Sunday, February 25, 2007

Learning To Trade

I've never met anyone who has read "Rich Dad, Poor Dad" by Robert Kiyosaki who didn't agree with the premise that in order to become rich it is necessary to have your assets working for them (unless they inherited wealth or won the lottery, etc.). Most of us work for a living and we, ourselves, are the only money producing asset. That is a very rare way to wealth yet it is what we are taught to do. I recommend Mr. Kiyosaki's "Rich Dad, Poor Dad" to you. Hopefully it will inspire you to learn to utilize assets in addition to your own time to produce wealth for you.

I teach seminars and mentor students concerning stock and option trading. One of the common misconceptions I see when students begin taking our seminars is that they think it is a way to get rich quick. That is definitely not the way I see it. Stock and option trading can, indeed, lead to great wealth, but it also has risk. Sometimes the risk is relatively slight and sometimes the risk is enormous. I've seen traders "bet it all on black." In other words, I've seen people take all their money and put it into a single play. That's scary to me. I've seen them lose all their trading money in a single day. That's not investing, it's gambling. I don't mean to say that money can't be made gambling, it can. Over the long haul, however, the gambler in the markets usually goes broke. One of my own mentors told me not to try to get rich quick, but rather to try to get rich steady and that made a lot of sense to me.

In this series of articles, I've written about a number of things that I believe are extremely important to successful trading. Subjects I've touched upon include having a business plan (I set out a beginning outline to construct a basic business plan), money management, some ways to cut losses and let profits run, and various strategies. All of those things are important, but, most important of all, in my view, is knowledge. The more advanced trader can sometimes transform a losing position into a winning position if she knows some countermeasures or she can at least reduce the loss in a position that has turned against her. The beginner just doesn't know what to do. Where do you fall in that continuum?

I don't care who it is, your money is more important to you than it is to anyone else. You probably work very hard to earn it. Isn't it every bit as important to learn how to preserve it and how to grow it? Only you can motivate yourself to do it. Is it easy? Is it get rich quick? Is success going to be handed to you? Probably not. Like almost everything that is worthwhile, it is going to take work. I think we've been schooled to believe that trading is too hard for most of us and we must rely on someone else. Horsefeathers! How well did the experts running the mutual funds do when the market crashed in 2000? How well did the analysts pushing Enron do? With a little knowledge and the willingness to keep learning you have the opportunity to place yourself in a financial position you never thought you could achieve. The catch is IT'S UP TO YOU. I've heard it said that if you are willing to do what others won't for 6 months or a year, you'll be able to do what others can't for the rest of your life. Wealth is not just about money, it is about quality of life. It is a wealthy man who can enjoy and spend time with his family. It is a wealthy woman who can devote time to what she loves. Money can help achieve the independence necessary to live the quality of life we seek; it can help free our time for the things that are truly important to us. Family, charity, activities that may be beyond our means now are within our reach if we choose to make the effort. It isn't for everyone, but if it is for you, start now.

One of the first things that deter students is vocabulary. "I'm going to open a diagonalized calendar spread" or "I think I'd like to adjust my bullish put spread since the stock turned bearish" may have little meaning to you at the moment, but with a little study you'll become fluent. Did you ever study a foreign language? Remember the first couple of days in class when you thought you'd never get it? After a couple of weeks, you were beginning to converse and understand some basics. It took some effort, but you gained ground rapidly. The same thing is possible in studying trading. Chances are you can do it. You just have to want it. If you don't go after it, I doubt you'll get it. If you do go after it at least you're giving yourself the chance.

Let me suggest that you set aside some time each day or each week or each month to study. Set aside the time and do it regularly. Use your subscriptions to see what I am doing. See if it makes sense to you. Learn from my mistakes. Trade on paper without real money until you see how you are doing with any particular strategy. Don't trade with real money until you have personally practiced a strategy and understand the risks and nuances. Keep learning, it's worth the effort.

Bill Kraft, Editor
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