to 0% then the subconscious mind will not put obstacles in the traders path. Once a trader achieves a 0% ROR and completes the T.E.S.T procedure (please see my comment under When do I know Im ready to start live trading? For more on my T.E.S.T procedure) everyone will be far more relaxed. The subconscious mind will enable the conscious mind to achieve its potential. So in my opinion, I believe money management ranks above methodology that in turns ranks above psychology. However once the person starts trading psychology will be important as it will be the glue that holds money management and methodology Copyright 2010
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together. That glue is important and its important for a trader to be able to hold the eye of the tiger so to speak. Well anyway thats my short take on psychology. And before I leave you I just have one simple observation. Id imagine if psychology is regarded as the biggest obstacle to success then youd think that the people managing billions of dollars in global markets would have to be close to suicide due to the large amounts of money theyre trading? If your head is where its all at and youd have to believe it if you believed those who think psychology is the highest mountain to climb in trading then those large money managers would have to be on suicide watch or being close to being committed to an institution where everyone and your family usually forgets youre there? Right? And yet those managers are normal people. I personally know two of Australias largest traders trading over a billion dollars between them. And guess what if you passed them in the street you wouldnt know they were trading that amount money day in, day out, night in, night out across global financial markets. If you saw them you could easily mistake then for a pair of suburban accountants. Successful, easy-going professionals. Theyre not strung out. Theyre not nut cases. Theyre not struggling with following their trade plans. Theyre not arm wrestling their psychology. Anyway thats my two bobs worth. And before I depart I should also say that Ray Barros and I agree to disagree on the importance of psychology and have done so both privately and publicly (when weve been together on panels at Trading Expos). And I should also say that Ray is far more successful them I am so I am always happy to bow to him when it does come to the subject of psychology!
Trader Psychology
Extremely! Chairman Mao Xian famously said, Good trading is 10% methodology and 90% psychology. Consequently, I think that trading is a pendulum between ecstasy and agony. I believe that good trading has to be an amalgam of analysis, money management, market sentiment assessment and individual emotion and if you think about it, all of it can be influenced by the last component - individual emotion. Emotion can color your view of the market and make you ignore your money management rules. I believe strong emotions are a necessary ingredient for success have you ever met any successful athlete who was not passionate about her work? The trouble begins when emotions, instead of being the driving force behind the act of trading, become the driving force behind every trade! Latest behavioral research has highlighted the role of emotion in risk management Traders are usually highly emotional about their holdings, and thats the reason why they have difficult talking losses. They usually hold on their losing stocks. Instead, they should use the same emotion, which can be distractive and destructive in an individual stock holding level, to the vocation of trading. A few years ago, I wrote an article about emotions and trading. I am reproducing it here. In Money Matters, Mind Matters It does seem out of place to talk about feelings in the crisp world of finance, in this jargon of numbers, intricate formulas and back testing strategies. As a matter of fact, there are trading strategies designed to take emotions out of the equation because apparently emotions are a sign of weakness and we need to not only realize that but work toward eliminating that distinguishing human trait. Many Wall Street pros say feelings and emotions have no place in Copyright 2010
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trading. And I would wholeheartedly agree, if we were all computers! In my opinion, emotions are an integral part of trading, because they deal with two of most important assets of individual investors: Their money and their ego. People get involved when their money is at stake, thats understandable. But when they place a trade, they also judge themselves by seeking validation from trade outcome. So, trading is intertwined with a curious mix of emotions. Also, to advocate trading without emotions would be like saying that its better to not have pain receptors since pain is detrimental to the body! In reality, the ability to feel pain is a survival instinct; it keeps us from doing irrational things. Similarly, if we didnt feel the emotional pain of losing, what would stop us from losing? I thought it would be interesting to look at some familiar trading scenarios in their emotional context, since emotions might impact the trade identification, initiation and exit. Unsure about a losing position? If in doubt about a position, judge it as if you dont own it. Owning a position makes one unduly partial and looking at the same position as a new position, infuses some objectivity in it. Think as if you didnt have it and now evaluate if you would re-initiate it! Youll be able to make better decisions about the fate of the position, rather than rationalizing it simply because youre holding it. Just took a large loss? Were you in RIMM, GOOG, MICC, MSFT, TXN or VMW when they plummeted after their earnings announcements? Next time, you have a trade that gets recorded in the worst trades of the year; do whatever it takes to step away from it. You want to be mindful of the feelings of revenge trade. Your first instinct is to want to short the same stock (if you were long) or to destructive tendency. If you dont harness this emotion, that single loss could cascade into a domino effect. Now that you have taken that loss, leave it behind while evaluating other trades. If it helps, take it off your screen. Rebuild your portfolio and more importantly, your confidence by trading small and trading conservatively. The only way to ensure that this loss is erased from your memory is to not solidify it by creating an environment of even greater losses.
Trader Psychology
