TraderNovice.com
Mark was reasonably successful in his buisness life. He and his wife and child lived in a modest home and had two young children, and Mark was in his fifth year in sales with a national company. Interested in stocks and the markets all his life, he had invested regularly and paid attention to his 401k with great scrutiny. He read Barron's, kept up with Bloomberg online and watched Kudlow and CNBC as often as possible.
As time went by and family expenses continued to be more than anticipated, Mark began to think more and more about additional income. He dreamed of making large sums of money in the market and in so doing becoming financially independepent and able to leave his job. He talked about it with his wife, but her skepticism led him to keep these dreams to himself more often than not. Nonetheless they remained and he began to study trading, more than investing. His casual interest had now become a passion. He read trading books voraciously, sent away for online trading courses, watched the markets every chance he got, and began to paper trade. He was spending more and more of his free time devoted his dream of financial success, without recognizing the impact this was having on his family life.
Mark researched Barron's reports, and opened a trading account with a major online brokerage. He made sure that every conceivable market was available to him and opened a margin account, were he to need leverage. Without much discussion with his wife, he transferred half of the family savings into his new brokerage account, knowing that in the near future he would be able to "repay" that transfer without difficulty. He began to trade.
Initially, Mark prospered. He made money with stock investments time and again. He had known he had talent in this arena, but even he was surprised by the degree of success his investments garnered. The market had been in a bull trend, and a friend had told him in relation to his success to "not confuse a bull market with brains", but he was sure that his success was secondary to his own diligent efforts. He recognized how much more money he could be making with futures, or options, or some other type of leverage. Soon he was trading on margin, using futures and any derivative available. He continued to make money.
The market changed. The bull run became a prolonged trading range and the trades that once worked so well, were now failing. The brokerage account that had been up over 30 percent, soon had a balance less than the original contribution. Little by little the balance fell and Mark began to feel uncomfortable about losing his family savings. He had hoped to spring the success surprise on his wife in the near future, but now he was confronted with telling her of his losses. Yet he knew this would be no option, as she would force him to stop trading.
A trade came up that seemed to be a no brainer, sure to win. Mark put money in options counting the proceeds that were sure to come and get him back into positive territory. Yet the trade went bad and the option price fell. When his investment expired worthless, he now had lost most of his original capital.
Now Mark knew he was in trouble. Yet he also knew that one single trade could make him back his money. He just needed to hit it big. He transferred the rest of his savings to the brokerage account.
A small winner provided some solace and Mark knew that he was soon to be making money again. He went long the stock averages and in an effort to get his money back as quickly as possible, he leveraged with futures and options. (review leverage) A small bounce up, and the market was down again and his investment was once more lanquishing. He thought about getting out, but how could he do that now? He would be left with only a small amount of his original money. No, better to stay the course at this point. He thought about how much he could make if his hopes came true and a large rally appeared. The market coninued down.
Like a deer in headlights, Mark watched as his account dwindled daily. He became irritable, a poor husband and father, and was having issues at work. He prayed for a market rally and found himself awake at night, thinking only of his investments. But he left the trades on, and watched as their value dwindled. In the end, Mark lost it all. (I have been a lot like Mark.....see my story in About Me)
The story sounds a little hokey, right? That could never happen to you? right?
Trust me. That could happen to you. It happens everyday. The dirty little secret that all the major brokerage houses know, and that is shared by all those who market their advice and knowledge to traders is that thousands of trading accounts suffer huge losses and close everday. Every aspect of the trading industry is aware that they must try to get their piece of each and every trader, and they must do it now. Because those traders likely will not be here tomorrow. Then there will be thousands of new lemmings to take their place. The seduction will start again. And the industry will try to take what they can from those new traders, before they too are gone.
Trading systems, software, advisories, trading courses, black box strategies, brokers, mentors, and on and on, there are countless ways to make money off of those trying to learn to trade. And the industry knows this, and they know they must get their money while they can. A black box strategy that is worthless, who cares because it will take the trader too long to figure that out. An advisory that speaks only in broad terms and never specific trades.....it will take the novice too long to figure this out. A mentor, who could not make a dollar trading if the brokerage spotted him fifty cents? Again, what recourse will the student have in the end?
Trading is tough business. Never kid yourself into thinking that there is someone out there who really cares if you succeed or fail. That is usually not the case. There are plenty out there who care only for one thing..... what they can make from you.
The odds are so enormously stacked against novice traders that it is a miracle any succeed, if in fact they do.
So where am I going with all this? Why bring up such negative comments about trading and the industry? I bring this up because I want the novice trader to know what he is up against. I want him to understand that the benefits of successful trading are counterbalanced by the risks of complete failure. The trader runs the risk of loss of most or all of his capital. He must always, always be wary of this and protect against that possibility. If you are going to be a trader, the first and most important rule is STAY IN THE GAME!
Lest you think that only novice traders can make bad bets, remember Barings (nikkei futures), Orange County California (leveraged bond investments), Amaranth Advisors (gas futures) Sumitomo Trading (copper futures), Long Term Capital Management (Interest rate derivatives.......with a nobel laureate's advice) and now UBS and John Corzine at MF Global. The list is countless. Individuals, corporations or funds, often the end result may be the same......complete and total loss of all capital. Trading firms have spent countless dollars developing risk control strategies only to have them completely circumvented by traders, often with disastrous consequences.
As an individual trader you must make yourself understand that first and foremost, if you want to succeed at trading, you must find a way to stay int the game. The story that started this section was fictitious, and yet I am certain it has happened countless times. I have been in similar situations. You lose money. You lose more. You become dejected. You hope. You pray. You beg for the market to move your direction and all the while you make no decision at all regarding your current trades, because to close them out would be to accept a large loss. As long as the trade is open, their is a chance that it may succeed. Yet every day you wait, every minute you do nothing, you come closer and closer losing all your captial. In the business this is known as "blowing up"!
Sometimes the loss that you may be conteplating can be so very severe that you simply can't bear to think about it. You may force yourself to avoid thinking about and thus acting, on a terrible losing trade. But this is a large step in the direction of the death of a trader. You MUST stay in the game.
Every trader can have bad luck. Every trader can suffer large losses. Every trader can have a bad run of trades. But good traders never (they cannot)
lose EVERYTHING. There is a difference between bad trades and completely irresponsible trades. A good trader recognizes that:
You can never bet the ranch! You can never hold out until you lose everything! You can never KNOW you will be right in a trade.
Good traders think in probabilities. Good Traders recognize that they will sometimes be wrong and incorporate that into their plans. Good Traders accept losses. Good traders NEVER avoid thinking about their trades and acting on them. Good traders recognize that being in a trade causes a trader to be biased; he will no longer be objective, and because of this, the trading plan must be thought out in advance, what if scenarios must be addressed before the trade!
Every trader has a chance to become successful. The one thing that will end that is the loss of all capital.