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Lessons from the Pros

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Frequently Asked Questions

Tue, Jun 30 2009, 11:03 GMT
by Sam Seiden

Online Trading Academy

There are many questions that new and experienced traders have on a routine basis. Instead of going over two or three questions in lots of detail, I thought I would change things up a big and go through a rapid fire short question and answer piece that offers my opinion which is based on my experience. This is all for educational purposes only and to specifically share my experience with common issues among traders and investors.

What markets should I trade if I am new and don't have the $25,000 minimum?

Consider Futures, you don't need the $25,000 minimum for day trading. You can get plenty of buying power, you're trading the Equities, and your risk in some ways goes down. Risk can be less with Futures because of two reasons. First, you eliminate the overnight gap risk that is present in stocks because Futures trade during the night. Also, equity index futures like the E-mini S&P and that group have tons of volume which means they are very liquid. The more liquid, the less slippage, which again reduces risk.

I hesitate when entering and exiting positions; how can I change this behavior?

You're human, we can't change that. Instead, replace emotion with a concrete set of rules based on the laws and principles of demand and supply. Also, consider using bracket orders to "set and forget" your trades. This again takes you and the psychological mind traps out of your trading world.

Do chart patterns really work?

I assume you are asking about conventional chart patterns with this question. The honest answer is this: It depends. No, I am not a politician. If you take every conventional chart pattern as explained in the books as is, you are looking for trouble. To make patterns such as the Head and Shoulders, Double-Top and Bottom, Triangle Breakout, and so on work, you need to first understand REAL support (demand) and resistance (supply). Let's take an ascending triangle breakout chart pattern. The entry is to buy when price breaks out to the upside from this pattern. Here is the key component that determines whether this trade will work or not. What is price breaking out into? Is there resistance (supply) just above the breakout? If so, this trade is likely to fail. If resistance is significantly higher and price is breaking out into a pocket of very little trading, the trade is likely to work fine. In short, the trader who knows where support and resistance is will do far better than the trader who does not. Learn the foundation of price movement and then learn the conventional chart patterns, they are all breakout entries after all.

Should I focus on one asset class or many?

The astute market speculator focuses on many and here is why. Let's say you are trading equities and doing well, maybe making 5% a month for a while. You will see your account grow and think you are increasing your buying power. Well, what if you are trading in the United States, your account is held in US Dollars, and the US Dollar is losing value at the rate of 5% per month against the other major global currencies? The answer is, you're not increasing your buying power at all. Your trading account is increasing but your buying power is decreasing at the same rate. Most people never get this concept which is why they lose buying power to those who do. This does not mean that the person trading equities or managing an equities portfolio needs to start trading currencies, it means that they need to learn about them and have a little money in an account that can trade currencies when it is time to hedge your buying power risk. Also, what if you have lots of stock options or are holding stock for years and the stock market is nearing a major resistance (supply) level and about to fall. One of the best places to hedge that risk is in the S&P Futures market. This means learning about Futures.

If I am working during the day, can I still succeed at trading?

This is a great question which is why I saved it for last. You can certainly succeed at trading if you can't be around during the day. To be honest, you are more likely to see your account grow under this situation typically and here is why. Your day job is going to force you to do your analysis, find your low risk / high reward opportunities, and then place your entire order into the market as a "good till cancel" (GTC) order. This means you will put your entry, protective stop, and profit target orders into the market and let whatever happens happen. I can't tell you how powerful this is. The biggest risk to trading is you and your emotion. Eliminating that is key and bracket orders do this for you. In doing this, by the time you are ready to make the full transition away from your day job, you will have already set up your trading strategy in a way that gives you plenty of free time. That day job is a blessing in disguise; don't think it puts you at a disadvantage.

These are some of the more frequently asked questions I receive. The people that end up doing well at this (or anything) are the same people who ask the right questions. If something does not make simple logical sense to you, chances are it does not work. It's still a good idea to find someone you trust and ask them the question. Hope this was helpful.

Published on  Tue, Jun 30 2009, 11:08 GMT