The best trade of the year? Now, lets talk about a really successful trade that was great both for your wallet and your ego. Did you happen to catch the great moves in GS and AIG and did you short UNG or USO at the very top? What about these feelings of being a proficient trader, of knowing the markets intimately and owning that particular stock? Well, this is precisely the time for extreme caution and not letting those feelings get the better of you, because if that happens, you might give up all those gains, very often in the same stock that made you feel rich! Like alcohol, this feeling impairs prudent judgment, makes one feels invincible and encourages trades where none should exist. It is worthwhile to remember here, that unless this is your last trade, the race is not over yet! Dont feel like trading? It is also crucial to be in sync with your own moods if you want to get in sync with the market. If youre tired, preoccupied with something else or simply cant keep up with the recent, daily gyrations of the SPY or QQQQ and are simply feeling disengaged, it is best to not trade for some time. There are times when the market wears you down, and the choppiness continues to chip away at your portfolio. Learn to recognize that `couldnt -careless-feeling and curtail your trading accordingly.
They say, trade without emotions to be better at trading. I think this philosophy is good only at taking losses; one should be detached about taking losses at predetermined exit points. But trading has numerous other aspects and in all those other aspects recognizing and being aware of emotions matters more to a traders bottom line. So, in my opinion, the aim is to not remove emotion but to harness it. Why deny that there is no place for emotion in the equation? As long as you can isolate irrational exuberance, pride, despair or boredom among other feelings from your trading decisions, and endeavor to be dispassionate about individual trades, yet remain passionate about trading, you can continue to ascend as a trader, whether or not the market does! Mastering the trade is really not possible without first mastering yourself.
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How can I overcome my fear when trying to pull the trigger on a trade?
Confidence is what allows you to click the mouse button to enter a trade. Some people are naturally confident and have no problem committing to the risk. Others are more hesitant by nature, and struggle to pull the trigger. Actually, the interesting thing is that trading experiences sometimes leads those who start confident to become hesitant, while for others its the reverse. If you are afraid to trade youll have to work to develop your confidence. Here are some ways to do that. Education is a big factor. We are generally more fearful about things we dont understand. Most people also just generally feel better when they learn new things. Fill the gaps in your trading knowledge and that will tend to help you be more comfortable with your decision to act. Practice is also important. Its much easier to do something we have done over and over before. In trading that generally means doing a lot of work in the demo world to get comfortable with things before making the plunge to real-money trading. Starting small is another good way to build confidence. If you can trade at a level that really doesnt put you at much risk you can work through things without worrying about losing a lot of money. As you gain in confidence you can slowly increase your trading size to ease into things rather than jumping in all the way. The last suggestion I would offer is to test, test, test. The more time you spend testing your trading system or methodology the better you will understand it, and the better you understand it the more confident youll be in employing it.
Trader Psychology
One simple strategy that helped make all the difference for me was keeping a Visual Journal. If we are simulated trading, or trading with small size to build experience and confidence, take an extra step and begin keeping a visual trading journal. Instead of looking at your trades in an Excel Journal or text spreadsheet where they have little emotional or visual meaning, print out the chart of the stocks you traded that day and draw in your entries and exits for your trades - simulated or real. If you are an intraday trader, print out the full intraday action on the timeframe you were trading - maybe the 5-minute or 15minute chart - and draw in and label where your system gave you buy and sell signals, and then note how you performed if you traded that day. If you are a swing trader, you can print out the daily or weekly chart and note the signals you found and then what happened later. Compare where you entered and exited with what was possible in the trade set-up or indicator signal you were trying to take. Pay special attention to answering the following questions: Did I enter too early or too late? Did I exit too early or too late? Did I enter a trade off a signal that was not there? Did I purposely not enter a trade I saw because I was afraid of it not working out? What will happen over time is that you will begin to see where you are making mistakes and you will learn how to correct these mistakes.
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You will also build confidence in your strategy or the entry and exit signals you are using because you will then follow trades from their start to finish. You will also develop confidence through increasing your pattern recognition skills, in that the more times you see these trades and how they played out, the better you will be able to take these trades with confidence in real-time as they set-up. Familiarity with these set-ups and their outcomes will help build your confidence.
Trader Psychology
Why can't I follow my trading system?
Following a trading system generally comes down to a couple of things. The first is fit. You need to make sure youre trading a system which fits you. That means the right market, the right timeframe, and the right risk profile. New traders seem to come into things thinking that if they can find a system that makes money theyll be good to go. The thing is, however, there are loads of systems like that, but they have different characteristics and styles which work for some but not for others. For example, some systems make a lot of money but suffer through large drawdowns. Many traders just cant handle that sort of roller-coaster. They end up second-guessing the system, usually at the worst possible time, and it usually doesnt work out well. Even if youve got a system which suits your personality, theres still a confidence issue which often needs to be overcome. This is generally a question of you lacking understanding of the system and experience using it in various types of markets. This can be overcome by testing and practice. That can mean backtesting the system over different data sets to see what it does. It can also mean forward testing it by trading in a demo account. The bottom line is the more time you spend with the system the more confident youll be using it and the less likely youll be to override or fail to follow it.
Assuming that you understand your temperament and have found an approach that suits you then if you still experience the inability to follow your trading method then it has to be your mental/emotional framework. Something in your mindset and/or Copyright 2010
New Trader FAQs

