Before sitting down to write this article, I gave the subject a lot of thought. What would a beginner to stock trading really want and need to know? What might they not find elsewhere?
After ruminating on this for some time, I hit upon my title, 'A Beginners Guide To Stock Trading' and my subject matter - something that is vital to the success of a trader but is discussed all too infrequently.
The topic? Some of the nitty gritty details of stock trading, which we could easily call the 'business of trading'.
As I read materials designed to help beginners get started, I am often amazed at how easy it can all sound and how profitable it is. The truth is that once an individual has mastered many of the basics and some of the advanced skills, stock trading can be both profitable and relatively easy. However, getting over the knowledge hump can take some time.
Instead, here I propose to discuss one of the key attributes of a successful trader and hope that a beginner to stock trading will take some note.
The Number 1 Lesson
The truth is that the business of stock trading is very much like any other business. It is hard work. I'm sorry to break this to you, but it isn't easy. Now if you happen to work at the bottom of a shaft in a coal mine in inhuman conditions, stock trading is pretty easy in comparison. But compared to many other occupations, it really is not easy...
It needs to be treated as a business. If an individual trader is to both survive and prosper, he or she must be professional and take it very seriously. It might be worth remembering that your competition for profits in the markets will often be young and hungry, recently graduated, MBA holding whizz kids. Or perhaps people with an engineering or pure mathematics background. In other words, your competition will not be pushovers.
Not only are they very bright and money hungry, but they are employed by some of the largest corporations in the world. They are equipped with the latest number crunching software and technology, top line economic analysis and up-to-the-second news feeds from Bloomberg. They also have competitive and equally bright colleagues with which to discuss strategy and trades for advice.
To win in such an environment, you must be very serious about taking part.
Many of the books written by trading legends of yesteryear don't hold very much for the modern trader or day trader. Typically, many of the successful legends hit on a niche or had an insight that gave them a playing field with very few competitors in. They were the first to have this insight and it provided them with an advantage for a number of years. Unfortunately, there is now so much computing power analysing ever little element of the stock exchanges of the developed world that these little edges will be very hard to come by.
It used to be that it was possible to find these edges by moving away from the Dow Jones and Wall Street and looking to smaller markets elsewhere - that is no longer the case. For example, it is widely believed that Renaissance (a hedge fund in the United States) uses former cryptographers (code breakers) and speech recognition analysts to help write the algorithms that drive their computers. Most of us mere mortals will never be able to compete in that world.
Before this descends into a cautionary tale designed to put you off stock trading for life, there are some advantages to trading as well.
the advancement of the internet, market information has become a
commodity which is often given away for free. The charges and costs
involved with dealing and the price of quality software have fallen
which means that the amateur can compete - in theory at least - on an
almost level playing field. The information now provided for free by companies such as eTrade and Ameritrade about the NYSE and NASDAQ is more comprehensive than many professionals had back in 1995.
I can also tell you from experience that not all super whizz kids will prove to be that great! For some time I had a friend who worked for a major European bank on their trading floor. He is a degree and MBA holding polyglot - who cannot make a decision. His young colleagues seemed to be remarkably similar - super bright but unable to act on their own initiative.
Additionally, trading can be incredibly stressful. Having lots of money - plus leverage - on the line takes a certain mental strength. Looking at a trade not as an amount of money, but let's say, a house or an apartment, really ratchets up the mental pressure.
We know of several traders that take regular help to keep them calm. Weekly massages, sessions with a psychologist or hypnotherapist can help them to remain balanced, calm and objective in high pressure situations. In London, we know of one very skilled hypnotherapist with a number of trader clients - Deborah at WholeBeingToday.co.uk.
In other words, it isn't all doom and gloom!
But, an individual will still need to be very prepared and organised. Are you?
All of those tasks that none of us really want to do, have to be done by a trader. Can you keep good records so that your accountant can understand them at tax time? Can you maintain a profit and loss ledger that enables you to understand the things you do well and the things you do badly? Can you learn from your mistakes? Can you manage money effectively so that if you have a poor run of trades you will not be made homeless?
Of course none of these things involve the activity of trading... How are your mathematics skills? Can you read and understand a graph and moving averages? These are core skills!
In short, should you plan to become an equity market trader, it is vital that you approach it in the same way as a new business would be approached. Do some research, buy the relevant tools (such as a very powerful pc) and study the different methods available and find one that suits you.
One True Faith
If you are able to find that one method that makes sense for you and is profitable, it is vital to continue to hone your skills. There are so many people chasing profits from a limited number of day trading strategies now that very few people can and will maintain a market advantage for very long. Over time, most of the options trading and swing trading strategies have become devalued as more and more people try and use them.
As has been the case for many stock picking methods - and is something admitted by Warren Buffett - it becomes ever harder to allocate large amounts of capital and when there is too much money chasing opportunities, it can be difficult to buy stocks at advantageous prices. Over time, this problem of too much money chasing too few opportunities has widened from the DJIA and FTSE 100 to all major stock exchanges.
The problem is heightened by the proliferation of hedge funds and their almost bottomless supplies of money. The momentum or event driven funds are often referred to as the "hot money" and they have the power to move markets, making trades more attractive and bringing in more capital, pushing up prices still further.
After all that, I can only wish you luck!