the young and the feckless

C

captcontrary

i was gonna ride the recent theme of "taking $x to $y" with the title "taking $20k hopefully not to $0" but it turns out that's not as funny as i first thought. neither did i want to use the word newbie in the title.

i'm a relatively new trader; started full time in october '07. i've been inspired by reading some of these journals to start my own. whereas it seems most people here are trying to test their trading prowess by setting high goals for their accounts, i'm simply hoping to survive. it seems like it might be a different twist and a compelling journal to follow for those of you who have already achieved success in this field, although maybe that's presumptive of me as an ET forum and trading "newbie." i figure i'll never know if i don't try. i will try to be especially candid with my errors, past and present, not because i'm interested in "full disclosure" or think anybody needs to know, but because i don't want to gloss over my failures or make myself look better than i am. i figure the best way to refine my skills (or prove to myself i have none and am in the wrong line of work) is to be as honest as possible. this is my attempt to longer be an irresponsible trader.

a brief history:

i started trading stocks with around $20k in my scottrade account in october, and at one point in january i had achieved my goal of reaching minimum equity requirements for pattern day trading. at the peak i had about $28k, but quickly in the span of two weeks and two trades the account was back down to $20k. i never developed a trading plan, and though i told myself i would when i reached $25k, i revised my planning stage up to $30k because that's the level i wanted to maintain before making withdrawals for expenses. i knew i was taking chances and not trading wisely but thought i could make another $2000 without getting burned. so much for that idea. i got hit for about $3000 trading IDMI in mid-january (though i knew i should have never touched it with a ten foot pole), then promptly let a day trade on ETFC @ $4.90 turn into a swing trade because the profit was moving too slowly (first sign i should have bailed), then a position trade as the pps dropped sharply and i was caught with my pants down. i held that for a month in order to get past the wash rule and realized a loss of about $3500. i've since decided to make the mark-to-market election this year so i could have cut it way sooner, but oh well. here i am. oh, i cut at $3.94 last week expecting another flirt with the low $3s, and ETFC was trading in the $4.30s two days later. again, oh well.

ok, i won't be trading for the next week and a half because i initiated a brokerage transfer to thinkorswim just last night, but i intend to use this week to develop a basic trading plan and get myself ready to take this more seriously. i'll update my plan here this week as i hope to chronicle every step towards profitability. i don't intend to update live trades during the day, but part of my plan may be to use this journal and my blog as a way to review my trades at the end of the day. i want to be disciplined, i want to be thorough, i want to prove that it's possible for a newbie to not only *not* blow up his account but be genuinely profitable, and most of all i want to be successful before my extremely high student loan payments drain my savings.

here's to survival!
 
Quote from captcontrary:

i'm a relatively new trader; started full time in october '07. i've been inspired by reading some of these journals to start my own. whereas it seems most people here are trying to test their trading prowess by setting high goals for their accounts, i'm simply hoping to survive. it seems like it might be a different twist and a compelling journal to follow for those of you who have already achieved success in this field, although maybe that's presumptive of me as an ET forum and trading "newbie." i figure i'll never know if i don't try.
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Congratulations and best of luck in your new 'career'. I've been a fulltime and successful trader since 1998 and can honesty say that I never thought it would be possible to have such a rewarding career, both financially and intellectually. That said, I'll try to summarize the advice I'd give a relative or best friend, if they were starting in this industry.

First, recognize that the odds are stacked heavily against you. More than likely, you will fail to achieve success as a trader, and will evenually quit to find another career. However, for those that do survive (and that may be you, as well), the rewards can be outstanding.

I think that you are wise to start with the goal of simply surviving, and not thriving in your trading. That's the key, surviving. The biggest obstacle for a beginning trader is to get to achieve the ability to consistently break even. Once you are comfortably 'treading water' with your trading, then you will gradually be able to further refine your trading to the point of profitability. Initially, please plan on losing money, and make your goal to lose as little as possible while you are learning and developing as a trader.