psychology is in conflict which is causing inaction. This type of self-sabotage is all too common amongst traders or anyone who is trying to operate at a higher level of performance. There was a great exercise that Dr. Van K. Tharp detailed in his Peak Performance course that I never forgot. It had to do with the parts of ourselves or parts work. The premise is that we all have these individual parts that make up our psychological makeup that stem from our internal beliefs and personal values. Once we recognize what those beliefs and values are, then we begin to develop an awareness of our on internal dialogue or the way that we talk to ourselves. Each of these parts of our whole has a voice that, more or less, competes with one another to fulfill its role by protecting you in some way. Your integrity part may speak to you when your boss tells you to do something unethical even though it may get you into trouble but, at the same time, your security part may tell you to just do it so you dont lose your job and depending on the value you put on what each part represents and/or ascertain its impact to your survival you will make a decision. When two parts like this are in conflict with one another it creates tension or self-sabotage. In the above scenario, you may decide to do what the boss tells you but then your integrity-part may feel that you need to punish yourself with guilt so th at you dont do it again. This is why so many people who have issues with guilt or shame because of the rules that they have unconsciously setup for themselves. If they let one of their values down then the part assigned to it begins to deride them. With trading, your fear-part may be telling you that this is risky or your respect-part may not want you to make more money than youre spouse or parent because of the unconscious rules youve set up. It says you cant make more money than those people otherwise you will disrespectful and the aftereffects are guilt, shame, fear of abandonment, and so on. www.newtraderfaqs.com
Trader Psychology
Its an incredibly complex and brilliant subject that speaks volumes to all the wonderful paradoxes that make up being a human being. Now, thats only one broad example but its worth checking into to study (my sharing part told me to say that ).
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New Trader FAQs
Why isn't everyone trading in the same direction?
This question speaks to a narrow perspective that new traders can often have. They only see the market within the parameters with which they are interacting with it, not stopping to consider that the universe of traders is vast. It covers people trading all different timeframes and methods and strategies, and with varying motivations. Let me take that last one as a really good example. This might sound crazy, but not all trades are done with a profit motive. In fact a great deal of volume in the markets is hedging related, meaning people and institutions trying to protect themselves against an adverse market move. A gold miner will sell gold futures to lock in a sales price. A cereal company will buy wheat futures to lock their costs. Portfolio managers will sell options to hedge against a downside movement in the stocks they hold. Multinational corporations will do forex swaps to lock in exchange rates. None is attempting to make profits on the transaction. They are attempting to protect their downside and/or to help in the budgeting process. Clearly they are not going to be looking at things the same way as some day trader. Even among speculators there are wide differences. Some folks scalp, getting in and out in minutes, if not seconds. Others hold positions for months, or even years. Some employ technical analysis. Others use fundamental. Some use both, and yet others still are purely quantitative. Some folks are discretionary traders and others automated or quasi-automated systems. Some play ranges and others play trends. The bottom line is that people come at the markets from a lot of different directions and perspectives. The markets exist to allow them to express their trading and investing views or meet their business needs. It is that variety which allows for real market www.newtraderfaqs.com
Trader Psychology
movement. If it were only a homogenous group of traders all trading with each other volatility would probably be very small and there wouldnt be much opportunity for trading profits.
(relating the question specifically to covered-call options, but it applies across markets) There are so many options trading these days (several billion contracts every year) that there is no single strategy that overwhelms the markets. No matter how many people want to sell options - covered calls or any other - there are always buyers. There are a bunch of funds that adopt covered call writing as a strategy, but compared with the total number of mutual funds there are on the market, very few are allowed to use options in any form. The Buyers Professional market makers are either standing in the trading pits (where the options trade) on the exchange floors, or are represented by computers. Those market makers continuously show a bid (price they are willing to pay when buying) and ask (price they want to receive when selling). Thus, there is always a market for your orders (or any orders) arriving on the trading floor. These days, orders arrive electronically. Many orders are filled instantly because the price that the buyer is willing to pay meets, or exceeds the price the seller is asking. At other times, there is no trade and the sellers offer waits for someone to be willing to pay the price. No seller is required to settle for the market makers bid. You may ask any price you choose. The higher that price, the greater the likelihood that no one will want to buy the calls you have for sale. The premise that buyers of the sold calls want to see a big rally is not accurate. You must remember that plenty of people sell put options, and the market makers will be overloaded with puts on occasion. That means the buyers of options dont always want to see a big rally, sometimes they want to see a big decline (when they buy puts). Copyright 2010
New Trader FAQs

