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.