How do you lose as little as possible? Well, first of all, trade no more than 100 shares per trade. You will never make a lot of money trading only 100 shares per trade, but it will be a lot tougher to lose a substantial amount of money trading with only 100 shares per trade. And don't 'cheat' this by picking stocks like GOOG and RTP, that trade at $300 per share or more, to get more bang for your 100 share trade.

Focus on keeping your commission costs as low as possible. Find a brokerage firm that charges a per share commission rate to ensure that you are not paying excessive commissions on every trade. I'm not familiar with the commissions from Think-or-Swim, but use IB (www.interactivebrokers.com) as a guide for a commissions comparison. I've never traded at IB, but believe they are probably the among the best firms for a new trader to start with, with reasonable commission rates that allow the new trader to learn without wiping out their accounts on commissions alone.

Ideally, you should not need to take any money out of your trading account to pay expenses for 6+ months. You should not have to be worried about 'making' money to pay living expenses. The goal of trading, is to trade 'well' and let the profits take care of themselves. Some weeks/months will be good, some will not be as good, but your goal should be to 'trade well' and not to make $xxx of profit to cover your rent. If you are worried about paying your bills, you will begin to take on too much risk to meet your financial needs, and you odds of blowing out your account with dramatically increase.

Critical point: Live like an extreme tightwad! Almost every successful trader I know has this tightwad mentality, and this is likely a component of how they became success traders in the first place. Personally, I have at times spent 50+ hours fine tuning my trading to help reduce the average slippage per trade by $0.0005 per share. Over time, all these little savings add up. Once you reach the point of break even in your trading, all these little improvements you make to your trading will add up to success.

Hmmm, gotta run, lunch time. I might pop back in later with additional thoughts. But, hopefully, some of these thoughts will keep you thinking in the right direction as you begin. Best of luck.
 
Fixed costs: Don't be afraid to spend $100-300 per month in fixed costs. I know many successful traders, for example, that pay for eSignal charting.

Watch the market every day, during virtually every minute of the day. Look for patterns, watch the news stocks, and the stocks that are moving. You may (or may not) find more success by focusing on stocks that are 'in play' or moving sharply during that day. Look at charts using multiple timeframes, both intraday and a daily and/or weekly chart. Watch to see what the overall market is doing (using the QQQQ stock or NQ futures and SPY stock or ES futures). Watch to see what other stocks in the same sector might be doing.

Don't feel you have to trade every day. Just watch, pay attention, and try to see things that appear to happen repeatedly. Your goal when starting out, remember, is to learning and lose as little as possible with your trading.

As you think you notice similar things recurring over time, start to develop a possible 'system' to trade that observation. Try writing down the 'rules' for this potential trading idea. Begin to test the validity of this system idea by papertrading, or even doing occasional live 100 share trades with real money. Focus on breaking even, or maybe making a few bucks of profit on each trade. Check out the blotter thread in the Journal sections to see how many other beginning and small time traders are relatively consistent, making small daily gains. As their confidence and consistency improves, they can begin taking more trades, and increasing the share size on each trade.

As your success and trading volumes increase, maintain a rigid focus on minimizing your costs. Are your commissions still competitive? As your trading volumes increase, you will often find that competing firms have better pricing for more active traders, making them a better choice once your average volume has increased substantially.

Be skeptical of anything you hear from someone in business to sell you something. The best traders are those that have learned to trade on their own, and rely on their own judgment exclusively. Newsletters, chatroom that charge clients for trading ideas, seminars from trading gurus, and other payment for trading advice services should be avoided (IMO). While some of these <i>may</i> have value, the bulk of them tend to be offered by those that have been unable to profitably trade themselves, which make their products/services virtually worthless.

