Trading 101 – Trading for Dummies

Trading really can be as simple as he makes it out to be. Too many people, usually those trying to sell advice or trading systems, try to make it much more complicated than it needs to be.

Some key tips for success (for a full list read this article):

  • Keep It Simple, Stupid (KISS) – So many traders get bogged down in a bunch of intricate indicators. Note that all you see on our charts are price, volume and a moving average of price. While the search for that magical formula is seductive, I find that less is more with respect to using indicators. All indicators are just derivatives of price and/or volume anyway.
  • Trade with the trend – This is the one that every trader knows, yet sometimes it’s hard to abide by. I know I’ve had my struggles with it. I’ll often see some tiny stock double of triple in a day (or less) on some ridiculous news/rumor. My first thought is usually ‘this is crazy, I should short this crap!’. But that kind of counter-trend trading can be very hazardous to your bank account.

    There’s a quote in Dr. Alexander Elder’s ‘Trading for a Living’ that’s very appropriate:

    If eight or ten people place their hands on your head and push you down, your knees will buckle no matter how strong you are. The crowd may be stupid, but they are stronger than you. Crowds have the power to create trends. Never buck a trend. If a trend is up, you should only buy or stand aside. Never sell short because “prices are too high” — never argue with the crowd. You do not have to run with the crowd — but you should never run against it.

  • Trade only active, liquid stocks – Stocks that are extremely active (experiencing a surge in volume) usually have some news that’s driving them. You want stocks with a good amount of volume so that you can get in and out easily, quickly, and with minimal slippage (the difference between the order that you gave your broker and the actual price that you got for your order).
  • Define any risk – This one is key. You have to know where to exit (at a loss and at a profit) before you enter.
  • Manage risk by adjusting a stop loss order. – This is an area that I’m always trying to improve upon. There’s an old adage that says ‘never let a profit turn into a loss.’ That’s a lot easier said than done because you have to let the stock fluctuate. But at some point, once you have a decent profit, you should move adjust your stop loss so that you’ll at least break even on the trade. This is definitely an art as opposed to a science. I like to call this process taking a free position. It’s a great feeling to be in a trade that you know you can’t lose money on. I like to get to that point as soon as reasonably possible.
  • Always enters a protective stop loss order – This seems like a duplicate of the previous point, but there’s a critical distinction here. The order is a physical order, entered into the market and will execute automatically. It’s so easy to fool yourself into believing that you can get by with using ‘mental stops’ (keeping the stop prices in your head and entering the orders manually). But we all know what that leads to — the dreaded ‘stop creep’. That’s when you keep adjusting your stop as you lose more and more money in desperate hope that things will turn around. You’re risk/reward ratios won’t take kindly to that kind of thing.
  • Trade always with good reward-to-risk profiles – There’s no sense in risking $500 to make $100.
  • Have a well-defined plan and stick to it – Discipline and money management are the two most important aspects of trading. The greatest of trading systems will fail if you can’t stick to the system.

Comments

  1. Posted by Tom on May 7, 2004 at 3:56 pm

    The Chairman’s site is one of the best blogs out there. I love his simplicity of it all.

  2. Posted by zod on May 7, 2004 at 8:32 pm

    I think I’d give Maoxian more credit if he actually posted tangible results of his trading, and stopped with the hand-wavey “It’s very simple if you trade the Dummies way” or whatever that he lards his text with. Then again, this is reminiscent of every trader weblog I’ve seen online.

  3. Posted by Michael on May 8, 2004 at 7:51 am

    Zod,

    You should take a look through his archives. (You’d have to go back a couple of weeks b/c he’s on vacation right now & not trading.) He posts his trades in very close to real time. You can’t get much more open than that — in fact, that’s probably too open. I wouldn’t post my positions for the world to see while I’m still in them.

  4. Posted by zod on May 8, 2004 at 9:49 am

    Michael, no need to talk about going back through the archives, I’ve read the site that’s currently up front to back. I still think it would really show-and-prove if more stock bloggers would post their portfolio results, not necessarily all the details of their position. I was really happy when the Kirk Report started doing it, and then, of course, he made it an incentive to get a paid membership to his site. I guess everyone ends up becoming a newsletter writer in this area.

  5. Posted by Michael on May 8, 2004 at 1:13 pm

    Maybe it’s just me, but I’d give more ‘credit’ to somebody that’s posting exactly what they’re doing in real-time. Not only does he show you what stocks he’s in, but also where his stops are. It wouldn’t be too hard to figure out his performance based on what’s already in the site. What’s more, he’s doing it for free. Sure, one could argue that he has an ulterior motive of pumping his positions, but the stocks he trades are so active that such a strategy would hardly be successful. And if anything, it’s likely that any followers would mess up his ‘program’ by placing stops just ahead of his — both on entry and exit.

    I can’t speak for Kirk, because I haven’t seen his portfolio, but I take a somewhat skeptical attitude towards people that charge to see their portfolios. Especially if I wasn’t around when the trades were initiated. So I’m supposed to pay money to see something that may or may not be true? Not me. What’s more, just seeing the positions themselves doesn’t do much for me. I want to know what made you chose each position and where and how you’re going to exit the position. Otherwise, what’s the point of seeing somebody’s portfolio & performance? So you can blindly follow what they do?

    As for me, there are a few reasons why I don’t post my portfolio. It’s too much work for zero-to-no reward for me. Also, I don’t want to be accused of trying to falsify anything or of trying to pump my own stocks. I tried posting my positions and what I was looking at trading each day, complete with where my entries and exits were, but nobody seemed to care, so I stopped doing it. So I just see no good reason to do that again — unless I want to become a newsletter writer (which I don’t).

