I was asked the following question over the weekend and after giving it some thought, I’ve come to the conclusion that the answer is not a simple one. I’ve read a number of times that it can take up to 10 years of trading to really come into your own and feel comfortable to trade your plan and plan your trade.

Hi Jeff, I have been trading for two years on the dot as of this past Monday. It has been quite a roller coaster ride in terms of my skills/actions and the underlying markets. I have a question I like to ask of people who appear to be successful traders — Was there one thing that changed when you “got it”? I am very curious but also respect your privacy.

Many thanks,
Mark

Mark, thanks for a great question that has many answers. First off, it seems like you’ve started your career as a trader at one of the worst possible times possible with the level of volatility that exists in these markets. Veteran traders are getting their lunch handed to them on a silver platter, so don’t let frustration set in if you’re not making the kind of money that you thought you would be at first. The mere fact that you’ve been able to survive during this credit crisis should give you a reason to be optimistic about the longevity of your trading career. Most traders (95%) blow out of the accounts in the first year so as you can see trading isn’t for everybody, however anybody can be sucessful if they work hard, follow sound rules, and leave emotions out of their trading.

For me it seems like I’ve had a number of a-ha moments during this journey that I’ve been on for the last 10 years that lead me to where I’m at today. What I’m going to do is list a few of them call on the readers of zentrader to share a few of their own. By turning this into a group experience, I think we’ll all learn more because I certainly don’t have all of the answers, and I think it will be more beneficial to learn from others and not just me. Remember, this only works if people share, and you never know what you may know that another person may be struggling with, so all nuggets of experience are valuable and welcome.

The following are a few a-ha moments that I’ve had over the years in no particular order:

  1. Ignore the news, pay attention to investors reactions to the news. – I used to try and analyze earnings reports in my early days of trading I couldn’t figure out how a company could report stellar earnings and yet the stock sells off. Or else the earnings would be the worst in a very long time and the stock would rally. The news is not important, it’s how investors interpret the news that is.
  2. Use intraday charts to time your entries – This may sound obvious, but it is possible to trade without ever looking at an intraday chart. I did this for my first 7 years of trading and made money, but when I was introduced to smaller time frames it greatly increased my timing and consequently my profits.
  3. Develop a market timing system – It is imperative to be a top down investor.  There is a time when the risk/reward favors the long side and a time for being short. To be long when the markets are falling is financial suicide, and yet many traders still make the mistake of trying to buy into falling markets and short markets that are rising.
  4. Buy high, sell higher– or if your shorting a market short low, and cover lower. It took me a long time to fully grasp this concept but when I did my whole concept of investing changed. Wall St. will have you think that the secret to investing is buy low, sell high. There is a reason that the majority of traders who try to follow that trading methodology lose money. Trying to catch a falling knife is far more difficult that riding a trend. There is a reason that Newton’s first law of motion (Intertia) is “an object in motion tends to stay in motion.” Stocks are an object and need to be treated that way.
  5. Amateurs access potential while professionals access risk – Always analyze a trade from the point of view of how much money are you putting at risk to see if a trade will work out. Being defensive with your equity will keep you in the game longer and give you more peace of mind while trading.

I could go on and on, but I’m going to stop here and see what other gems other traders can come up with. Best of luck trading Mark and everyone else.

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6 Responses to “Reader Question”

  1. Stockkicks Says:

    Good One!
    I always visit your site and get informational and quality contents.
    Thanks,
    stock market shares

  2. momostocktrader Says:

    I too am learning trading, and I have found it to be one of the most difficult things I have ever attempted — as difficult as working on my dissertation. One step forward, two steps back. Wild emotional swings and self-confidence. Just when I get some success, the floor goes out underneath me. Most people's "hobbies" are less painful and I feel like I am banging my head against the wall. Most other traders say it will take about 3-4 years before I get good, and in the meantime, try not too lose too much money. For me personally, I am refocusing now on analyzing my past mistakes (so I don't repeat them), and developing more of a system (my own) and become more disciplined (e.g. only enter a trade when a recognizable low-rise setup appears). One benefit of being a student at this time, is that if you can survive this trading environment without going broke or losing too much, then a regular bull market, or mild bear market will seem a lot easier. Mark – thanks for asking (we all wonder this), and Jeff – thanks for sharing your insights (keep 'em coming!).

    MomoStocktrader

  3. Danny Bevans Says:

    Been trading since last sept come to your site every morning just wanted to let you know what a great job you do on this site and how munch i enjoy it.

  4. Dave Ambrose Says:

    I think the a-ha moments really come when you start to figure out who you are as a trader/investor. A few days ago Jeff highlighted a few days ago that he doesn't like to day trade, and the stuff you don't like doing in the market is ultimately the stuff you won't make money with. One way to nail down these moments is to keep a record of your trades with the ticker, entry date and price, exit date and price, what you were thinking when you bought it, what you were thinking when you sold it and where you got the idea to buy/short it in the first place. That was one of my a-ha's a long time ago when I realized that most of my scans were returning mediocre results and the trades I opened from my own intuition worked much better.

    I would also like to support Jeff's view on market timing. The thing with market timing is that not every strategy works every time in the market, and you need to know what kind of market you are in before you choose a strategy. So you need to develop you own market timing system or buy one that has a proven track record. Jesse Livermore said that the more things you can get going your way in a trade will keep lowering your risk (paraphrased). Getting the direction/volatility of the overall market is a big one of those things. That is, of course, if you are the kind of trader that can deal with market timing, but that comes through self-discovery which goes back to my first point.

    One of my other a-ha's came from discovering how to analyze the position size of a trade. When I talk to people about this who ask me questions about the stock market I always see a light bulb go on somewhere for them. Basically, just because you open a position for $5,000 on a stock, it doesn't mean that you are risking that $5,000. What it means is that you need to establish your selling/covering targets beforehand and tune your position size to those targets. And a consistent rule of thumb that I keep hearing is that you should make sure that the individual risked capital on the trade is no more than 2% of your entire portfolio at most. What I have found through practice, is that when you are timing the market, and you open up 5 positions at once based on a timing signal the aggregate of those 5 trades should not exceed the max 2% of your portfolio since they are all essentailly the same trade (just with a little form of diversification built in).

    Hope this helps. The biggest thing is figuring out who you are as a trader though and once you do that you'll know it because your confidence will go way up even if your account is not. A good book that has about 100 questions on who you are as a trader is Trade Your Way to Financial Freedom by Van k. Tharp.

    Good luck.

    Dave

  5. Mr Doji Says:

    I have been trading for five years now, and the art and science of trading seem to be the most difficult and challenging and interesting of any profession.Here is the truth for me.
    I have not made a consistant living from trading.
    I have spent thousands of dollars on cources,dvd's,
    books, etc.Some days I trade like a wizard, completely in the Zone, other days are frustrating and confusing.I have figured out who I am as a trader, what time frames suit me, what to trade,when to trade and most importantly what to stay away from.I have blown out 4 trading accounts, with losses well over $100,000.00.
    Most people would say, Are you insane?
    My relpy is, how much money does a doctor or lawyer have to spend on their education, probably more than a hundred grand.I have not given up.
    Don't fall for the get rich quick scheme,this is hard work, mentally and emotionally.

  6. d Says:

    i'm curious as to what resource you guys recommend for intraday charting. i think jeff uses stockcharts…any other recs?

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