Some Advice for Newbie Traders

The trading game has changed significantly since I got in it back in 1986. What’s changed is obvious. It’s now electric.

But certain things haven’t changed. Barry Ritholz wrote a nice post on the competition, and the odds of becoming the next Wizard of Wall Street. They are long odds. Longer than becoming a pro jock.

Trading your own money is the most competitive, toughest business in the world. Prepare yourself for that.

Ritholz sports analogy rings true to me. I played basketball at a pretty highly competitive level in my younger days. Could dunk it just about any way you wanted. The guys I played against are coaches now. As competitive as athletics were, trading is that much more competitive-and harder on you mentally.

Back in the pit trading days, we had plenty of pro athletes come to the pits. Tom Hicks, started at middle linebacker for the Chicago Bears, was a broker in the S&P’s for Merrill Lynch.

Chris Gambol started at tackle in the NFL, traded interest rates. Jack O’ Callahan was a 1980 Gold medal winner in hockey. He plied his trade in the S&P pit along with Troy Murray. They will tell you that trading in a pit was one of the most competitive things they have ever done-and it was physical too. Not like an NFL or NHL game, but it was physical nonetheless.It was brutal trying to move one of those guys to get to a trade.

The other really great thing about the floor was the fixed costs of trading were really low. You needed a seat lease, some trading cards, some pens, and off you went. Seat leases varied anywhere from $1000-$5000 during my entire career. Now they are just over $1000.

Fixed costs off the floor can be quite high. Trading from home cuts costs, but then you are by yourself. That may or may not suit you. Your charts/quotes cost money, front end costs money, office costs money….it seems endless. When you are new, try and keep your costs as low as you can.

One thing you should learn early in athletics is to set goals. When you are a newbie, set small goals. When I first started trading, I wanted to try and make $250 bucks a day. At the time you could do it by scalping in and out of the market, and scratching a lot. Now the game has changed, and you really can’t scalp. Soon, I hit that goal and then said how about $500? One day, I will never forget it, I made $1100. It was a volatile close and I made a quick scalp. After that, I was off to the races.

Computer trading doesn’t lend itself to that. So you have to have a disciplined strategy. Figure that strategy out, and then increase your size. Set small goals, then as you hit them build. And remember, Rome wasn’t built in a day. Your fortune won’t be either.

It’s awfully hard to simply be a straight long or short trader these days in futures markets. The moves are just too violent. One thing computerized trading does is make the volume on the bid/ask spread small. You just can’t get size off at a price. That means you have to scale in, and scale out. Or, consistently give up the edge.

Try trading spreads. Simultaneously buy one month and sell another. The risk is still there-but at least you don’t have to be dead right the direction of the market. You just need to be right momentum. It’s an easier thing to be right about.

The markets the last year and a half have been absolutely brutal. I don’t know a lot of traders that are making money. Be patient. Don’t let it mess with your head. Get out, walk around in the sun and get away from it. Having trouble? You aren’t alone!

Try and find a mentor. Find a graybeard that is willing to share knowledge with you. If he/she won’t, pay him for it. Give up a percentage of your profits to get the mentorship. It will be worth it in the long run. 30 years from now, learning at their knee might pay gigantic dividends.

If you miss a rally or a break, don’t beat yourself up. There will be another one. Start small and grow tall.

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