-
Be that as it may, you have a family and a full time job to boot.
You don’t have anything like a grubstake to live on until you get the hang
of trading. Hey, you haven't even set aside a comfortable trading account.
(Not good, you'll be thinking about money all the time instead of thinking
about trading properly.)
-
And to top it off, you're
worried about conventional trading wisdom inhibiting the "developing of
your own style"! I take it you've been reading "Market Wizards", or
following some of the bluster in the various Forums. Get real!
Have you forgotten the first
rule of childrearing?
Do you not want to raise a
child that will stand up for his beliefs and against injustice in society?
Paradoxically, to do this effectively, you must first teach the child to
understand society's limits and rules. I.e. Lesson 1: "No!"
A Doctor must complete 4
years of undergraduate studies and 4 more of medical school
studies. Internship and residency follow this, 3 years. After
successfully passing major medical examinations; the doctor can commence a
lifetime of further study and practice.
A CPA must complete 4
rigorous years of university Business, Law, and Accounting studies.
Internship follows this, 1-2 years. After successfully passing
major Unified CPA Examinations; the CPA can commence a lifetime of further
study and practice.
An Architect must complete
4-5 exhausting years of university Drafting and Architecture studies.
Internship follows this, 1-2 years. After successfully passing
major Architectural Examinations; the architect can commence a lifetime of
further study and practice.
Trading is a profession, a
science, and an art. Seems to me that it is fair to conclude that similarly,
there are three stages in the professional learning curve of a trader:
For a foundation, you need
to study commodities and futures, technical analysis, trends, support and
resistance, Fibonacci, Elliott Waves, options, exit techniques, entry
techniques, target setting, order placement, risk control, money
management, and the list goes on!
Ideally, along the way you
will attach yourself to a mentor, a master trader who suits your trading
preferences and style.
The essence of any
internship is observing the master (trader). Read what the mentor suggests
that you read and diligently do what he/she requires (daily paper trading
drills, for example). In today’s world of hi-tech, this will probably wind
up a "virtual" mentorship, but before going full time it would be of
inestimable value to sit side-by-side for some period of time and trade
together with your mentor (every newby's dream!).
Now you are armed and ready
to start your new career. Impeccably, emulate the master trader.
Cautiously gain experience and expand your style and your account. Study.
Study. Study.
A few years ago, I heard Joe
Ross, a famous trader, author, and teacher tell the story of his trading
internship. His trading mentor (his uncle, I believe) assigned him the
grinding full time endeavor of practicing nothing but order placing, for a
year. He gave orders, out loud. To a tape recorder. To his aunt. To his
mentor. Day in and day out for a full year Joe simulated placing orders,
before ever putting on a single trade!
BTW, apparently, even the
mythical trading genius, Gann studied the markets for ten (10 !) years
before putting on his first trade.
NEXT
!!!
Let's evaluate some of the
results of your Reality Principle (RP) inventory we did last letter:
-
You are somewhat short
funded, opening your trading account with between $5,000 - 10,000. Since
you are planning to trade options, having such a small account is not
quite the kiss-of-death that it would be for straight trading of other
types of instruments. Mainly because unless you sell naked options you
don’t squarely face the silent killer, Drawdowns. The most you can
lose on a trade would be the price you paid for the option.
-
For now, you are preparing
to become a successful part time trader of options.
-
Again, without getting into
it right now, options are best traded medium to long term, so that's going
to be our time frame. We're medium/long term part time options traders.
-
Many aspects of your RP
(including account size, experience, and comfort zone) suggest a goal of
gentle to moderate equity growth, at relatively low risk - at least till
you build up your account, experience, and confidence.
-
Most traders view the
markets with a Bull trading mindset (to make money the market has to go
up). It demands flexibility to do what you once did so successfully
(Samech, soon we'll have to share the story of "Samech's Optiontrading
System" with those who are following our discussion), but this
time to do so also in a Bear market (make money when the market goes
down). In many ways, a bear market presents altogether different market
characteristics to deal with than a Bull market.
As an option trader, you can
actually make money selling the market going up (sell a Call) and by
buying the market going down (buy a Put)! That's in addition to buying the
Bull (buying a Call) and selling the Bear (selling a Put). The
possibilities are awesome!
Interesting Option
Highlight of the Day: =]
;-)>
The market value of
Calls responds almost immediately to upward movement of the price of
the underlying instrument.
Response in the
valuation of Puts to downward movement of the price of the underlying
instrument is delayed.
It has been conjectured
that this is due to the fact that most traders view the markets with a
Bull trading mindset. They are thus anxious to jump on any Bull
activity, but tend to ignore Bearish activity. This tidbit will be of
use later when we start constructing option strategies.
Commodities vs. stocks remains
a big question for you. You keep chirping, "Commodities is gambling." I
don't know who put that one in your head. Assuming trading commodities is
gambling, how do you avoid the same conclusion about stocks? Perhaps highly
leveraged investing might challenge your comfort zone, but that is a
personal, psychological thing and hardly an objective truth.
Either way, I am going to
proceed to discuss trading from the perspective of commodities, because I
prefer them.
Stock trading, by nature,
requires more attention to fundamental analysis. Stocks are arguably less
amenable to technical analysis than commodities. Why do I say that? Without
going too deep right now, here’s the short of it:
-
Basically, I view technical
analysis as the study of market price-activity charts, graphically
depicting patterns of mob behavior and psychology. Measurement and
analysis of mob behavior is most reliably gained from examining a large
sample size, taken from a large population. Stocks in general, and stock
options in particular are just too thinly traded (small sample from a
small population) to give such smooth observable results as observed with
commodities.
-
Slippage is directly
proportional to the trading volume and open interest in your instrument.
The thinner the market, the greater the slippage.
-
Consider, on the other hand,
T-bonds. T-bonds are so heavily traded that under technical analysis the
market can be observed to behave in almost textbook fashion (most of the
time!). Don’t get me wrong. To trade T-bonds without giving due attention
to fundamental input (read: Greenspan speaks!) is suicidal.
Anyhow, most of the option
stuff is basic to both types of instruments, stocks and commodities,
equally.
I'm gonna recommend a thick
text book and a website for you to read. Then we can talk without me having
to get entangled explaining things that others have said better already! To
encourage your hunger for more information, let’s start building your
trading library. Either of the following two books will give you the grand
tour of technical analysis and belongs on your desk:
or
Start reading "Phantom of the
Pits", tonight. It’s a fascinating, well written, online book, full of
real-life insights into trading. When I first stumbled onto it, I stopped
trading for a full year to re-assess. Read it now, so you won’t need to
unlearn your trading habits and attitudes later. FREE!
Get to work, ‘cause I’m
planning to recommend some more books and give you lots more links in future
letters!
Be well. Love to all,
Asher
StrategicOptionGrid does what $1500 programs don’t
!
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