Friday, April 30, 2010

How to Become a Better Trader

That is the real question for all of us, isn't it? How can I become a better trader? Over my years of dealing with a few successful traders and a whole lot of wannabe successful traders I have observed one very significant difference. It seems that the wannabes often believe that success can come without a lot of effort. So many of those who fail seem to approach trading as something they will pick up by doing as little as possible. They may attend a seminar or two and maybe even read a book or watch a DVD or two and then start trading real money as if they had a clue what they are doing.

Imagine if a plumber or skilled auto mechanic started out that way or an electrician (zzzzzzzzzzzzzt!) or a doctor. How good would any of us likely be at our jobs without serious training yet many jump into the business of trading with superficial knowledge at best. Trading is a business. It requires effort, a lot of effort, to succeed. The business has a great deal of risk and unless one becomes trained or trains oneself to understand and deal with risk potential the prognosis is poor. Unless one understands the nuances of the strategies one employs, the prognosis is poor. Unless one knows how and where to cut losses and how to let profits run, the prognosis is poor. Unless one understands the need for money management and incorporates a way to manage money in the guessed it. The prognosis is poor.

On the other hand, for those who are willing to undertake the necessary education, trading can be a fantastic way to add to one's net worth. It also can permit someone like me to have a wonderful quality of life. I can travel and accomplish my business anywhere I have an internet connection; I am free of employees; my commute is the distance from my bedroom to my in home office; I report to no one except the IRS; I can choose what I want to do, when I want to do it. All those abilities give me a life I really enjoy, but it did not come without a great deal of effort on my part. I attended hour upon hour of seminar, read every book on trading I could get my hands on, watched DVD after DVD and practiced, practiced, practiced.

I see so many who are unwilling to pay for a trading education though the rewards of the knowledge can be exceptional and the lack of knowledge can be and often is, disastrous. At times I have people contact me for the first time for a coaching session only after they have paid enormously in losses in their account because they had no idea how to cut losses or let profits run. The person who seeks the knowledge first in trading seems to be the rarity. Instead, many start with greed as the only arrow in their trading quiver only to be erased from the business through their ignorance and/or unwillingness to pay for their education. One way or the other we all pay. Either we pay for some structured education or we pay even more dearly through the losses we generate.

Anyway, in my view, that's how to become a better trader. Learn more. Read, attend seminars and webinars, get help before you wished you had. Study and practice, practice, practice by paper trading first and only when you see that your practice is yielding good results is it time to risk some real money. In the past when I have written about paper trading there always seems to be someone who writes saying paper trading does no good. While I disagree adamantly, I would ask in turn does it do any harm? Can a student learn anything by paper trading? I do agree that paper trading only gives us a part of the game. However, it gives us an important part. It permits us to learn the intricacies of a given strategy. If we do it correctly, it teaches us how to utilize a money management methodology. It simply adds to our knowledge. The part paper trading does not give us, at least the full effect, is dealing with our emotions during the course of a trade. I contend that while the emotions will still be very difficult to master when trading real money, it will be a lot easier if we at least have a clue of what we are doing.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

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Anonymous said...

I enjoy reading your essays on how to become a better trader. The summary of all you are saying is that it's WORK. Just like all the other jobs in the world you need to put in the time and study and WORK at it. Perhaps you could advise how much capital do you need to use to make $1000 per month profits. I'll assume a person needs to use 5 times as much to make $5000/ month.

Bill Kraft, said...

Thanks for writing, Anonymous. I am afraid it is impossible to say how much capital a given trader might need to make $1,000 a month. So much depends upon the individual trader's knowledge and abilities and risk tolerance. Some strategies might yield as much as 30% or 40% in a month, but, of course, relatively high risk might be expected. Writing covered calls might bring in 1% to 7% in a month or could result in a loss as with all trades. Some investments are available that could yield 7% to 9% a year in distributions. I wrote extensively on this subject including methods and strategies in my most recent book, "Smart Investors Money Machine." You might find that book to be really helpful in answering the question for your own circumstances.
Bill Kraft

Anonymous said...

The amount of capital needed to trade depends on the size of the trades you are willing to trade in termns of number of shares you want to trade and price per share.A rule of them is probably a minimum of $50,000.What is really more important than how much you want to make is the discipline to keep as much of the capital you start off with by adhering to your stop losses. This all must be stated in your trading plan; an absolute necessity in order to be a successful trader.I am not a professional trader but have spent years reading, learning, and practicing as this article points out !

Frank said...

I heartily agree with your complete article. "The pain of discipline (i.e. Trading Virtually/Paper Trading for as long as it takes) weighs ounces.....the pain of regret (trading with real money in ignorance and losing REAL money) weighs TONS". Frank.

Bill Kraft, said...

Thanks, Frank. That is a great way to put it.
Bill Kraft

Anonymous said...

Hi Bill thanks again for all your helpful comments.
I had a question about finding potential candidates for trading.It seems like I have to spend alot of time at night looking for stocks to trade. When I see somthing that looks to be setting up I might watch it for a day or two, if it pulls back I will drop for another stock .Only to find out later it made a nice move. Do you think its wiser to follow a small basket maybe 10, "religiously" than jump around from stock to stock.I'm trying to spend a hour a night on this .

thanks Bill


Bill Kraft, said...

Thank you for writing, Morris. One of the difficulties many retail traders have is the same as you suggest and that is finding candidates to trade. Naturally, one of the impediments, as you suggest, is time. I once had a trading student who traded only one stock. She traded options as the stock (it was IBM) went up, down, and sideways and did well enough to quit her day job and, last I heard, was doing quite well trading. While I am not necessarily suggesting you follow that example, traders sometimes do work with only a small basket of stocks, or, perhaps stick to a single sector. I personally use various searches that I or others have created to narrow the field of potential candidates relatively quickly and efficiently. I suppose the bottom line is to decide with some precision what you are seeking and then use those parameters to set up a search assuming you have charting software like Worden Brothers StockFinder or Telechart (or others that provide the ability to formulate such searches) to find the candidates.
Bill Kraft

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