Educating Yourself and Starting to Trade

As the market is chugging higher without a true "follow-through" day, a 1.5%+ advance with higher than average volume, I have been studying more about the markets through books. I have been preaching about learning by being involved in the markets, whether paper trading or real money, but everyone needs to have a steady foundation of knowledge about how things work first. Otherwise, it'll feel like you are a lone deer amongst a pack of wolves

The first book I suggest to read is Technical Analysis, by Charles Kirkpatrick and Julie Dahlquist. It looks, feels and reads like a textbook, which we are all used to, but does not include any extraneous stuff and gets right to the point. It covers the very basics of technical trading, like properly recognizing trends, short term patterns and the usage of stops, and yet delves into harder topics such as Elliot Wave Theory and Point and Figure charts. It gives a great overview of all these concepts and even makes the case for technical analysis as a viable way to trade by delving into topics such as the the Random Walk Theory and the Efficient Market Theory. It is a well-rounded book, but never bogs you down in details. This should be one of the first books to read if you are new to technical trading.

The most important concept you need to know for technical trading is recognizing trends and once you have mastered that, you can understand successful traders' trading patterns and systems. One of the greats in short term swing trading is Dave Landry, and he has published two books: Dave Landry on Swing Trading and Dave Landry's 10 Best Swing Trading Patterns. His setups, given the right market conditions, are golden. They give you a lower risk entry point and still allow you to ride most of the trend. And the greatest thing about them are that they are simple to utilize and easy to recognize. Keeping it simple in the market is incredibly important, especially since brokerage packages include many shiny bells and whistles that can distract you from what is important. Any other books out there by renowned traders giving away some of their "secrets to success" should also be read.

Afterwards, I would suggest one to start paper trading the market through whichever avenue one wishes. I would suggest using ThinkorSwim, as it is a good platform for technical trading. Be involved in the market, use the patterns that you have learned, try a system of your own, make mistakes. It won't cost you a thing and it provides as real of an experience as one can get save for the real thing. I know I began paper trading by trying my own thing, believing that what was published and given to us through books would already be arbitraged by professionals, since they would have read the book as well. I had to be the genius that comes up with a new pattern because only geniuses make money. Many paper losses later, I've realized that I do not have to reinvent the wheel, I just need to learn how to use it. You should make as many mistakes as you can while you paper trade.

Once you feel like you have left no stone unturned, you should definitely join a brokerage that does not have only web-based trading. Executions are slow and unreliable. The brokerage should have technical tools integrated into the platform. The granddaddy of them all is TradeStation, but others are sufficient, like ThinkorSwim, TD Ameritrade, etc. Make sure you start off small, because no amount of paper trading can supplant the anxiousness one feels when real money is in play. Be diligent, be discipline and follow what you've learned through paper trading. Most people start off with a losing streak so make sure you stop yourself after a certain loss percentage to refrain from ruin. Always be looking to tweak your system if you notice a change that will benefit the bottom line, but make sure you are not distracted by the plethora of oscillators and indexes the platform may provide. Also, I would refrain from using any of the pattern recognition software some companies provide. Patterns are notoriously hard to computerize, as they are mostly visual, and to think that a brokerage firm developed an accurate measure of patterns is hard to believe. Besides, the most important learning phase through one's trading career is the beginning.

Finally, after you have gained some experience in the market, you can read the holy grails of trading books: Reminiscences of a Stock Operator by Edwin Lefevre, The Black Swan and Fooled by Randomness by Nassim Nicholas Taleb. People who have read through these books without experience in the market do not feel the impact of the lessons in these books. Trading maxims and lores come from these books. If Warren Buffet is the greatest investor ever, then Jesse Livermore in Reminiscences of a Stock Operator is the Warren Buffet of trading. Experiencing the ups and downs of the market allows you to relate to the Livermore and Taleb teachings. The teachings are very simple to understand, but they will only hold weight if you can relate to them. Thus, I recommend reading these books not before, but after you have traded to truly learn what both men have to say.

Technical concepts are very easy to learn and do not require a genius to interpret. Through study and some practice, anyone can be well-versed in present day techniques. The hard part is in the implementation, the recognition of when to use what. All these books will tell you that there are no holy grails. Certain techniques are reliable only during specific type of markets, and the recognition of the type of market is more after the fact. Thus, through study alone, no one can be profitable; experience is everything.

Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.