Hello, my name is Matt and I am a self confessed trader. I have been a successful trader for nearly 10 years, but I’ve also lost thousands in minutes while simultaneously wishing I had a well timed bleep to edit my “figures of speech” that I shall not repeat here. Both traders and gamblers share a certain risk of failure. Its not a maybe or a possibility, it is an absolute fact that we will lose money. However, the successful trader has this happen fewer times and for less of a financial loss than your typical gambler betting everything on red at the roulette table. Herein lies the most fundamental rule of successful traders: the trader must be capable of successfully predicting the price increase or decrease based upon the stock’s trading pattern. Thus, giving the trader more wins than losses. Sounds easy right? In theory, yes it is simple but in real life applications it is difficult to say the least.
Lets look at the numbers. If you were to correctly anticipate a stocks share price 7 out of 10 trades you would have a 70% success ratio. Consequently, this equates to a loss 3 out of 10 trades, or a 30% failure ratio. Therefore, the successful trader has a method of “stacking the deck” in his or her favor to yield a 70% success ratio instead of the everyday 50% success ratio, where the gambling trader flips his lucky silver dollar and makes his guess. Since the comparison of gambling is relevant in this article, the trader has essentially brought a set of loaded dice to your favorite craps game. Unlike Las Vegas, this will not result in your kneecaps being broken but it will have every brokerage firm on Wall Street scrambling to learn how this was accomplished.
Now that we have shown that limiting risk is possible, lets look at at how traders predict these fluctuations in stock trends. Traders use a field of study called technical analysis which is analogous to a team of decryption experts looking for a secret message in a sea of chart patterns. Simply put, it requires a detailed analysis of many different types of stock charting patterns combined with dozens of different mathematical formulas that display visual indicators to anticipate the stocks future value. This is the group in which I fall, and my preferences are a 15 minute candlestick chart overlaid with the daily share volume charted with the RSI (14) and a Williams %R (21) momentum indicator. If any of that caused you to squint at the screen, scratch your head or look like someone just tried to describe relativity to you in two lines then short term trading is not for you at this time.
Consistent, successful trading is an extremely complex process that is not for everyone. If you pursue trading without analysis data, chances are that you are playing heads or tails with your investment capital. Don’t fall victim to this because it is almost certain you do not have the expertise and trader psychology to continue short term trading. There are many documented cases of traders that lost half, if not all, of their investing capital within 30 to 60 days of trading. Therefore, if you choose to manage your own portfolio, it is highly recommended that you use a more fundamental approach. Find a collection of companies that are well managed, generating increased earnings year over year or providing a generous dividend, that also provides a valuable set of products/services to their end users.
For those of you who wish to learn technical analysis, you have a tough challenge coming but it is definitely achievable. The best option is to learn from an expert with considerable experience, and if this isn’t feasible, you can find several “webinars” at brokerage firms like Charles Schwab in their educational library. There are also courses offered (some better than others) for a fee but they can be very pricey. Once you feel comfortable analyzing your own charts, setup a practice trading account and test your trading strategy for thirty days. Once you achieve a success ratio of >65% you could start at the kiddie pool and work your way into the market.
Remember, there is no shame in learning to crawl before you try to walk.
Personal note: if anyone has questions/comments/concerns just drop me an email. I would normally include a few charts as examples, but I don’t want to put in a web address into the article.