Learning to trade
If I ever got to load an earlier quick save of my life… there are definitely some things I would do differently. Chief among those might be a little more discretion into whose gutlocker my junk might go spelunking in. Quality over quantity, while not usually my go-to operating procedure (as is evident by the sheer volume blog posts I publish), lets be honest, it is not necessarily always the best policy. Also… having now procreated I am now scary cognizant of how committed and formidable Joey’s little swimmers are… (very much unlike their progenitor)
If I had to learn trading as a do-over or teach someone what I felt I could add to their trading arsenal, how would I tackle the subject matter? After all I now come armed with two decades of hubris, hundreds of hours of wasted time and huge dollop of survivor-ship bias so I feel comfortably qualified to waffle on about this for at least a while.
Disclaimer. I have no idea how your brain works. Nor do I have any understanding or appreciation of your personality and/or life experiences that may help or indeed hinder your ability to trade the markets successfully. I can just prattle on about what works for me and then market it to you as some sort of codex-de-magnificence. I am however quite excited by the possibility of sounding knowledgeable and conversant in something that isn’t boardgames, playstation or the color variance in my naval lint (something I consider myself to be quite an expert in)
Also, this will likely become TL;DR… so I totally understand if you quit now while you have lost only a minute or two of your life so far (likely a good trading rule)
1. Know stuff about money
University teaches you absolutely fuck all about anything. Especially money. I feel comfortable asserting this because I double majored in evil (finance and consumer psychology) and even started an MBA (before coming to my senses)… anyway, I feel in terms of actual practical knowledge about anything work or business related a business degree was a complete waste of time. (I can’t speak for accountants, doctors and engineers… I feel they get more of a practical learning experience, even if they are not learning anything about money)
Multiply this with my expensive private school education… and it all adds up to big fat zero. Okay, that’s not entirely true, there is something happening in the cavernous pit that is your mind during that time… but how much of that is because of school and how much of this is ancillary and just by-the-by… at the risk of sounding like a crunchy homeschooler, our current education system is really messed up… and higher academia… is the absolute worst. I am much more in favor of practical learning and apprenticeship. Also you have no idea what you want to be when you grow up… pushing every kid through this STEM funnel feels maddeningly crazy to me, especially if you have no aptitude for these subjects (but this is likely a rant for another time)
Everything I know about money seems to have come pre-wired and ready for use since my parents didn’t teach us anything about personal finance. I offer as a case in point my sibling, who (aside from weekends of hard labor) basically had the same life as me, but struggles with the concept that there is a finite amount of ‘money’ available on her credit card and that for seemingly (at least according to her) arbitrary reasons it sometimes seems to run out. So in that sense I’m lucky. But personal finance can be taught (its also really easy, in fact you will likely be gobsmacked how basic it all is… trust me I’m basically sub-par in almost ever other life dynamic, so if I can do it, anyone can). You just have to take an interest in it and get ‘educated’.
While having good money knowledge is not… technically essentially for being a good anything I would likely recommend this as a fundamental base for any profession. While I hate quoting the bible, it really is like the ‘Man who built his house upon the sand’ versus ‘the man who built his house upon the rock’. I feel you’re gonna struggle to reach the pinnacle of any vocation if you don’t have a solid financial foundation. If you’re teetering on a fiscal cliff every day of your life you’re not not going to be able to give 100% to that thing that you really love doing (well… hopefully you love the thing that you do)
Also there are hundreds (if not hundreds of thousands) of people giving away their thoughts on personal finance online. So it shouldn’t cost you anything. While I don’t necessarily agree with the extreme frugality often associated with Fi(re) [Financial independence retire early] enthusiasts and their kind, this is a great community to get up to speed on all things personal finance. They are incredibly helpful mf’ers and I can’t really fault them on their core fundamental belief system… or indeed their goals of a better life for themselves. (having said that there are a lot of things we disagree on, but that might just be the narcissism of small differences)
If you’ve got the basics of money more less understood I think I’d likely concentrate on my headspace next, since I feel this is probably the hardest (and most time consuming) thing to get right as a trader. I might have put it as number one, but… after some consideration, I feel the money thing pips psychology to the post. Understanding your relationship with money should also evolve your headspace… I don’t think this works as well the other way around.
You have to understand your relationship with money. Whether we care to admit it or not, all of us have some sort of psychosis with cash. Personally I am naturally inclined towards austerity (the one end of the spectrum). My savings rate is usually somewhere between 30% and 50% (as a percentage of what you earn every month). And if I don’t have a significant safety margin available to me at all times, I am likely to get really stressed out.
On the other end are the people who blow their entire paycheck every month. Neither of these extremes is likely entirely healthy.