That said, it can be beneficial to develop a support group of fellow traders to offer mutual support and even trading ideas. I've been in a private chatroom for the past ~5 years, and enjoy the daily interaction and camraderie from the 7-15 traders in that room. On average, these fellow traders make $400k to $1M per year from trading, and by interacting with them, I can better assess my performance and development (some days, most of us lose money, indicating it was just a low opportunity day, for example, and not a day in which I necessarily 'screwed up' in my trading).

Running low on thoughts and ideas now... Probably the biggest thing to focus on is to lose as little money as possible, and focus on learning by watching the market each day. Don't feel bad if you have watched the market for two solid months and feel you have little to show for it. It takes time. Watch and learn, and try to find repeating patterns in the market. Test out ideas based on what you see, and eventually you will (hopefully) stumble upon something that begins to make sense to you and is capable of helping you to make consistent profits in the markets.
 
holy moly (yes, i'm trying to bring back the holy moly), thank you for all your insight. i can't spend much time now but i'm going to re-read your posts later to pick out some special things you said. this was especially helpful off the top of my head:


Quote from EricP:

As you think you notice similar things recurring over time, start to develop a possible 'system' to trade that observation. Try writing down the 'rules' for this potential trading idea. Begin to test the validity of this system idea by papertrading, or even doing occasional live 100 share trades with real money. Focus on breaking even, or maybe making a few bucks of profit on each trade.
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it makes so much sense and doesn't seem all that profound, but like my dad always said, take it one step at a time. i was wondering how to develop strategies and/or a system, but i was beating myself before i started by taking too much on at once, trying to develop the system before the individual parameters.

here's a little more information. once i get up and running again i'm going to stick strictly to the ES. part of my problem was that the constant search for a new opportunity in a stock was only letting me scratch the surface of the trends. sure i had a short list of permanent watchers that i learned more about, but i'm fairly indecisive so i could never pick a trade and stick with it. instead i'm going to throw all my energy into learning the ES where hopefully i can develop the little bit i've learned so far while trading stocks. my plan will include a rule to trade only one contract at a time until i can show some sort of tangible improvement. that's another problem i had with stocks. i didn't stick to small lots. i was trading 4000 and 5000 shares of ETFC at a time. admittedly way beyond my ability but i was trying to make a quick buck. i know i can't do that anymore.

thinkorswim isn't the cheapest, but i went with them over tradestation because i didn't want to worry about separate platform, exchange, or clearing fees yet. the simplicity of their fee schedule will suffice until i know more of what i want and need. $7 per round trip on the ES isn't great, but it's a good platform and i won't be trading super high volume. at most probably five RTs per day at first. i don't know, that's something i'll put in my plan.

eric, thanks again. i appreciate your thoughts and hope you'll stick around.
 
Quote from captcontrary:

here's a little more information. once i get up and running again i'm going to stick strictly to the ES. part of my problem was that the constant search for a new opportunity in a stock was only letting me scratch the surface of the trends. sure i had a short list of permanent watchers that i learned more about, but i'm fairly indecisive so i could never pick a trade and stick with it. instead i'm going to throw all my energy into learning the ES where hopefully i can develop the little bit i've learned so far while trading stocks. my plan will include a rule to trade only one contract at a time until i can show some sort of tangible improvement. that's another problem i had with stocks. i didn't stick to small lots. i was trading 4000 and 5000 shares of ETFC at a time. admittedly way beyond my ability but i was trying to make a quick buck. i know i can't do that anymore.

eric, thanks again. i appreciate your thoughts and hope you'll stick around.
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You need to go with what makes you comfortable. However, I would typically discourage beginning traders from trading the ES. I believe the ES is one of the most liquid, efficient markets available for trading. And since most traders make money by attempting to exploit inefficiencies they find, an efficient market does not usually make a good choice.

Also, by trading the ES, you limit yourself to a single market. Even by throwing in the NQ and YM, etc, you may still only have a couple of markets to monitor. What happens when there are few opportunities in those markets? When that happens, traders tend to 'force' trades, essentially compromising their systems and strategies, simply to allow themselves to get into trades. This is a bad idea.

