A Trade A Day

Know any good trading clichés? You know what I’m talking about. Those trite pearls of wisdom oft spoken ad nauseam in major media outlets like CNBC. We all shake our heads solemnly in agreement when spoken. Of course there is truth to all of them, but they’re spoken so often in financial circles that we’ve become desensitized to their meaning. Here’s my top 5:

5. Bulls make money. Bears make money. But Pigs get slaughtered.
What does this mean? Greed is good, but to a point. Trader death can be brought on quickly by trading too much or trading too large.

4. Sell in May and Go away. An often heard, but less understood cliché. This is a top cliché because everyone knows it, but people don’t know its application or ignores it. The theory is that the first four months of the year are the best for trading. Once summer roles around, it’s time to go on vacation. Perception of market performance aside, this cliché is true because summer tends to be quieter with less volume. Low volitility and low volume decrease my edge. If your trading edge has been degraded by market conditions, sit it out. The market will give you better opportunity if you are patient.

3. The Trend is your Friend.
While still a cliché, the trend can your friend. When the market is up, my longs tend to move up faster. Vice versa for a down market. The point is that you need to put as many market variables in your favor. The trend is one of my top 5 trading decision criteria.

2. “stock XYZ is cheap”.
I just hate this cliché. I think it’s overused to describe a stock with a low PE ratio. Cheap relative to what? “Cheap” in stocks insinuates there is value. Maybe it’s cheap because it’s a piece of crap.

1. Buy Low/Sell High or Buy High/Sell Higher
Ok, I get the implications of these two clichés. Buying low and selling high is a general investment rule that is as obvious as it is true. I also get the momo version, buy high/sell higher cliché. But this isn’t even the best advice. What about volatility. Prices move quickly and then they slow down. Ranges contract and expand. Maybe someone who reads this blog and is familiar with this concept can enlighten us with a new, volatility-based cliché.

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1. Start with as much capital as possible
My favorite market cliché goes like this “if you want to make a small fortune in the futures market, start with a large one.” I think that traders stand a better chance of making money than this cliché would have you to believe, but whenever I am asked “how much trading capital do I need to start?” my answer is always: As much as possible.

The reason is, like the market, a trader’s performance is characterized by streaks. One day is profitable Three are not. Three months are profitable. One is not. One year is profitable and the next one isn’t…you get the idea. With less experienced traders, swings in your trading equity can be magnified through over trading, the use of leverage, and just plain poor decision making. Experienced traders are not exempt. Drawdowns and mistakes still exist and are a constant threat to their bankroll. Starting out with an account as big as possible cushions your psyche from the inevitable swings.

2. Commit to a method
One of the most difficult things to do is to stop second guessing yourself. In every trader’s career, there are times when you ask the question. “Does this method still work?”. If your method gives you an edge, if you have a sound risk management plan, there’s probably nothing wrong with it. Do yourself a favor and stick to your method. The nagging feeling that you could be doing better never goes away. Feel free to tweak and experiment, but commit to a method.

3. Take ownership of your actions
Do you record your trading activity in a journal? Do you know why you did well today? Or why your last trade went against you? Did you follow your rules? You need to take ownership of your trading. You should be able to tell anyone why you entered and exited a trade. How much you risked and why. These simple questions should be answered for every trade. They focus your mind and allow you to reflect on what works and what you as a trader need to work on.

4. Trade small
This should be my tag line. “A Trade A Day: trade small”. I know that I have advocated trading small before, but it’s worth repeating. Trading smaller lessens stress and anxiety. If fear and emotion are impacting your trading decisions, this is the way to get rid of them. Earn the right to trade size. If you’re following your rules and your trades are winning, then bump up your size. The opposite holds true. Use it as a risk management tool. It’s saved me countless larger losses.

5. Get a mentor
If you want to learn to trade, it helps to learn from someone who’s been through it. Experience remains the best teacher, but it’s helpful to have another pair of eyes to look over your mistakes and to provide guidance. Finding the mentor is easier said then done. Being an independent trader is a lonely profession. That’s part of the reason why I blog about trading. One of the best mentorship opportunities right now is through the blogosphere. Each of the blogs in my blogroll has good content that traders of all levels can benefit from. Of course you can always leave a comment or shoot me an email at Jonathan@atradeaday dot com, and I’d be happy to do what I can to answer or at least point you in the right direction.