While its true that an order to sell a very large number of contracts may go unfilled for awhile, unless the price is lowered, in general buyers and sellers find an agreeable price and the trade is made. This is true for all options - puts and calls. So, the question is: how do these buyers make any money. Thats a good question, and most rookies never give it a thought. 1. The option buyers hedge their trades. They do not take the risk of hoping the market will move in the direction that makes their option portfolio profitable. 2. How do they hedge? First, the term hedge means: to reduce the risk of owning. That is normally accomplished by taking on a new position that offsets, or at least partially offsets, the risk of owning the current position. First they use the Greeks to quantify their risk. If you are not familiar with the Greeks, take a bit of time to learn about them. For now, lets just say that the Greeks allow the market maker (or anyone else) to evaluate the risk of a specific position with regards to: How much will the trader earn or lose if the stock moves higher or lower (delta)? How much does it cost to own the options (options are wasting assets and decline in value as time passes) (theta)? If the market becomes more (or less) volatile, how much can I expect my option portfolio to gain or lose (vega)? Plus other risk factors
The Greeks allow these market makers to see how much risk they have, and then the traders can decide how much risk to offset (usually the decision is to offset 100%). They hedge by buying or selling other options and/or shares in the underlying stock. The goal is to have no market risk. Instead, they hope to profit by accumulating options at or near the bid price and www.newtraderfaqs.com
Trader Psychology
selling at or near the ask price. If all goes well and the hedge is truly market neutral, they can prosper. Complete hedging is a complicated process, and almost all market makers are in partnership with large trading companies who have off-the-trading-floor computers. The market makers make the trades and then forget about them. The computer is programmed to find the smartest hedges - once they have a new position. In fact, the computer manages the portfolio and even makes trades when there is a way to add some edge (profit potential) to the position. Dont be concerned with the people who buy the options that you, or anyone else sells. They can take care of themselves.
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Brokers
Section IX
Brokers
The folks doing your trades
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New Trader FAQs
What's the best broker?
There is no such thing. Brokers have different strengths and weaknesses. You should try to match that up with your specific needs and wants. Chances are there are several good candidates in your market of interest. I would strongly recommend you select a broker who is registered with the proper regulator or a member of the appropriate industry group - for example FINRA for US stock brokers, NFA for forex/futures brokers. That will give you some recourse in case there is ever a problem, and in fact keep the chances of any issues coming up to a minimum. Beyond that, check out the trading forum sites to find out what other traders are saying. Word of warning, though. Dont get crazy about all the negative comments. People are always quicker to complain than to praise. Also, there are a lot of traders who feel the need to blame someone else for their poor performance. Brokers can be a prime candidate, especially in the forex market. Take the criticisms you read with a grain of salt.
Brokers
How should I select a broker?
There are, generally speaking, a few things youll want to base your brokerage decision on. 1) The availability of the markets/instruments you wish to trade. Obviously, you need to pick a broker through which you can do the trades you want to do. A stock-only broker, for example, isnt going to be much use trading futures. 2) Safety of and access to your funds. You want to be able get your money out of your account promptly when requested and not have your account be at risk of getting frozen or wiped out because of poor management or shady business practices. Generally speaking, brokers who are duly listed with the overseeing regulatory and/or industry body will be fine, but there are sometimes exceptions. 3) A trading platform which suits your needs. This can mean being able to trade on your computer of choice (Mac, Windows) and/or being able to trade via a web browser. It can also mean having the right tools like charting, screeners, and other research and data applications. 4) Good customer support. There isnt much thats more annoying than not being able to get answers to your questions in a timely manner. 5) Execution speed. This is something very important for shortterm traders, but less so for those trading a bit longer-term. You will probably find that most of the brokers you look at are pretty comparable, especially if they are big ones. The differences tend to come in the tools and customer service areas. At the end of the day, it will come down to personal comfort. For that reason, definitely take the opportunity to test drive different brokers to find the one which suits you best. Copyright 2010
New Trader FAQs
Is my broker trading against me?
This question mainly comes from forex traders, but whether they realize it or not can also be a factor for stock market traders. This has to do with brokers being market makers. In forex there are pass-through brokers (SPT, which are generally ECNs) which put your order into the market and get it matched up with an opposing one somewhere else in their liquidity network. They dont take the other side of your trade. The other type of forex broker is the market making sort which does take the other side of your position - at least initially. Some stock brokers actually also act as market makers in certain stocks, so they to can sometimes be on the other side of your trade. Heres the thing, though. Market makers generally speaking are not in the business of taking positions. They are looking to buy at the bid and sell at the offer. That means if they buy from you they want to pair that up with a sell to another customer so they can book the spread as profit and be left with no price exposure. In other words, whether you make or lose money on your trade doesnt matter to them because those gains or losses will be offset by someone else, not by the broker itself. This is the same market making mechanism which takes place in all markets. Its just that in something like futures your broker just passes the order through into the exchange where a market maker or another broker takes the other side. In forex its like youre actually on the trading floor with the market maker, taking the broker (and his commission) out of the equation.
If you are in a dealing desk environment absolutely although there are chameleons out there who claim not to have a dealing desk when in fact they do. Market makers are the chameleons and they www.newtraderfaqs.com
Brokers
are very good at blending into whatever new traders are gullible enough to believe. If you value your trading account and self-esteem never trade against a market maker, especially if they are outside the purview of the NFA. With a market maker when you win they lose. This may be hard to believe but some of them really do not like to lose, incredible I know yet true and they control the trading platform. Imagine playing a fixed Wheel of Fortune. How good do you think you will do? In my opinion there is no difference between a rigged wheel and a foreign market makers platform. (see Broker Xs answer to Is spot forex trading a scam? for a thorough discussion)