While there certainly must be a large number of very successful futures traders, I can honestly say that I don't know a single one of them. All of the successful traders that I know are stock traders, where you have thousands of candidates to choose from, and a more inefficient marketplace that plays to the strengths of an individual trader, and works against the strengths of the larger players in the industry (i.e. hedge funds and institutions are tool large of fish to play well in a small pond => their size works against them, leading to large slippage and very difficult profits).
 
Posts from captcontrary and EricP are very informative.

As a new trader (1 month) I can relate to many of the comments made by captcontrary. I also read EricP's comments with alot of interest ... they make sense in where I'm at right now.

captcontrary ... I also started out trading the ES. It looked like a future trade that provided decent money and I would be able to understand its movement. NOT. For a newbie ... it moved too fast and it moved in the opposite direction to what I believed to often. I used stops ... 4 ticks (1.0) which at $100 per contract was enough for me to loose, but got stopped out too much.

I have since moved to stocks and have done much better (breaking even). I'm not sure my reason for improved proformance has to do with the issue stated by EricP, but I do know I feel much more confortable trading stocks then I did trading the ES. Confidence is such an important part of being a successful trader.

I look forward to reading more of both of your posts.

CFMTrader
 
also pretty new to trading.
thinking i was getting good, i tried to play in the big boy sand box for a day (ES). good bye $2700. im still diggin myself out of that hole. can you say "lets bring a ziploc to the happy hour buffet in your purse honey"

maybe ill try again in a year.
 
Quote from CFMTrader:

captcontrary ... I also started out trading the ES. It looked like a future trade that provided decent money and I would be able to understand its movement. NOT. For a newbie ... it moved too fast and it moved in the opposite direction to what I believed to often. I used stops ... 4 ticks (1.0) which at $100 per contract was enough for me to loose, but got stopped out too much.
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You make another very good point regarding a downside of trading the ES futures for a beginning trader. The losses can add up very quickly.

It's been a long time (~4-5 years) since I traded the ES, but at that time, a 1.0 point move in the ES was worth $50 (not $100). Maybe it's changed since then. In any case, the SPY (S&P 500) ETF stock trades with the identical movement of the ES (S&P 500) futures. The difference is that you can buy 100 shares of the SPY, which used to be about 1/8 of a single ES contract. Note that the bid/ask spread on the SPY is always extremely tight, so you don't lose any extra slippage getting in or out quickly.

For a quick disclaimer... I would discourage beginning traders from trading the SPY, for the same reason I would suggest they avoid the ES. However, if a beginning trader is intent on trading the S&P 500, then I would certainly prefer to see him/her do it with 100 share lots of the SPY and not single contracts of the ES. The risk, as well as the commissions would be a lot lower. And remember, the name of the game is to lose as little as possible while you're learning.

Once you are consistently successful while trading on a small scale, you can easily increase your size (slowly, please) to achieve larger profits. While you are learning, play with small size and very small risk.

A decent analogy might be playing No Limit Texas Hold'em. Let's say you just read a book on the topic, and understand that with the proper strategy, that the game can be beaten. You've decided to fly out to Vegas, and 'invest' your $20,000 savings on the venture. Since you've read the book inside and out many times over, you feel very confident with the strategies suggested. You walk into the casino and are offered tables which have limits ranging from $1/$2, all of the way up to $1000/$2000. Which table do you choose? => You'd have to be an idiot to go to the $1000/$2000 table, right? Instead, you would start playing at the $1/$2 table, and only after you've won fairly consistently, would you progress to the $2/$5 tables, or the $5/$10 tables.

Similarly, with trading, the first goal is to NOT LOSE MONEY, or at least, lose as little as possible. Don't increase your size until you prove to yourself that you can win on a small scale.

I hope some of this makes sense, but I'd certainly prefer to see a beginner trade the SPY versus the ES. And I'm not at all keen on a new trader trading even the SPY (but at least the losses won't accumulate as fast with the SPY).
 
