Thursday, February 4, 2010

The Smell of Money - Learning to Trade Stocks

Continuing Education is a wonderful thing.
No matter what you do for a living, the world is
changing so fast that if you're not keeping up
developments in your field, you're falling behind.
And, even if a requirement for continuing education
apply to you, (say, if you are retired), you
should never pass up an opportunity to flex your
mental muscles.

So, having the benefit of a flexible schedule (one of the
good things about being self-employed), I decided to
enroll in a Professional Stock Trading course, taught
by a reputable broker with a trading floor here in
Las Vegas.

Now, I know what you're thinking. We've all heard the
story that the best way to make a small fortune in stock
trading is to start with a large one. It's a guaranteed way
to lose money. But, as the instructors make clear, you can
make money
doing this
if you do the following:

1) Take formal classroom training in trading, even if
have professional experience in finance, accounting
securities, or investments. This is different enough from
"investing" in both mindset and methodology that you can
get in real trouble real fast if you don't know what you're
doing. Fortunately, all of the reputable trading brokerages
(E-Trade, Scottrade, TD Ameritrade, Charles Schwab, etc.)
offer both classroom and on-line training (in most instances,
if you open an account), as do many colleges and
universities. In my case, I am taking the course at the local
junior college, taught by instructors from Bright Trading and
Charles Schwab.

2) Make sure that any trading instruction you receive also
covers fundamental security analysis, such as calculating
earnings per share, P/E ratios, free cash flow, and so forth.
You won't necessarily be making trading decisions on this
information, but this information is critical in deciding which
stocks might make good trading candidates and which industries
to focus on;

3) The best way to learn anything is to learn by doing.
So, even if you have no experience in trading, start with
an imaginary account and go ahead and "trade" some
stocks according to what you've learned. Don't be surprised
or shocked if you lose money right out of the gate - that's the idea.
You want to make your mistakes now - not later when there's
real money on the line. Make a simple spreadsheet to track
your daily positions, and keep a log of what you trade.
You should also keep an informal "journal" of why you
picked each stock, what your objective was, and the outcome
when you exited the trade. This will give you a "feel" for what
actual trading is like and if it's for you;

4) Once you have a "feel" for what the trading world is like,
make sure that your instruction leads you to the development
of a Trading System that works for you and that you are
comfortable with. In developing a system, our instructors
stress that simple beats complex every time. One of the big
and expensive mistakes many novices make is developing a
system that relies on two dozen or more different indicators
as to whether or not to trade and when to enter or exit.
Even worse, they immediately sign up for expensive
monthly subscription services that promise to do this for
them. Our course stresses building reliable, simple systems
that are tailored to the needs of each individual and that you
don't need a Phd. in Statistics to understand;

5) Risk Analysis and Position Sizing in Terms of Risk is the most
crucial concept to absorb, whether you are a trader or a
long-term "buy-and-hold" investor. It's one of the first topics
we've covered in class, and it's stressed throughout. This issue
governs your entries, exits, and protective stops, and what to
trade as well;

6) A big part of having a profitable trading system is keeping
expenses down. In this internet age, there's no point in buying
information that you can get free. Yahoo! Finance and Google
can give you a wealth of fundamental and technical information
at no cost. Our instructors suggest that instead of buying
expensive newsletters and "tip" sheets, your money is better
spent on a regular subscription to the Wall Street Journal,
, or Investor's Business Daily. And for technical
analysis, when you open a trading account, you'll get a
Trading Platform that includes all the charts, graphs,
and indicators you'll need to make trading decisions,
and you'll enter your orders online right from the
platform. No need to spend a lot of money on a separate
charting service;

7) Finally, when it's all said and done, and you have a
trading system built, relax and have fun with it .....
especially during the trial phase before you invest any
money. It's informative, exciting, and educational.
Even if you ultimately decide not to trade or invest,
you'll be better equipped and better informed when
you do.

And how did I do this first week? Well, after starting out with
my imaginary $100,000, after eighteen trades (far too many
in the opinion of the instructor), by sheer luck I managed to
wind up right back where I started, with $100,000.

Did I make mistakes? Sure I did - I used the wrong indicator
for the wrong situation about six times, I traded out of good
positions too early twice, and some of my picks were
definitely of the "What Were You Thinking?" variety.
All rookie mistakes. But we'll improve - after all, if
you didn't make mistakes, there would be no need for

Anyway, at this rate I'm in no danger of becoming a
one-man Goldman Sachs - or a Gordon Gekko for that
matter either. But, then, I'm relying on free, published
information - not the kind Goldman and the others pay
out good money for. And, without the ability to to "flash"
trade, I'm not peeking at the other guy's cards in this
poker game, either.

But, just as in poker, if you have system with rules and
stick to it, you'll come out way ahead of the guy who just
tries to "wing it" and bluff his way through.

Well, we'll see. Watch for future developments.

1 comment:

  1. I like the caption smell of money, a lot. It is quite an attractive one. The content also helped me a lot.