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Beginning Trader -Joe Ross original article! (inglês)

SEEKING STABILITY IN TRADING
By Joe Ross

Recently someone threw the following question at me, and I thought the answer might be of significance to both new traders and those who have already gotten their feet wet. The question was:

“I want to become a professional trader, but I also want to get married and have children. As far as I can see, income from trading can be quite inconsistent—certainly not the kind of steady income that would make a wife feel secure, and possibly neither of us would feel sufficiently secure about having the money to raise a family. I also wonder if my involvement in trading would leave me sufficient time to devote to a family. How should I approach a career in trading, and what are the solutions?”

I can answer those questions best through my own experience. I really think that the way I began is just as applicable today as it was over 47 years ago.

I began trading as a young man. I was 22 years old, and the year was 1957. There were only a few futures markets worth trading, and that may have been a good thing. Today there are so many choices that it tends to be confusing.

Currently the beginning trader is faced with media bombardment pushing trading in a variety of markets. The end result of this bombardment is that the novice trader becomes a victim, and is soon parted from his money. The next potential victim is not far behind, ready to fill the shoes of the most recently departed wannabe trader.

The current industry statistics for the success of novice traders is deplorable. I have heard that the mortality rate is over ninety percent, and that in the most popular venue, day trading life for a beginner lasts from three to six months, for an average life expectancy of four and one-half months.

I have to ask myself: “Why can’t novice traders start out the way I did?” And the answer is: “It would be a lot easier for them if they did.”

So, how did I start out, and how could a beginning trader emulate what I did? The answer is not one that will make me popular with the people in the industry, but the entire teaching and training part of my career is based upon revealing what I know to be true. The answer is not to be found in any kind of “get rich quick” scheme. The answer is not found in being suckered into ways of trading that are designed to make your broker a wealthy man at the expense of your capital.

The first step is to be sure you have sufficient capital with which to trade. That means a bare minimum of $5,000, and preferably much more than that. You are definitely not going to be able to support a family with $5,000 trading capital, but it is a beginning from which you can build. Once you begin trading steadily and consistently, you can expect to earn an industry average of four percent per month. Some traders earn considerably more than that, and others obviously less. Based on the average, you will then have to compute how much capital you will need to support your family. If you do better than average, you will need less capital. But you must give your trading a few years to see what you are able to earn on average before you can settle on an amount of margin to keep in your account. I suggest stripping out any amount that exceeds the capital you need to satisfy your financial goals.

I started out with $5,000, but $5000 then was worth as much as ten times that now. Be that as it may, there are now other compensating factors: lower commissions; more opportunities; better information; live simulated trading, and relatively lower margins, due to a more accurate way of computing them.

The second step is to make sure you have an adequate education in trading. For me that meant being mentored. I studied with my great-uncle for one- and-a-half years. I cannot emphasize enough that you must be ready to trade before you should ever make the attempt. My opinion is that a wannabe trader should study the markets for at least a year, never making a trade, doing nothing but observing the price action and trying to understand what makes prices behave the way they do. I’ll say it again: DO NOT TRADE UNTIL YOU THOROUGHLY UNDERSTAND THE PRICE ACTION. You need to know why prices move as they do. You need to know to where they are most likely to move. You need to know how prices are moved. You need to know what makes prices move as they do, and you need to know who makes prices move when they do move. Do not even attempt to trade until you thoroughly understand the answer to what, why, how, where, and who.

What about mentoring? Nowadays there is no reason to go live with your uncle to learn how to trade. You can be mentored online via seminars on the web, with follow-up via online chats and private mentoring rooms. Keep in mind that mentoring is not reading books, not reading magazines, and not sitting in chat rooms and on forums gossiping and listening to other wannabe traders.

There were, as best I can recall, from 8-10 truly tradable markets when I started. I was not faced with Single Stock Futures, Forex, Stock Indices, Gold, Currencies or other financial instruments such as bonds, notes, Fed Funds, and others. Options on futures were also not available.

I had to stick with trading things that people consumed. This included the grains, some softs, some metals, and some energy products.

Because there was no intraday trading, I looked at weekly and daily charts. I still do. In order to find sufficient trades, I also looked at spreads. Trading spreads provided a major part of my income. The rest was from outright futures position trades. On these, I took signals from the weekly charts and managed them on the daily charts. Amazingly, I had time for my family and earned enough money that my family could live from my earnings as a trader.