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New Trader FAQs
Is my broker running my stops?
This is mainly a forex trader question and the answer is almost always going to be No. Are there some potentially unethical sorts out there who could do that sort of thing? Of course. If you stick to the reputable brokers, however, this isnt a problem. One commenter on my blog described a test he did with a large group of brokers in which he looked for questionable prices which would suggest intentional stop running and he discovered none. Now, this doesnt mean stop running isnt done. You can bet it is. Its just done at a more macro level where the big volume is in play - namely the inter-bank market from whence the prices your broker quotes you come. Stop running has been going on for as long as there have been standing orders in the markets, in all markets. Ask some of the old time futures pit traders and theyll tell you all about it. Its a legitimate tactic - one which sometimes works and one which sometimes does not.
If you think so they probably are, yet you can tell if you see one market exploding and all the others quiet. Running stops is a great way for a foreign exchange market maker or broker to enhance their bank account at your expense; you must understand, when you are in a trade with them you are vulnerable. They can see you order, your stops, limits and they know how much money you have. You however cant see a thing on their end, can you? Plus they can control your platform. (see Broker Xs answer to Is spot forex trading a scam? for a thorough discussion)
Trading Jobs
Section X
Trading Jobs
So you want to work on Wall Street?
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New Trader FAQs
How do I get a trading job?
Ive never held an actual trading job, so I cannot speak directly to that, though I have experience on the analyst side of things. I think in either case it depends on whether youre planning on going after that type of position coming out of school (graduate or undergraduate) or whether you are trying to come in through a non-academic recruitment process. If its the former then youll probably rely quite a bit on the resources and contacts of the school in question, unless you have your own contacts. Its been my experience that trading jobs often arent advertised. Networking will probably go a long way toward landing something. And of course there are ways to get in the door at a place and work your way into a trading position. No matter which path you take, I think its a good basic idea to take a look at trading job listings that are out there to see what kind of requirements and such they have.
Getting your first trading job requires a bit of work. Its a competitive business, after all, and offers the potential of making some of the best money in finance. The bigger trading firms commodity firms, investment banks, and retail bankswill often interview at the top universities. If youve just completed a math or economics undergrad program or an MBA degree, your school is a wonderful resource for entry level spots. Make sure to take advantage of the recruiting days on campus. The firms that come to these events interview for associate positions. These new hires will move about through different trading groups or desks, taking a variety of training classes along the way. These classes are rigorous and intended to eliminate the www.newtraderfaqs.com
Trading Jobs
low hanging fruit. To be successful, it helps to have a stand out personality. The smaller trading firms do advertise assistant trader positions. However, there are still many trading positions that will never be advertised. This is when it helps to know someone in the industry. Because its common for people to move into trading from some other area, your connections at this step are important. How do you make these contacts if youve never worked in the industry? Think college internships, or use your schools alumni network if youve already graduated. Finding alternative routes into a firm can also work. Take a look at the list of member firms on different exchanges and visit their Web sites or contact them directly. Remember, mutual fund firms also have trading desks. Look at jobs in the analyst department or at one of the many firms that support trading operations. There are companies that service and provide applications and clearing services to trading firms. And a huge number of people support trading operations in everything from network management to accounting. A position in a related department or organization can provide you with inside information on job openings at a trading operation.
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New Trader FAQs
What types of trading jobs are there?
There are many different types of trading positions, even with individual markets. To get a feel for what they are I strongly suggest that you research the listings for them at the job board sites like eFinancialCareers. Some will be in fixed income (interest rates). Others will be in stocks. There will no doubt be derivatives trader listings, and those for commodity traders. Some trading positions are junior ones, while others are for more experienced types. Some are quant positions which often require PhDs. The listings will give you an idea of the duties and requirements for each type.
Whatever firm you work for, new folks generally start out as assistant traders. At a small shop that may mean making coffee runs, building spreadsheets, and doing lots of research. If you want to start at a smaller firm, do your research before you apply. It helps to know exactly what they do and how you can help them. Look for what products they trade, what professional organizations they belong to, and where their management started before working there. Traders from larger institutions are the ones whove started many of todays smaller firms. The interview process is tough, which is how they winnow out applicants who cant deal with high amounts of stress. At a big firm, youll do more coffee runs, build mor e spreadsheets, and do a lot more research as you learn about the extensive and complicated nature of the business. But dont assume that youll get lots of authority right away. They dont put new hires without a track record in charge of millions of dollars. Generally, youre required to hit the ground running. Firms need to see how you react and deal with things in a risky and very errorwww.newtraderfaqs.com
Trading Jobs
intolerant environment. Most of the real experience comes when you begin trading. There are a variety of things to trade, including stocks, bonds, commodities, fixed income, or derivatives products. If you have considerable experience and an educational background in mathematical modeling and programming, then you can build and back test trading models.
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New Trader FAQs
What is a proprietary trading firm (prop shop)?
