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.

Drawdowns

The act of losing money, especially losing more than you expect or intended to, is really an emotion that cannot be described and must be experienced by the person him/herself. I've seen people react very differently: vocal anger, physical outbursts and sometimes just a state of shock. For a trader, losing money is planned and should be expected. But what hurts the trader's state of calm and ego is when he loses more than expected on trades that are absolutely poor with regards to risk-reward. I went through such an episode yesterday.

For those who have been following, you know that I am concentrating on the short side of the market. But, the market has already come off 10% and by in large, the action in the market this week has been rally attempts on Monday and Thursday. As a trend follower, this is exactly the type of market action I am looking to short into, especially weak volume rallies, such as Thursday's, has highlighted by the chart. So if this is the type of market I am expecting, the next question should be why did I lose money and lots of it?

 

To be brutally honest, I did not listen to my own teachings of preparing and planning trades. I broke my own rules. I saw the market attempting to rally on weak volume and got giddy, looking for stocks at good prices. And without any confirmation with regards to chart patterns, resistance or any other technical tools I know work, I began to blindly short what became one of the strongest stocks in the market that day (CLF, which was on my weak watchlist stocks). Trader lingo for shorting at perceived "good prices" without any confirmation of any sorts is called picking the top (or bottom, if I was buying into a down market). I became an egomaniac with my view of the market and disregarded my system, my bread and butter. I was acting as if I was an institutional player with millions of shares to short, who most of the time, are forced to do what I was doing in order to get all the shares they want. But I am just a minuscule fish in the sea, with no buying power to affect any stock. What was I thinking? 

Anytime you are wrong, the market will make sure you get smacked in the face. This time, I was smacked hard, deservedly so, and without any mercy. As the stock kept rising, I kept covering and shorting more. After a big fat check from the market, I realized in the insanity I was going through and covered my entire position (using full leverage, adding insult to injury) at a price way out of the money. As I was replaying the scenario in my head, I had thoughts of anger, disappointment and ultimately sat in a state of shock, which might be worse than letting out the frustration through vocalization or physical exertion. I felt like a drunk mess in Vegas, saddled with an exorbitant bill I did not want to pay for services I did not even know I receive. 

Even the greatest trader to have lived, Jesse Livermore (search him on Google and get the book Reminiscences of a Stock Operator), had countless days like these. His teachings are now maxims in the trader world and yet he made and lost millions, going broke twice in his life. I reminded myself that this was just a bump in the road, that my system was still profitable overall and that all I needed was one good trade to at least wipe out this market spanking. Livermore himself recounted countless times in which he was given a teaching lesson by the market in the form of a "tuition bill" he had to pay and was glad, no matter how much was given up, that his bill was not larger. Basically, his attitude is to learn from his mistakes and to never make it again. I am sitting here today on a great position that on paper, has already wiped out 80% of my mistakes yesterday, with the potential to actually bring me some profits for the week.

The cliche of how you rise up from a fall is absolutely true in whatever you do in life, and none truer than in the market, where even the best traders can slip up once in a while. All it takes is one trade to put you back in the game, to regain that self-confident swagger (but not reckless arrogance like my Thursday showing) that is needed to take on a position. Even in tough trading markets like this February has shown, at the very least a trader must believe that great opportunities with present themselves sooner or later and must be ready to pounce on them. I was lucky that my opportunity came the day after catastrophe.

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.