  6. Posted by zod on May 8, 2004 at 4:54 pm

    Well, in the case of Kirk, he posted his portfolio at the end of day for free for a month or two, and I found that pretty useful because I like to see the overall performance of a trader or investor. Obviously, when he started charging, I was less than enthralled — my point was that, initially, he did it for free and was one of the only ones I’d seen doing that in any detail.

    With Maoxian, I do appreciate his individual stock analysis, but I’d still like to know how effective he is overall — is he making money on the whole, or are these trades done in a vacuum? After all, performance is one of the best gauges of a person in this area. If I’m going to read the lessons of someone online, knowing that they’re successful on individual trades doesn’t really help me decide whether they’re successful enough to want to take their advice seriously.

  7. Posted by Duru on May 9, 2004 at 1:51 am

    If I wanted people to pay attention to me, I would post my portfolio moves at the end of the day (or week or month) by picking out the best stocks. I would manage to prune the losers right before the hammers dropped on them. However, I would also throw in a few modest losers for good measure to keep it realistic – always showing how well I managed to cut losses before they got really big. If I wanted people to be able to verify my wizadry, I would announce my moves either right before or right after I made them in real-time. Providing portfolio tracking is a lot of work (and a pain) so I am not surprised you typically have to pay to see it, especially if that portfolio is churning from a bunch of real-time trades.

  8. Posted by zod on May 9, 2004 at 10:16 am

    Duru, true enough. I wasn’t speaking about real-time portfolio tracking as much as percentage gains YTD and for the past few years, to at least compare against the averages — of course, as in your example, these are another thing that can be faked. What it all boils down to is trust, as usual. The whole stock market rests on that shaky foundation.

  9. Posted by Duru on May 11, 2004 at 12:30 am

    Hey Zod, there are still some things that can foster trust. A big one is telling people what you’re gonna do before you do it. Or being bold enough to make predictions rather than just retrospective, “I meant to tell you so” commentary.
    Mike is gonna roll his eyes on this last comment, but I can use Jim Cramer as an example of someone you can trust. He is quite the emotional firecracker, and you may not like his style, but he says exactly what he is thinking, he is not afraid of making predictions, he examines where he went wrong and right, he tries to learn from his mistakes (and MAN has he been making a good number of them lately!), he tells his subscribers what he is going to do BEFORE he does it, AND he provides a portfolio that tracks his performance (not sure what state it is in these days). Trust can be had, it just does not come easy (or cheap sometimes!).

  10. Posted by zod on May 11, 2004 at 5:25 pm

    That certainly doesn’t engender trust in me — people willing to make bold predictions are a dime a dozen in this industry. I think “trust” is really the wrong idea we’re moving toward, here. My initial comment was sparked by the fact that it’d be nice to really have a good gauge of a trader/investor’s prowess, without having to pay to see it, much like we can see Warren Buffett’s results PLUS hear about his strategies. That’s why Buffett is so well-respected.

    In the case of Cramer, maybe he’s got all that you say, but the fact that you have to subscribe again brings back that whole “charging to learn their performance” problem that I hate.

  11. Posted by Robert on November 22, 2004 at 3:49 pm

    Which is the best on line trade company?

  12. Posted by Michael on November 23, 2004 at 3:11 pm

    Perhaps this site will help you to find a good broker – Online Broker Ratings. For what it’s worth, I trade with CyberTrader and have been very happy with them. Let me know if you try them out so we can both get some free trades. :-)

  13. Posted by profjose on February 1, 2005 at 8:09 pm

    You have frequently written about stop losses rather informatively but I have not come across
    a way to protect a major loss with a stop loss in effect when the drop in the stock is a rapid
    severe avalanch. The point of the stop loss activation correlates with an acceptable trading loss but when it is swamped by a precipitous drop
    it often goes down irrationally to a point where
    the loss decimates capital. Are there any technics
    that can be used to protect the trader?
    Jose

  14. Posted by Michael on February 2, 2005 at 9:21 am

    I’ve rarely seen such things happen, especially if you’re trading a stock with decent liquidity. There is always the danger of a stock gapping past/through your stock though. Hedging via options is one way of protecting against such events.

  15. Posted by frank on September 24, 2005 at 9:59 am

    I have been following chairman’s work for a while. Now I actually started to go through all of his published lessons one by one. This is the first time I actually enjoy studying any trading system. Each system has its advantages and drawbacks and the trader will choose his own path. I also went through some of the older chat sessions and I do believe that Maoxian helped a lot of traders without charging hundreds of $ as others do.Maybe I am naive and I cannot say if his system is better or not, but is simpler to work with.
    I read some of your experiences with the dummies and my question is this: Is the A/D and Trick and trin reliable enough to decide the trend after you have found the inside candle? Especially today, when sometimes even after 10am it is difficult to see where is the market going, mistakes will be made… Thank you for bringing his system to the pages of your blog, which I enjoy tremendously. Regards,
    frank.

  16. Posted by Michael on September 24, 2005 at 10:53 am

    Frank,

    I have TICK and TRIN on my monitor but I really don’t even look at them that much. I mainly key off of the market’s intraday trend, which I define by looking at the QQQQ (15 minutes candles) in relation to its 10 and 20 period expoential moving averages. As you know I also use the A/D line(s) and I also pay close attention to the market’s first 30 minute range. I (generally) want the 10:00 high to be broken before I go long…

    Those are what have been working well for me, of course your mileage may vary. :-)