[this post came from Jeff P, one of our Spikers – AE]
Last week I had lunch with fellow Spiker Mike Brenke. I’ve known Mike since we both became Spikers the same quarter in 2006. We live about 10 miles apart and talk often.
Over the past 6 months or so, he has become a different trader. I can tell it in the way he talks and more importantly, you can see it in his results. The story of his recent evolution is very instructive and interesting and I encourage him to tell it as his story is not mine to share. However, as often happens in life, a single comment he made to me has refocused my direction and led to this entry.
He was telling me about the changes in his focus and thought processes when he paused and said, “You know, I think it can be of great benefit to clear all your assumptions and consider how you would train someone to trade if they were starting with no experience.” Wow, that was a very profound thought! I’ve rolled it around in my head for a few days and I’ve decided that I would take this approach, but I would be my own student!
I decided as an initial experiment, I would imagine sending a message back to me when I began trading from me, “Future Jeff”. This message contains 7 ideas that I wish I had known at the beginning. Perhaps learning them properly, at the beginning would have prevented the need for the market teaching me over the years, in some cases more than once!
No single trade will make your career so don’t let a single trade end it.
Ah, the eternal quest for the home run! A trade which may make 1000 dollars could make 2000 with twice the size. 4000 by going on margin. If you buy the bottom and sell top, as we all do, the sky is the limit!
Trading is not like winning the lottery. A successful career is made over years and contains many losses. A prerequisite for making it is not evaporating your trading account. Never put yourself in a position where one trade can wipe you out. Always have a stop loss in the market and keep your position size at a level where even the company going bankrupt doesn’t leave your account the same way. Survive, then thrive!
No trade can be made unless you can explain why you are making it and what will take you out
Making a trade is such an easy thing to do. Make a few mouse clicks and suddenly, you are in a trade! It’s exciting and fun! It’s so easy to do, you may be in a trade with the only explanation being “I think it will go up.”
Well, that is not adequate. Not only do you need to have a plan prior to entry, it needs to be clear enough to explain to another person. Ideally, another trader could take your plan and execute the trade the way you intend. If it’s not clear what condition will put you into the trade and why and similarly, what takes you out at a profit or loss, then you are not trading responsibly but instead are gambling.
Understand Price Action
Most traders spend their development years looking at tons of different price based indicators most if not all of which are derivative of price action. The signals produced certainly have value, but a key to interpreting them is understanding the overall market structure. A MACD histogram divergence will have different meanings if the price is trending up rather than down.
My trading has improved as I’ve reduced the number of indicators I consider and instead focus more on the structure of this market and how the price is reacting.
Think about the risk first
It is our nature to look at a trade and consider how much money we can make. That is certainly a necessary part of the trade evaluation process; however it is not to be done in a vacuum.
Survival and ultimate success in the market is determined by the risk one takes. A trade which makes 10% if it works is a reasonable bet if you have to risk 3% on it but not so much if you have to risk more than 5%.
At this point in my career, I determine my entry and protective stop first so that I’m not tempted to tweak those values to improve the odds.
Expect, accept and plan for the losing trade
The losing trade can be difficult to swallow. A big losing trade not only slams your account but it also can be devastating to your confidence.
All traders take losses. If you know they are coming and expect they will happen from time to time, it’s easier to keep them in perspective. It will also reduce the chance that you will fall victim to the twin mistakes of moving your stops further away ( or pulling them completely) or averaging losers thinking the position will now have to move less to get profitable.
Ultimately, these actions come from an unwillingness to take losses. The attitude needs to be developed where losses are just part of the cost of doing business and a losing trade is one of the statistical group that just didn’t work out.
Trade Often – Trade Small
I remember Alex once saying that at the beginning of a career is when a trader is at their worst and the key is to survive and improve. Much of the prior writing will help in the survive aspect, however to improve one must trade and analyze the results.
As you begin, or recover from a down period, you aren’t going to produce life changing income. So trade small. Make sure the amount risked is all but trivial. Get a track record of trades and once success is established, move up the risk a little and repeat. Keep making progress and keep performing post mortems on your trades! That will help you improve the quickest and get you back on track when things start going wrong.
Pick a single stock and look at it every day
If you follow one particular market day in and day out, over time you will see most every situation play out. That alone has great value, but even more important is that you will see it in context. You will see topping patterns after following it during a long uptrend. You will develop a deep perception concerning when it is over or under sold.
A good selection for this is a market proxy such as SPY or a conglomerate such as GE. If you have a particular favorite you want to follow, but it is a bit focused such as Timberland, I say by all means but I would strongly suggest adding a GE or SPY or another along those lines.
Each trading day look at the weekly, daily and at least one intra-day time frame. Not only will it further your education, it may lead to some nice trading opportunities!
Conclusion
After several days of thought, these are the best suggestions I have. However, I suggest that you each go through this exercise and document any ideas you would share if you could train yourself at the onset. Feel free to post the ideas to the blog and if this grows, I may talk to Alex and Kerry about combining the thread into a single document.
Jeff P