See you tomorrow!

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1. Unlimited Income potential.
This is cliché and a half-truth. As a trader I am limited in my income potential by a couple of things:
The size of my account.It’s so much easier to make a living off a million bucks, than 10K. However, if you can make a living of 10K, you are a better trader than I. Secondly, My trading aptitude. Look, I could give you the best laid out trading plan. There are some traders that will make money, and some won’t make a dime. Trading techniques can be taught, but it’s the ability to execute your plan and manage your risk that will make you money.

2. My own working hours.
This is another half truth. The market is open from 9:30 to 4, Monday through Friday. I’m limited to when I can trade. If I choose to trade forex then I have more flexibility in my schedule because that market is open 24 hours a day, 6 days a week. The caveat is there are still times during the 24 hour session that are better than others for price movement. I like to trade the dollar when New York opens and I like to trade the Yen when Tokyo opens because there is more volatility. So thinking you can make your own hours trading is not accurate. It seems like there’s a lot of flexibility, but for serious traders, that’s just not the case. You can make your hours ,but they need to match the market.

3. I can work from home.
A lot of people want to get out of the rat race and the nasty office commutes. People want to take it easy and work from home, but let me give you some insight. You will need to be shut in your office from market open to close with an hour on each end. This doesn’t include time you need to do research. Serious traders get dressed in the morning and treat it like a job at a regular office. You will perform better if you do. This also means that serious traders don’t sit on the couch and watch Oprah while they trade. Unless Oprah comes on at 4 in which case be my guest, but Ellen is probably out. I think Ellen come on at 11 est…

4. I can trade a little then do a little (insert activity here).
Wrong. I am primarily a swing trader. I got tired of staring at a screen all day trying to scalp a living, but I still sit in front of my monitor and watch the market or do research. When you trade, you must be committed. If you have things you need to do, then “take a day off”, but you still need to show up everyday and not treat trading like something you can do whenever you’re in the mood.

5. I am passionate about trading. It’s all I want to do.
There’s no half truth here. I would rather be trading than anything else. I would rather talk about trading or blog about it than anything else. You must have a passion to be successful at it. There is so much to learn and trading is an enormous commitment. Trading will give you so many reasons to hate it. Trading takes your money. it bruises your ego. It penalizes you for your faults in a very tangible way (money). The only way to stay with it through the bumps and bruises is to love it.

Let me know what you think. See you tomorrow.

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Do your homework. Whether you call it research or post trade analysis, you need to sit down and methodically analyze your winners and losers. Ask yourself why you selected the trade, what rules did you use to enter and exit the trade. Generate a list of reasons why you won or lost. Then track this every day to see what common reasons your winners and losers share. It is a tedious, time consuming process, but nothing aside from my risk management plan has caused me to have more success.

I have several market scanners that automate my research. I subscribe to IBD, but it can be as easy as using Yahoo’s market scanner. I find a lot of trades just by looking through the NASDAQ 100. The point is that you need to do your homework everyday.

I spend 90% of my day doing research and analyzing trades. Very little is spent actually trading. Looking over thousands of charts and doing my post trade analysis has caused me to grow more as a trader than any book or system.

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New traders should not use margin. It is a great tool, but it compounds your mistakes. In the beginning if you can agree that your focus should be to learn. Anyone should have enough capital without having to go on margin.

When I first started day trading, I found a firm that gave me 10X my capital on day trading and 4X for overnight with no cost of carry. It was such a great deal. But I was learning, and I was I wasn’t making good trades. I wanted to make money so bad. I wanted to just trade and I thought the leverage would get me there fast. My results were erratic and eventually I took enough losses that I had to close my account.

A consistent, tested risk management plan with a solid methodology is what all new traders should focus on. Advanced traders who have developed consistency can use margin to accelerate their progress and grow their bankroll exponentially, but new traders need to acquire a consistent methodology first.

Want to know where you can get a consistent methodology? I’ll be posting what has worked for me in future posts. Until then keep researching and if you are going to trade, trade small.

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