To Trade or Not to Trade, Part 33 1/3

 | May 08, 2014 | 11:00 AM EDT
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To read the first three parts of this column, click here, here and here.

I know I have been a bit of a Debbie Downer this week. I may have you feeling a bit like Bart Simpson in the Simpsons episode, "Homer at the Bat" from season 3:

Bart: You make me sick, Homer. You're the one that told me I could do anything if I just put my mind to it.

Homer: Well now that you're a little bit older I can tell you that's a crock. No matter how good you are at something, there's always about a million people better than you.

Bart: Gotcha. Can't win; don't try.

I actually know many traders who feel this way. The system is rigged. The market is rigged. The big brokerage houses and the high-frequency traders (HFTs) have all the advantages, so why try? Well, the first step in taking on the trading task, either full-time or part-time is to get over yourself. Sure, things may change in time and maybe you can be a part of influencing those changes, but for today, deal with today.

The most prevalent question I have received from this series surrounds the concerns with working and trading. Trading is a high pressure job. If you begin your trading career gainfully employed, then you avoid trading in a "make or break" situation. While you'll hear some people say they do their best work under stress, often they are talking about meeting a deadline for a presentation or a paper at work. While it would be disappointing if they missed the deadline or the overall presentation was lacking some pizzazz, they aren't likely to find themselves out on the street or forced to start selling their possessions. If you are trading to pay the bills, then a few bad months could put you in that exact situation.

So, ideally, a person could start his or her trading career while still working a job that pays the bills. And there you have it, so thanks for reading. 

Of course, I'll expand on this thought.

First, find yourself a mentor. This is crucial. In a perfect world, you could find someone to meet with face-to-face (at least occasionally) while exchanging emails or phone calls on other occasions. Someone who has been trading for at least 10 years, although longer would be preferable. And as much as I may have been critical of advisers in a previous article, a current or former adviser would actually be great. They often excel at interpersonal communication, and, if presented with the change to speak openly, could be a huge asset. Plus, they have a different insight into the emotions of a non-professional. Emotions are a key, of course. So lock down a mentor -- or maybe even two.

Second, start with low expectations. I can't emphasize this enough. Starting with realistic expectations is a key to confidence and keeping emotions in check. A big part of this will be tuning out the performance of others. Turn off Twitter (TWTR). Turn off the television. You hear about that 20-year-old pulling a 42% return in three months and you start to doubt making $50 or $100 in a day. You see newsletters yelling Kapow!, we just scored another 300% winner, what did you do today? It's all marketing or fluff. It isn't the whole story, but it will drag you down if you give it attention, so just ignore it. This isn't a competition against anyone other than yourself.

Third, begin with an account size that will allow for some diversification in your trading, both in style and securities. Furthermore, make sure you can avoid drawdowns that would wipe you out entirely. A mentor or experienced trading group here is a huge asset. They can help guide you in position sizing. And listen to your gut. When you are too nervous or anxious to sleep because of a position, then write down why. What's the size of the position? Why are you anxious? Remember, excited and anxious are two very different things. Excitement might pay or it may lead to disappointment. Anxiety will lead mistakes and losses. You'll have a "Trader's Tuition" when you start trading. Make sure you can afford the losses.

If you are working a 9 a.m.-5 p.m. job, then chances are you won't be staring at the trading screen all day long and this will have some repercussions. As a trader in this situation, you have to be willing to sacrifice some excitement, and yes, this may mean missing some potentially quick trades and quicker gains. It may also mean you'll be bypassing most known trading events, including Fed days as well as NFP data and earnings reports. If you're able to tune out others, then this can be done. In fact, this may actually be a blessing in disguise for most traders.

A benefit of being away from the screen forces new traders to learn stops, position sizing and potentially even how to use options for hedging or defined risk positioning. These are invaluable tools for any trader and can often be overlooked by the gun-slinging mentality of new traders.

The key is to build confidence and experience the emotions of trading without damaging a portfolio or even a career. Even with small amounts, when you first start trading, any profit or loss will be felt because it is real (not paper). If you can keep trading small at the start and avoid the "gambler's high," you can be well on your way to shedding the 9-5 grind and trading full-time.

You might ask, "What is the 'gambler's high'?" It is a trap that many traders fall into at one point or another in their careers. If you find yourself needing a bigger and bigger move to retain excitement or to make a trade more interesting, then you're falling into the trap. Some traders can't avoid this. They have addictive personalities and trading becomes gambling. That rarely ends well. It is better to find out while you still have a job or another source of income and are trading with a smaller sized account. Again, this is where it all comes full circle. A proper mentor can not only advise you on position sizing, but can also review trades with you or, in some cases, act as an adviser who can execute trades on your behalf.

Trading can be a lonely game, but it doesn't have to be. Get a wingman and a flight pattern. Experiment with different styles and find what appeals most to your nature. Don't be afraid to ask for help and, whatever you do, don't put too much pressure on yourself.

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