Once you ascertain where your headspace is at you need to, if you want to be a successful trader at least decide on your risk profile. You can definitely trade the daily chart as a swing trader (as a side hustle) and keep working your normal day job. Jobs are great in terms of benefits like a salary and healthcare insurance, and a pension and social interaction. Becoming a day trader on the other hand and you lose that safety net. You are responsible for everything. That can be unbelievably daunting, especially if you have a family, a mortgage etc.
I imagine its similar to being a freelancer. Only as a trader you’re relying on your own money to make money. Downside is, you can only really know your risk appetite once in you’re in it (and not sleeping at night)
3. Money, money, money.
How much money is enough? If you’re Henry Ford the answer is ‘just a little bit more’. That is also likely true for most of us. Trust me when I say it is often MUCH harder to exit a trade (that is doing well) than to get into a trade.
The way I curbed this insidious tendency was to break down how much money I needed to survive every month. Then I divided that number by the number of trading days in a month (usually about 21). This is gives you a rough idea how much money you need to make every day. It turned out to be a pretty low-ball number. Then I entered all this information onto a spreadsheet and tracked how I was doing.
Now a lot of traders balk at giving yourself a daily target because you’re likely putting a lot of pressure on yourself. Because I’m more of a ‘classic’ day trader… and because the number I need is fairly low, I’m comfortable with working this way. That’s not to say I hit my target every day… and I know that its in my nature to take on more risk if I’m falling behind… but I think those things can be managed. It also helps me compartmentalize my days and write them off. This may not work for everyone though. Find out what works for you and set some goals.
I have a system which I call fifths. It helps to keep things clean and take away the decision making process in how I divvy up my income. I find automating stuff like this quite helpful.
I take all the money I earn in a month and divide it by five.
2/5ths of that, (sadly) gets put away for tax.
1/5th gets reinvested into my trading account, because the more you have in there the more you can make.
1/5th gets invested in something that is NOT stock market related eg, actual bricks and mortar property (not an ETF)
and then I live off 1/5th of that income.
While this may seem particularly bonkers and austere to some, there is a significant amount of freedom that can be derived from this harsh and disciplined regimen.
This works for me because I’m married. My wife also works (we share all expenses 50/50) and we have no debt. But even if this wasn’t the case I would try and stick to this plan.
5. Actual trading
I can’t really shed any light on the tactics you should use to make money trading (sorry). Trading is highly invidualistic. What works for me, the way my mind interprets the visual data and my risk appetite and personal circumstances are a completely different combination of yours.
I will say this. Don’t trade real money… for… *exhales* like… maybe a year.
Look there are people who can pick up trading super quick and be good at it really quickly. Most of us (and I include myself here)… well, it takes time. As a rule of thumb, on a demo account, trading amounts that are more or less in line with what you would actually bring into your trading account when the time comes, if you can hit your targets three months in a row… I think you can likely start trading with real cash.
Good luck on that first day. Transitioning from pretend money to real money is tough. Ha ha. But it will get easier.
I say a year because… well, it takes time to figure out what sort of trader you are. What’s your risk appetite? How much are you willing to risk with every trade? And then, perhaps most importantly, what sort of markets do you like? What currency pairs? Are you an index trader? Emerging market or mature markets? What time frames can you realistically trade? Do you have a day job. Its unlikely your boss is going to look kindly on you alt-tabing between your 5 minute chart and TPS reports. Does this mean you can only trade after hours?
Also, inevitably, you will need some guidance and mentoring. Let me quickly add that I used to think 95% of trading stuff on YouTube is bullshit. Its actually closer to 99%. If you follow the advice of these people you will get killed.
The problem is right near the beginning these charismatic charlatans with their glib lines and bullshit graphs look very impressive. (to be fair there are a lot really weird super uncharacteristic people with trading channels that can barely string together two coherent sentences). Seriously its scary out there. Even the trading channels that have some good stuff, because of the need to keep producing content, sometimes they go off piste with some really… shit subject matter. Anyways be weary. These people are in it for the ad revenue, not because they want you to succeed.
6. Where to start…
If I was teaching my own kids or starting over I would likely begin with the following…
- Know what a spread is. (and why it changes)
- Know how to set a stop loss and a limit order.
- Pick the top three most popular oscillators (maybe MACD, Stochastics and RSI) and learn how they work. Understand lag.
- Play around with moving averages and exponential moving averages and understand how they can indicate market direction
- Learn support and resistance levels and how to identify them
- Understand basic patterns, like double tops and bottoms… trend lines… and the herd psychology that surrounds these mythical apparitions.
7. Take it slow
You know those trite idioms like ‘Rome wasn’t built in a day’… and stories like the tortoise and hare.
Yeah… I know they’re lame. But the best advice I think I can give you is to take it slow and build up your trading capital, day after day, month after month. Year after year.
This is a slow, grinding gig, that is… for the most part… pretty dull. Those small gains, every day, like with everything really start to add up. Stick to your trading setups religiously, get out at a predetermined point and repeat. Don’t over trade. Don’t get greedy. And you’ll probably be fine.