A proprietary trading firm (or prop firm) is a trading organization that trades the capital of the firm, rather than the capital of the traders themselves. In a true prop firm, the traders are employees and trade for the firm. The firm advances each trader capital based upon the traders experience and success and, in return, the trader and firm share in profits. This arrangement can be distinguished from an arcade, in which the trader trades his or her own capital at a company where the firm provides overhead and support (office space, computer equipment/support, brokerage services) for a fee. A trader is a customer of an arcade; an employee of a proprietary trading firm. In addition to splitting trading profits, prop firms may assess fees to traders that cover a portion of overhead; they may also assess commission fees per transaction. More recently, prop firms have been assessing fees for training and education services. In some cases, the fees assessed are significantly greater than the capital that is allocated to traders for trading, raising concerns regarding the legitimacy of these firms as true trading entities. When evaluating proprietary firms, it is necessary to conduct due diligence regarding all profit sharing and fees and make sure that these justify the advantages provided by the companies. The main advantages of joining proprietary trading firms can include: * * * * * * * Access Access Access Access Access Access Access to to to to to to to trading capital; reduced commission costs and increased leverage; peer traders for support and mentorship; high quality technology and trading tools; a facilitative work environment; risk management services; administrative support and employee benefits.
Trading Jobs
If traders are successful on their own and do not require access to trading capital for their living, joining a prop firm may be less attractive, given profit-splitting arrangements. Such traders may benefit more from joining an arcade, where there can be similar access to technology and tools; a good work environment; peer support; and reduced commission costs/increased leverage without the profit sharing. Much of the financial appeal of prop firms derives from their capitalization and membership status at trading exchanges. Membership provides lower commission costs and access to higher leverage, particularly for day trading. That is a major reason that prop firms often emphasize intraday trading, though prop firms that hold positions overnight do exist. Firms that are well capitalized can allocate significant buying power to their traders, aiding profitability for good traders. An important component of success for a prop firm is risk management. Because it is the firms capital at risk, the firm will often have a risk manager who helps oversee and control the risks taken by traders. Risk managers also typically participate in the capital allocation process, determining how much size or buying power will be allotted to each trader. When traders have difficulty managing their own risk, access to professional risk management can be invaluable. It is not uncommon for prop firms to specialize in particular markets and/or strategies. Traders contemplating joining a prop firm should investigate these markets and strategies closely; the fit between the interests and skills of the trader and the strategies of the prop firm is crucial. Similarly, if prop firms feature training programs, it is important to find a fit between the programs offered and the skills/interests of the trader before paying potentially lofty fees. When that fit is present and there is a well-designed curriculum, prop firms can be a setting for valuable real-world training in trading.
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New Trader FAQs
Proprietary trading is trading with the firms assets, as opposed to for customers. Most major firms and banks have proprietary trading groups. The difference between these and pure prop shops is that the latter do nothing but trade.
Trading Jobs
What's better, an MBA or a CFA?
The CFA is the Chartered Financial Analyst designation. It is comparable to a CPA in terms of it being a test based certification. There are three testing levels which must be passed to become a CFA. You can learn more about it at www.cfainstitute.org. The CFA is primarily a professional money management (think mutual fund or pension fund) type of designation. I took the first level of the exam right out of undergraduate. Its pretty intense and covers a number of different subjects. I opted not to carry on in pursuit of the certification, however, because I really had no plan on getting into money management. These days, the CFA and MBA are virtually interchangeable. In most job postings which list a CFA requirement you will find or MBA. There are a few exceptions, but the either/or is something Ive seen in most listings. That being the case, my general view is that an MBA will serve you better than a CFA. This is a simple case of it being a wider certification, applicable in many more areas than a CFA. Considering that most people change careers multiple times in their life these days, the MBA offers more job flexibility than does the CFA. Theres also the networking that you do through the grad school process which the CFA cannot really match. If youre thinking in terms of trading, neither one is going to help you much more than to provide high level background and theory. They are not practical trading programs. Thats my two cents anyway.
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New Trader FAQs
The bigger firms are looking for the best and brightest from the pool of math and economics majors. It certainly helps to get your foot in the door by having the necessary educational background. The MBA is generally a good place to start. For traders, the MBA is becoming increasingly expected, especially for those looking to work at larger firms. However, a CFA (chartered financial analyst designation) is something a smaller number of traders do obtain, especially if theyre working on the sales side or as analysts. The non-profit CFA Institute, which awards the CFA, describes the designation as a self-study graduate level program for investment professionals. There are three separate exams for the CFA, but there are also prerequisites to garnering the certification. Additional details on the CFA can be found at the associations website at: http://www.cfainstitute.org/cfaprog The big firms expect their new hires to have an MBA from a toptier school. Many prospective candidates have already finished the degree before they get an official trading spot.
Trading Jobs
What kind of program should I attend at school to get a trading job?
Its pretty safe for most folks to go with a Finance/Business program, or something in Accounting if you want to get into the stock market. I dont claim to know how the programs of every university are structured, but as far as I understand it, most of them dont specifically differentiate between a Business degree and a Finance or Accounting degree. The latter is merely a subset concentration of the former. For example, I have a BSBA - a BS in Business Administration. My major (we still called them that back then) was Finance. I also have an MBA with a concentration in Finance. Again, Business is the degree, Finance is the concentration. So basically a Finance degree is the same thing as a Business degree (though not necessarily the other way around). Of course traders dont just have business degrees. Some of them have economics as not all universities offer business programs. Still others find their way into trading jobs from entirely different disciplines. It is probably that much easier going for a job in the markets coming out of a Finance/Economics program than something like English, though, for the simple reason that the programs in question are generally more geared to placing students within their field. There is also the math/physics type of path. The markets are heavily math oriented, after all. The quants or rocket scientists often come from this area of study. They are, however, often holders of advanced degrees, not just coming out of undergraduate programs. Having said all that, it could very well be what you do outside of your college classes which help you get your foot into the trading door. In my case, my understanding of technical analysis and membership in the Market Technicians Association went a long, long way toward landing me my first job out of college.
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New Trader FAQs

