Reader question: staying alive long enough to learn to trade

I received a lengthy question for a reader who has put in a lot of time learning to trade, and has not yet left the trading simulator. I thought his questions were insightful, and they mesh well with a topic I’m considering covering in some depth: how to start from scratch and learn to trade–basically, the true beginner’s guide. Anyway, I thought his questions might be interesting to many of you, so I’ve cut some snippets below:

I should probably not be too surprised that I’m part of a category seen as “easy money” and favorite prey not only for other, more established retailers, but also for hedge-funds and other big players in the market.

…could you briefly describe some basic bullet/points and means to avoid being in the most vulnerable position? I understand crowd behavior is important  (as something to avoid being part of) but can you please be more specific. For instance, as a retail trader, what would you typically do, what instruments would you engage in and what would you expect a retailer will do, such that to provide you with an edge?

What steps would you do as a newby retail-trader to minimize the risk of ruin, and maximize your chance of survival in becoming a profitable trader? I realize this is so subjective, and there is no right answer, but given one knows the most obvious pitfalls that “kills” a newbie in first years, one can hope to survive and learn how to “sharpen” his blade.

051414_1732_ReaderQuest1.pngWell, I have mixed feelings on the first part of your question. On one hand, you’re absolutely right. Many people are thinking about markets as ecosystems, with groups of predators and prey animals, both groups evolving to outwit the other, and the system having a type of stability within that change. In fact, this idea of evolving market efficiency (see this paper by Andrew Lo) is replacing the old, static EMH models.

However, it’s really easy to get caught up in an “us against them” mentality. For the developing trader, I would almost encourage you to see the market as a big impersonal force. Perhaps imagine you are a small boat in a big ocean that does its thing without caring about the consequences to you–it’s up to you to stay out of the rough weather and off the rocks. The ocean doesn’t care one way or another.

Now, as for some basic bullet ideas, yes, let me share a few thoughts:

  • Choose your market and timeframe carefully. There is no right answer here, but I do think one of the biggest borderline “scams” sold to newer traders is the focus on daytrading. (I had a friend ask me how to start trading. She was set to begin daytrading based on her online research, and I told her she was insane.) It’s not that you can’t be successful daytrading, but really dig into your reasons. Daytrading is sold as a solution to traders who are undercapitalized or who want quick results, and both of those things are huge red flags.
  • Be prepared and realistic. The learning curve is probably going to be 3-5 years, and your first sign of success will be when you stop losing money. The worst thing that can happen to you is you start making money from the beginning, so plan on a long period of losing money, or, at best, flat periods interspersed with more losses.
  • If you’re  realistic like that, you won’t be disappointed when you’re 8 months in and haven’t made money. You also won’t do absolutely insane things like quit your job, buy a few books, fund a trading account, and plan to live (rent, food, etc.) out of your “profits”! (Yes, people do that.) If you’re realistic, you can endure the psychological struggles much more clearly.
  • Since you know you’re going to lose money, focus on losing as little as possible and on losing well. Reduce your trading size as small as possible. Now, I think simulator trading or paper trading might not be the best idea. I’d rather you see you risk real money, but risk as small as possible. Buy a few shares of stock, and risk $50 per trade. Correct, you are unlikely to cover your commissions trading that small, but just think of commissions as a learning expense. The goal is to stay in the game through the long learning curve, so plan your losses well.
  • Realize that psychology matters, but so does methodology. Another “scam” sold to the public is the idea that the trading methodology is trivial, you just have to have “right psychology.” So many people struggle because they are simply doing things in the market that do not work. So many psychological problems come from doing things that go against the (very small) edges in the market.
  • On that topic of methodology: if someone is selling you some method that can’t be fully grasped without years of study and mystical insight, it’s probably garbage. Things that work in the market are relatively simple.
  • With all of these previous points in mind, the last thing you probably need is tenacity. You’ll sometimes hear successful traders joke that the only reason they succeeded was that they were too stupid and stubborn to quit. There’s wisdom in that little joke.

Just a few thoughts from my perspective. I imagine my readers will share some other good points in the comments, so check those out below!


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 5 Comments

  1. Jim Cameron

    For me, Adam’s cautions are well-taken. I’ve been trying to swing trade for several years now, with more losses than gains but no catastrophes). I’m only risking about $30-50 per trade. What worked for me during the last ten years (and allowed me to retire in June at age 62) was systematic saving, paying down my mortgage after our five children struck out on their own, investing in passive, dividend ETFs that were set up on dividend re-investment plans, not selling during the credit crisis, and living a mostly frugal lifestyle (with the odd trip to Cuba which snowbird Canadians have been allowed to do for many years now).

