Market Analysis for Nov 27th, 2014
Avi's Open Letter to New Traders
As you have recently signed onto ElliottWaveTrader, more likely than not, you are new to trading. And, if you are, this letter is for you. I apologize for the length of this email, but this is something that I and the rest of the team believe is very important. Not for us, but for you!
When you enter the trading room, you will undoubtedly be overcome by the activity, much of which you will not likely understand. Some even consider it information overload at times. Remember, on any given trading day, we have many posts about several equity U.S. markets (many even dealing with 3-5 minute moves), many World Markets, gold, silver, oil, the U.S. dollar, the Euro, Natural Gas, and dozens of stocks. Yes, there is no question this can be overwhelming to the novice.
Furthermore, there is a jargon used amongst traders, and even more esoteric jargon used amongst Elliotticians, which will be difficult for you to understand the day you walk in. So, don’t expect to be an “expert” in your first month or two.
Now, if you are like most people, you stumble upon a chart you “like,” and decide to do your first trade on your first day on the site. Forget that you really do not understand what is going on, but you just want in on the action, and to be a part of “the winning team.” And, nothing could be worse for you to do on your first day.
Well, I take that back. There is one thing worse – and that would be if you did your first trade and you made money. Often, winning on your first trade or two makes you feel invincible, but you are now on your way to becoming reckless. And, I have yet to meet a single trader who, upon starting out this way, hasn’t given back all of his or her profits from those first trades and then some.
Starting in this manner is not the recipe for a successful long-term career in this industry. In fact, there have been many studies of traders done throughout the years. The great majority of traders surveyed had a risk of ruin so high as to make eventual bankruptcy virtually inevitable. The traders with the shortest time frames (day traders) lost the most money and had the highest risk of ruin.
The question traders must ask themselves is if they have what it takes to be a trader, or to simply resign themselves to being an investor. And, in truth, there is nothing wrong with either one. BOTH SHOULD make money. The issue is learning who you are, your strengths and weaknesses, and which role suits you best. Until you understand yourself, you may be trying to fit your square peg into a round hole, and that is a sure fire way to lose money.
And, yes, it takes time to learn who you are as a trader. So, a main suggestion I always make is to paper trade until you learn which role suits you best. And, even then, when you have money on the line, be open to the fact that you may be wrong if you came to the decision while paper trading that you are a trader. When money is on the line, emotion often takes over. So, if you find yourself unable to control your emotions while trading, then trading is not for you. Learn it early enough so you aren’t forced to learn it by blowing up your account.
A long time ago, when I was first starting out, and not doing so well, someone in the business gave me some good advice: TRADE THE CHART, NOT THE MONEY. But, when someone has put a lot of money down on a single trade, the emotional attachment to that trade makes it very hard to trade the chart, since your primary concern is the money.
So, I have modified his advice somewhat: Trade the chart using appropriate risk management, so that you are not as worried about the money on any single trade. It is for this very reason we suggest that one does not use more than 3% of their trading capital for any single stock trade, and much less if it is an options trade. By sizing your positions appropriately, it makes it much easier to be less emotional about a trade, and to make the right decisions no matter if the decision is to stop out on a pattern that has broken support, or to take profits at a target.
Since I know you are new, and I do not want to inundate you with advice which is hard to remember on a daily basis, I am going to try to keep my advice to two things. The second piece of advice is that before you enter any trade, know your entry level, your stop out level and your target . . . and adhere to this trading plan no matter what happens.
There is an old adage that when you fail to plan, you plan to fail. So, before you enter any trade, you MUST have a trading plan. And, most importantly, you MUST adhere to that plan, and not fall into the “hope” that grips most new traders.
The inexperienced traders will sit in a position until it turns in their favor, if it ever does. Develop a plan BEFORE you enter into a trade, and stick to it. This is setting you up for what traders view as “cutting your losses short and letting your profits run.” Remember, it is not letting your losses run until they finally turn in your favor. The money can be better utilized in another opportunity to make money rather than lying dormant or continually losing.
HOPE AND BEING OVERLY AGGRESSIVE BLOWS UP MORE TRADING ACCOUNTS THAN ANYTHING ELSE.
In summary, my point in writing this letter to new traders is to have them focus on two main things. First, you need to take the time to attempt to learn what type of trader you are and the environment in which you now find yourself. You MUST be brutally honest in this self-assessment, or you will blow up your account. Second, you must adhere to strict risk management so that no one trade, or even 10 trades, can jeopardize your account. And, within this risk management process, you must size your trades appropriately and have a clearly defined plan to which you MUST adhere.
I am quite confident that if you follow these two rules at all times, you will likely be successful in making money in the investment world, no matter what HONEST conclusion you come to about yourself.