Be aware, however, that institutional trading is very different from individual trading. Recruiters probably are going to be less interested in your trading performance (unless youre going to work in a position where you will specifically be running money yourself) than in your overall knowledge of the markets. This is even more the case with the first line of corporate recruiters who are HR people, not traders themselves.
For those in an MBA program, it helps to focus your degree on finance or economics. Most MBA programs require some sort of concentration, and others offer the option of a dual concentration. Some dual concentration programs require the student to complete additional credit hours beyond the normal degree. For those interested in an even higher-level degree, it doesnt hurt to go for the PhD in math. While a lot of work, theres lots of money to be made by those willing to take this path. Generally, quantitative trading jobs require someone with a PhD (quants are essentially high-frequency traders). But no matter the degree, nothing replaces the on-the-job experience, and doing your homework is the best thing you can do to land your desired position. There are traders who started out as analysts, and even traders who began their careers by learning the ins and outs of the business at a financial news service.
Appendix: The Library
Appendix
The Library
Books Mentioned in the Text
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New Trader FAQs

Here is a comprehensive alphabetic listing of all the books which were mentioned in the FAQ answers throughout the book, plus the books authored by the contributors (indicated by *). A Mathemetician Plays the Stock Market by John Allen Paulos A Random Walk Down Wall Street by Burton Malkiel * An American Hedge Fund by Timothy Sykes * Back to Basics Trading by Brent Penfold Beyond Greed and Fear by Hersh Shefrin The Complete Turtle Trader by Michael Covel Confessions of a Street Addict by Jim Cramer * The Daily Trading Coach by Brett Steenbarger * Enhancing Trader Performance by Brett Steenbarger * The Essentials of Trading by John Forman Extraordinary Popular Delusions & The Madness of Crowds by Charles Mackay, Joseph de la Varga, and Martin Fridson How I Made $2,000,000 In The Stock Market by Nicolas Darvas How to Make Money in Stocks by William ONeil Japanese Candlestick Charting Techniques by Steve Nison * Lessons of a Lifetime: My 33 Years as an Options Trader by Mark Wolfinger Market Wizards by Jack Schwager Markets In Profile by James Dalton The Millionaire Next Door by Thomas Stanley Mind Over Markets by James Dalton www.newtraderfaqs.com
Appendix: The Library

