Another good RM column from Swing Trader author Alan Farley; Here’s an excerpt:
"Ready to take the plunge and try your hand at the trading game? If so, you have
a lot of work to do. This is an obsessive discipline that rewards its
enthusiasts in many ways beyond cold, hard cash. But you’ll also discover it’s
the toughest thing you’ve ever done.
What’s the best path to success for new traders, and how can they shorten
the learning curve? I’ve put together this checklist to address many of the
tasks required to get set up and ready to go."
Commit capital. Figure out how much cash you need to put into your
trading account. This should be discretionary capital you can lose without a
major disruption to your lifestyle. Trading is harder than it looks, and the
odds you’ll succeed are a lot lower than you think.
Pick a trading strategy. Then learn it inside and out. I like
swing trading because it holds positions longer than daytrading, without the
slow crawl of investing. But the markets will accommodate a wide variety of
tactics, so find the method that matches your personality and lifestyle.
Choose a trading style. Decide
whether to pursue a discretionary or systems trading style. Discretionary
traders watch the markets and pick their entries through real-time analysis.
Systems traders build automatic rules and backtest them to see how they perform
in different conditions.
Experiment with different ideas. You won’t be locked into your
initial trading strategy for life, so experiment with a broad variety of ideas
as your knowledge and experience grow. Sooner or later, the market will tell you
what works best, given your unique circumstances.
Find a good broker. A good broker means the difference between
lost opportunities and substantial profits. Most new traders need to choose
between a classic discount broker and a direct-access broker that offers
execution through electronic communication networks (ECNs).
Perform a reality check. Ask yourself if you have the ability or
desire to watch the real-time markets during the trading day. Those who want to
follow every tick do better with direct-access brokers, while end-of-day traders
with responsibilities outside the markets will find that a discount broker meets
Get an education. Now you’re all set up and ready to go. This is
where the trouble starts, because it’s easy to enter positions without a trading
plan that works. So take a giant step back and get an education in technical
analysis before you make your first trade.
Read some books. Three classic trading books to start with are
Trading for a Living by Dr. Alexander Elder; Technical Analysis of
Stock Trends by Edwards and Magee; and Technical Analysis of the
Financial Markets by John Murphy.
Buy some software. You don’t have to spend a fortune to watch the
markets. There are free alternatives provided by your broker, as well as
inexpensive charting programs that won’t empty your wallet. Two solid choices
for budget-minded traders are StockCharts.com and Medved QuoteTracker.
Learn to lose gracefully. Trading isn’t the same discipline as
technical analysis, and it will take longer to master than all of those charts
and patterns. It also requires real-life experiences with cold, hard cash. And
many of these will be painful and costly.
Avoid paper trading. There’s no substitute for placing your own
capital at risk. Many educators tell students they should paper-trade before
taking real market positions. I don’t agree with this at all. Simulated trading
doesn’t show how the markets really operate, and it also builds false
Trade small. The trick is to keep position size very low for a
long time while you learn how the markets operate. In fact, it’s best to take
positions of 100 shares or less for at least the first year. This way you’ll
experience many profits and losses, but control the emotional swings that can
undermine your growth.
Use only limit orders. You choose your entry price in advance with
this strategy, but you risk getting shut out of the trade. It’s a far better
approach for newbies than a market order that carries you into a position at the
best price available at the time.
Do your homework. Think about why you want to own a stock, or sell
it short at a particular price level. This is the first step to mastering the
market. New traders get filled at the worst possible prices when they use market
orders. This happens because they’re chasing stocks around mindlessly, buying
many highs and selling many lows.
Forget making money. Learn how to trade well, and don’t worry
about making money. This is tough, because greed is an overriding influence in
the decision to trade. But the markets aren’t printing money despite what you
may believe. And they won’t reward your efforts until you learn how to manage
Respect your opponent. Newbies get so blinded by the potential
rewards that they forget the substantial risks. The market is a giant chessboard
in which your opponent shows no mercy, so you have to be up to your game at all
times. It’s all about discipline, and the only way to get into the groove is by
forgetting about the goal entirely.
Lower the noise level. Trading isn’t a group sport. Avoid the chat
rooms and stock boards at all costs, because it’s your money at risk, not
theirs. Successful traders develop their own market approach, then apply it
religiously each day. This takes a lot of time, because the market is a
complicated animal indeed.
Yet another example of uncommonly good common sense advice . . .
So You Think You Want to Be a Trader?
RealMoney.com, 2/10/2005 11:00 AM EST