  2. irdoj75

    The answers as almost always seem ridiculously simple, but
    eventually extremely difficult to put in practice. Only a few more thoughts:

    There is no free lunch. Don’t believe anything, don’t buy
    any systems, jump on any hyped trading approach or anything like that. Never
    ever, because there is no free lunch.

    There is also no short-cut and it takes time. There may be a
    few lucky ones that make it faster and with less drawdown, but the fact that
    somebody traded a few months without loss does not make her a professional
    trader yet. I agree with Adam that daytrading most likely attracts most of the “borderline
    scams”, and furthermore the shorter the timeframe the closer you get into an
    area where you may be competing with machines on their terrain which seems not
    to be a good idea from my point of view. On the other hand you could also get a
    quicker feedback on your trade. In the end it is most likely a question of
    personality and current and desired lifestyle and I guess trading the daily
    charts is often a reasonable compromise.

    Have a plan on how to get better. Depends on where you are
    in your journey, but there is so much valuable information on this site and in
    Adam’s free course that you could spend easily 6 months of your afternoons and
    weekends full-time reading, watching, listening, drawing and paper-trading
    through it. If you are through it, keep going and think about your weak points
    and what to do about them – do you journal, do you have a written trading plan,
    is it clear enough, do you follow it, do you review your trades, do you have a
    sound knowledge of statistics, do you understand what you trade, do you understand
    how the market works on a micro-level etc.?

    There is also a reading list on this page to dive deeper
    into specific topics, there is the podcast and it seems rather recently a few other
    excellent podcasts launched (stocktwits, chatwithtraders, bettersystemtrader,
    others?) that give you some insight into a few professional traders’ thought
    process. You should probably also read a few other books beyond Adam’s, maybe
    only to be able to value Adam’s content…

    Good luck and keep going!

  3. Oleg Foight

    Great post! Some very good points. Though, I am not sure I agree with the daytrading discouragement. I just can’t buy the idea that low time frames differ from the daily chart in terms of the amount of unpredictability / “randomness”. No matter how I look at it (subjectively), I just don’t see any more predictability on the daily chart.
    The only real advantage that I see in high time frame strategies is less commissions to pay to your broker.
    Another possible advantage is less time spent in front of the screen. But is that an advantage or a disadvantage for a beginner?
    There is plenty of intraday volatility at certain times in certain markets. Which brings me to my next point. A daytrading strategy makes it possible to take on risks with the highest potential return (highest volatility) at any given moment. Whereas trading a small account with a high time frame strategy will not allow to free up capital quickly when opportunities arise suddenly.
    That being said, I am certainly open to the possibility that I haven’t looked at this topic in the right way.

    1. sentu

      AS a intraday trader for last 4 year,i can say intraday day trading is little bit tough,although all the market and timeframe is tough for a newbie.When i start trading on intraday first one year i only lose money,second year i lose less money, and afterthat break even then profit for living.
      first problem with intraday trading is if u trade on 1 min chart u got too many trade opportunity and thats a problem because morning session in between 30 mins of market opeing if u got 2 stoploss hit u eventually start cherry picking with ur signal,and then if u let go one signal and then it ups or down for 7 or 8 points on profit direction than frustration build on ur mind.Because u have two stoploss hit trade on ur trading log book and one trade which u did not took gone with home run.I know that feeling.Thats the worst feeling u want to go away from ur screen,but as a newbie u cant resist the temptation to go on another trade and u took another trade.And i’m telling u from my experience trade taken on desperation maximum time never done well.It plays with ur mind,then u mingle with different type of trade,searching for best techinal trading set up and blah blah.
      But,now i think first 2 or 3 years of struggle is good . As it sharpen my mind and conditioned my mind for big battle.As u gathering knowledge suddenly after sometime u can connect in ur mind all the knowledge the depth of the market,psycology of the market,u can anticipate the move very clearly.Yes it happen suddenly,u can see the chart on different way.Believe me its happen with me like that only.So,if possible be a good sponge and absorb everything what u got in the way,good and bad.Your mind know what is good for u.
      Its a rough jouney but its worth to take it if ur mind can bear all the humilition,fear,rejection nonethe less discouragement of ur family for most of the time.

  4. Ri Zen

    Been trading for 2 years now. Had my first major drawdown where I went below what I capitalized with, clawed back. Lessons learnt, instincts I’ve come to trust and a methodology defined…What’s funny is, I can now see what has made me successful since day 1-simple, blind contradiction. I’ve been a contradictory sort of person most of my life, and it has reflected in the decisions I make in the market. Because the minority is always preying on the majority, it makes sense that not thinking(or even being like)the majority is in and of itself-an edge. Think you understand something from this statement? Try and apply it. Enjoy your trip down the rabbit hole!

    PS-An understanding of how a game works helps.

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