I should probably point out a conflict of interest that many daytrading brokerage firms have. A brokerage firm makes money off of commissions, as well as any interest that they charge in the form of margin or 'haircut' to allow traders to hold larger positions than their cash balances would otherwise allow.

These firms have a tough balancing act. On one hand, they would like to see all of their clients become extremely successful traders. Note that a successful trader is a trader that will be generating commissions, often lots of commissions, and will continue to generate commissions for a long period of time. The best asset of a brokerage firm is a large client base of successful clients.

On the other hand, the brokerage firm realizes that the vast majority of their beginning traders will never learn to trade profitably, and they'd sure love to squeeze the maximum amount of commissions out of them before they quit. Some of these firms will 'teach' traders certain trading styles and strategies that generate excessive commissions, or encourage rapid fire strategies that again, generate excessive commissions.

Most traders would be better off by learning the art of trading on their own, by watching the market, and trading the least amount possible (i.e. generating the least amount of commissions) and with the smallest share size possible (i.e. lowest risk) until they get a better understanding of what they are doing, and how to make money.

Beware of firms that appear to encourage their traders to rack up large commission bills. Instead, look for an inexpensive firm (that charges commissions in terms of cents per share) that doesn't seem to care if you trade once per minute or once per month. Again, I would use Interactive Brokerage as the yardstick to measure other firms against. I suspect they are the most actively used firm by readers on this forum, and they are among the leading brokerage firm in the industry.
 
EricP

You are correct concerning a 1.0 point move on the ES ... it is still $50.

I mistyped yesterday ... I was setting my stop at 2.0 points for $100.

Thanks again for the advise and information you have provided.

CFMTrader

Quote from EricP:

You make another very good point regarding a downside of trading the ES futures for a beginning trader. The losses can add up very quickly.

It's been a long time (~4-5 years) since I traded the ES, but at that time, a 1.0 point move in the ES was worth $50 (not $100). Maybe it's changed since then. In any case, the SPY (S&P 500) ETF stock trades with the identical movement of the ES (S&P 500) futures. The difference is that you can buy 100 shares of the SPY, which used to be about 1/8 of a single ES contract. Note that the bid/ask spread on the SPY is always extremely tight, so you don't lose any extra slippage getting in or out quickly.

For a quick disclaimer... I would discourage beginning traders from trading the SPY, for the same reason I would suggest they avoid the ES. However, if a beginning trader is intent on trading the S&P 500, then I would certainly prefer to see him/her do it with 100 share lots of the SPY and not single contracts of the ES. The risk, as well as the commissions would be a lot lower. And remember, the name of the game is to lose as little as possible while you're learning.

Once you are consistently successful while trading on a small scale, you can easily increase your size (slowly, please) to achieve larger profits. While you are learning, play with small size and very small risk.

A decent analogy might be playing No Limit Texas Hold'em. Let's say you just read a book on the topic, and understand that with the proper strategy, that the game can be beaten. You've decided to fly out to Vegas, and 'invest' your $20,000 savings on the venture. Since you've read the book inside and out many times over, you feel very confident with the strategies suggested. You walk into the casino and are offered tables which have limits ranging from $1/$2, all of the way up to $1000/$2000. Which table do you choose? => You'd have to be an idiot to go to the $1000/$2000 table, right? Instead, you would start playing at the $1/$2 table, and only after you've won fairly consistently, would you progress to the $2/$5 tables, or the $5/$10 tables.

Similarly, with trading, the first goal is to NOT LOSE MONEY, or at least, lose as little as possible. Don't increase your size until you prove to yourself that you can win on a small scale.

I hope some of this makes sense, but I'd certainly prefer to see a beginner trade the SPY versus the ES. And I'm not at all keen on a new trader trading even the SPY (but at least the losses won't accumulate as fast with the SPY).
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