Preparing for Trading in Financial Markets
Beginning Traders Should Follow Checklists and Install Safety Guards
Jan 20, 2009
Before a new trader enters the market for the first time, success must be planned as part of a trading business that includes risk management, money management and a trading plan.
When compared to investing, trading involves relatively greater activity in buying and selling of securities. Investing on the other hand, is thought of as more passive.
Trading securities includes stock trading, futures trading, commodities trading and currency trading, etc. The trader's tools are based on market trading philosophy such as:
- technical analysis
- fundamental analysis
- both technical and fundamental.
Assuming one has an account with a broker, the following is a checklist of wisdoms in preparation before beginning to trade the markets.
Emotional Aspects of Markets
- Maximum Diversity. If a market direction looks too obvious, it probably is and the market will disappoint a maximum diversity of traders. Money is always transferred from the weak hands, who are not disciplined, to the minority who are the strong hands.
- Emotional Orientation. First, if the objective is to always be right, it is a guaranteed outcome to fail. Focusing on winning only causes traders to become emotionally disorientated. Second, traders with unrealistic expectations to make a fistful of money create an unachievable goal and usually over trade. A better approach is to define how much return would be reasonable, e.g. 20% or 30% per annum, and achieve it consistently.
Gaming Aspects of Trading
- Random Markets. Accept the truth that markets are essentially random. There are many predictive theories (e.g. cycles, Elliott wave, market profile, seasonal, W.D. Gann); however, in reality it’s impossible to consistently predict markets.
- Losing Game. Accept the truth that trading is a losing game. Know that 90% of traders will lose their risk capital within 90 days. Accept the difficulty of trading and not place a time factor on goals.
- Best Loser Wins. The only secret to successful trading is to manage your losses. Successful traders keep losses small and wins larger than losses. Thus trading energy should focus on managing losses.
Money Management Considerations
- Risk Management. Successful trading is about successful risk management, of which a central part is money management. Good traders are good risk managers.
- Trading Partner. Preparation requires finding a trading partner, a helper, someone you respect and not necessarily a trader. This person will help you to stay rational, honest and help validate trading methodology.
- Financial Boundaries. Make a commitment not to lose more than a certain amount of trading capital and advise your trading partner. When this amount is exeeded, this should be a signal that trading is not for you.
Should the financial boundary be exceeded in trading, consideration ought to be given to stopping trading altogether. Perhaps a trading company could do your trading. However, for traders who can succeed and trade within the financial boundary, trading to financial freedom may well become a reality.
Trading Plan
Beginning traders who have accepted the above ideas have a better chance to trade according to a sound plan. Trading is hard work and one needs to respect the market as a "fearless" trader is bound to fail. A trading partner should be used to assist with keeping one on track of the plan and adhere to a financial boundary. The beginning trader should be fully aware at the outset that there is a possibility of not proceeding beyond this trading preparation stage.
References:
- “Trading the SPI”, Brent Penfold, Wrightbooks, Qld Australia, 2005
- "Trade Your Way to Financial Freedom", Van K Tharp, McGraw-Hill, NY, 1999
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