However, because of the inconsistency of my earnings, especially at the beginning, I had to budget my money. I would have spectacular months and months that were not so good. One year, apart from spreads that made money, I was able to make only one trade in the “outrights,” and that trade came in November. It took the greatest amount of discipline and self-control to not force a trade during the other eleven months of the year.

A trader starting out with a small account should truly consider trading mostly, if not entirely, in reduced margin seasonal spreads. There are plenty of those and the sources of information about them are outstanding. Spreads are a great way to learn the discipline needed to become a successful trader, while at the same time gaining the most efficient use of your trading capital, and incurring a lower risk than is possible with outright futures.

Spread trading today is possibly the least known of all the trading methods, yet over the years it has been the most consistently profitable way to trade I have ever encountered. However, it is not popular with those who promote trading as a career. The reasons why are not important here other than to say that the promoters of the popular ways to trade are driven by the same greed as are many of the novices who mistakenly imagine that they can quickly acquire wealth trading in the markets. I am amazed at the blindness and absolute arrogance of beginners entering the markets on a daily basis. Do they not consider that if trading were an easy way to get rich, there would be tens of thousands of people getting rich doing it? I read a figure recently that showed that only five percent of traders are actually profitable after taxes, commissions, and fees.

Apart from the hype of media advertising, what makes novice traders think that they can come into the markets and become almost immediately successful? It is greed and arrogance, mixed with ignorance. Virtually any profession requires at least three years of on-the-job learning before a person can be considered worth his pay, and many more years before he can be considered expert at what he does. It is no different for a career in trading. This brings me to my next point: how much time should you allow for becoming a professional trader?

Fortunately, becoming a professional trader does not require as many years as it does to become a medical doctor—yet a professional trader can earn as much or more than many doctors. Unless a beginner is truly exceptional, he/she cannot expect to have a learning curve of fewer than three years. There is help in this area. Today a trader can use the facilities of simulated live trading to more quickly learn what happens when orders are placed into the market. Still, until real money is on the line, a trader has no idea of what it is actually like to trade. I suggest that every beginner should begin by at least engaging in live simulated trading.

Following is a list of the things that I did during and after my mentoring. I attribute my discipline, self-control, and management style to having done these exercises on a regular basis. The record of my trades was something my great-uncle required me to do. The rest I came up with on my own.

• I was required to keep a record of every trade and to review my trades so that I could discover the trades that were suitable for me and within my level of comfort. The record helped me to learn where and when I made mistakes, to confront these mistakes, and discipline myself to avoid them in the future.

• I kept a chart of my equity. Today this can be done with various software programs. The main point was that when my equity fell below a curve-fitted moving average of my equity, I stopped trading until I could figure out why I was losing money.

• I kept a diary of my feelings. This helped me to become an intuitive trader. I learned which feelings and emotions went with the winning trades. This turned out to be one of the most important things I ever did.

• I constructed something I call the “Life Index.” It is to be found in my book, “Trading Is a Business.” It probably did more for me in my development as a trader and as an adult human being than anything else I have ever done. It was a lot of work, but it was worth every moment I spent with it.

Now let’s look at how different trading styles can allow you to have a family. If you are determined to be a day trader, as long as you limit your trading to one-and-a-half hours in the morning and one-and-a-half hours in the afternoon, you will have plenty of time for a family life. The first and last hour-and-a-half of a trading session is usually the best time of the day to trade. You can spend the time in-between taking care of your record-keeping and planning duties. Every trader should trade from a definite plan.

What I’m saying here is that you can be married to a wife as long as you are not married to your day trading. Every trader must discover his/her style of trading and level of comfort—if day trading is yours, just don’t overdo it.

If you decide to be a position trader, an option trader, or a spread trader, you can have a more relaxed lifestyle. These categories of traders need, at most, delayed data, and can even use end-of-day data. Delayed and end-of-day data are free at some sites, and are without exchange fees from all sources. Trading this way will save you a considerable amount of money every year, and you will have ample time for managing your business and for a family.

Can a beginner make a living as a trader? Can a novice have a happy family life and still be a professional trader? I believe it is possible, but only if trading is viewed realistically as a career, which includes counting the cost in the time, money, and effort needed to succeed.

Joe Ross.