The New Market Wizards by Jack Schwager * The Nature of Trends by Ray Barros Options as a Strategic Investment by Lawrence McMillan Predictably Irrational by Dan Ariely * The Psychology of Trading by Brett Steenbarger * The Ray Wave by Ray Barros Reminiscences of a Stock Operator by Edwin Lefevre * The Rookies Guide to Options by Mark Wolfinger Secrets Of Professional Turf Betting by Robert Bacon Statistics Without Tears by Derek Rowntree Stock Market Wizards by Jack Schwager The Talent Code by Daniel Coyle Technical Analysis of Stock Trends by Robert Edwards Trade Your Way to Financial Freedom by Van Tharp Trade Like a Hedge Fund by James Altucher Trading For A Living by Alexander Elder * Trading the SPI by Brent Penfold * Trading With the Gods by Alan Oliver Way of the Turtle by Curtis Faith What I Learned Losing One Million Dollars by Jim Paul and Brendan Moynihan
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New Trader FAQs

Presented by John Forman

New Trader FAQs

Presented by John Forman

Anduril Ventures 11 Holyoke Street, Quincy, MA 02171 USA

Copyright 2010 by John Forman

For information, address editor@newtraderfaqs.com

Section VII - Trading Systems

About the Author/Editor

New Trader FAQs

New Trader FAQs

New Trader FAQs

New Trader FAQs

New Trader FAQs

New Trader FAQs

How is trading different from investing?

New Trader FAQs

New Trader FAQs

Why should I trade and not just invest?

New Trader FAQs

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

How much can I make trading?

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

When do I know I'm ready to start live trading?

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

What books should a new trader read?

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

Should I quit my job and trade fulltime?

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

The Big 10 The Most Frequent Questions

New Trader FAQs

Only professional traders make money, right?

The Big 10 The Most Frequent Questions

Do I have to accept some big losses in the beginning?

New Trader FAQs

The Big 10 The Most Frequent Questions

How long does it take to make a stable income from trading?

New Trader FAQs

The Big 10 The Most Frequent Questions

How do I start trading?

New Trader FAQs

The Big 10 The Most Frequent Questions

How difficult is it to trade?