Trading is very expensive to learn. There are countless ways to trade, many of which are unprofitable and many others profitable only to their sole practitioners. Of these countless ways of trading, only a couple are probably suited for you. Most people who try to trade systems without proving it to themselves will end up losing everything they put into it.
It is my opinion that a couple of observations of market behavior are insufficient to be branded setups and traded off. Its like observing the number thirteen is unlucky or people with the zodiac sign Leo are born leaders. It may seem true due to selection bias but most likely its just simple superstition. Many trading setups are superstitions and you should not trade them until know the probabilities for each setup.
Whatever setup you observe, read on a blog, hear from some hotshot trader or otherwise obtain from other means needs to be tested and measured to determine the following:
- Potential reward:risk (Needs to be at least 1:1, 2:3 or better recommended)
- Stop size required (Smaller is better or you may get shaken out)
- Probability of success: (Theoretically 50%+ but 60%+ recommended)
- Invalidating conditions and subtle variations (the fewer, the better)
The best way to get this information is to actually trade the setups. A sample of 20 trades will quickly eliminate poor setups. A sample of 40 should be sufficient to calculate probabilities. A sample of 100 should be sufficient to calculate stops.
Setups have subtle variations that make a given setup clear or strong vs muddy or weak. For example, today's trend down b12-27 from the W reversal was broken by a counter-trend move b35-49 and then we got a deep mW b50-55 (two inside bars b52,54 make this three tiny pushes). The subtle difference between the three pushes ending a leg versus an actual reversal of a trend takes experience and many traders could fail to realize that this is not an actual reversal. If they did not take a scalp profit, they probably were stopped out. Such losses add to the overall cost of your trading education and only screen time will make you better.
I believe the first year of trading can be done entirely in SIM and will probably save tens of thousands of dollars for the average trader. I have yet to meet a single trader who became profitable in the first year. Save the capital for once you know what you are doing. Modern SIM trading is extremely realistic and enables you to keep the same detailed records of wins, stops required, etc. The only thing missing is your mental discipline and ability to trade exactly as if it was the real thing. If you wish, you can toss a coin and switch between real trading and SIM trading arbitrarily until your mind does not differentiate.
Most traders fail because they run out of capital and the severe loss of the first few years of trading makes them give up. Reduce the cost of education by carefully evaluating and choosing setups and practicing your system until your prove it to yourself.
Cad, how do you deal with boredom during the day whilst you wait for a setup? Any advice on how to develop the ability to be able to say this setup is not good enough, i will wait till the next. Thanks
ReplyDeleteOmar
Well Omar, you just have to find something that you would like to do and haven't really started yet. As for you 2nd question, you just trade with your plan. Follow step by step what you have written on your plan. you should be able to eliminate emotions from trading. cheers
DeleteWell said PATrader. Sitting without feeling the urge to be in a trade is a very important requirement to be a successful trader.
DeleteCad I agree that the first year of trading could be done on sim but it would be even better if they could open a small stock trading account too. With 2 thousand dollars at 4x margin a trader could trade as much as 300 shares in the FAZ at the current price which is plenty. They would only be able to take 5 trades a week due to the pattern day trader rule so they could try and take the 5 best trades they can and then switch to sim for the rest of week.
ReplyDeleteI wanted to add that a trader could also trade 100 shares of IWM with 2 thousand dollars and 4x margin which follows the Russell and is very similar to Spy.
DeleteA pattern day trader is one who executes 4 or more trades within 5 business days. Therefore, our friend could only take 3 trades a week. And after the third trade, he would need to sit out another four days. This is just impractical. A mini-forex account or a cheap contract such as M6E is far better if you want to trade small time real money.
DeleteAnd thats a great way to start your second year.
Cad,any good SIM trading platform you recommend to practice on in the first year?
ReplyDeleteI use NinjaTrader, a free and extremely realistic SIM and live platform. You will need an account from a forex broker that supports it (most do) for data.
DeleteMost platforms these days have SIM trading, so choose whatever is cost effective.