Dear beginning trader,
Glad that you like markets and the opportunities they offer. Consider this to be unsolicited advice from your pedestrian market observer.
The path ahead is treacherous. Don’t be filled by your success in demo accounts. Remember, it is easier to be objective when no money is at risk. Ain’t no half-steppin. You have to be completely devoted and passionate. There is a saying in basketball: You cannot teach height. In markets, you cannot teach passion.
Big moves will attract you with promises of a killing. Exactly who gets killed is a question that you should ask. Keep in mind that different stocks have different personalities.
You’ll soon find out that the trouble with major rallies and declines is that while they are clearly visible in the middle of the chart, the closer you get to the right edge, the murkier they become.
Big uptrends will tend to be punctuated by drops, while downtrends interrupted by rallies. Emotionally, it will be extremely hard to hold a position through a countertrend move.
As profits melt away, you will begin to wonder whether this is a temporary interruption or a full-blown reversal. There will be a strong temptation to grab what little money is left and run.
Be sure to decide, whether you are putting on a trade for the long haul or for the short-term swing. The former will net you large moves and bring in more money per trade.
Other advantages include having more time to decide when to enter or exit and having the emotional satisfaction of calling major moves.
The latter enjoys lower risks owing to shorter turnarounds, and quick rewards will provide you emotional satisfaction. Both have their setbacks.
Expenses for commissions and slippage are higher with short term trades, due to more frequent trading. Also, you are likely to miss major moves—you can’t catch big fish on a small hook.
With long term trades, you have to sit through long periods of inactivity, which you may find hard to tolerate, and you are likely to miss many short-term trading opportunities.
Stay ready always. The market is not in the habit of sending memos to hop-off or for that matter, an invitation before take-off.
Keep in mind this is a business, so keep your ledgers constantly updated. The slope of your equity curve, which you must draw as a part of your money management process, reflects the state of your mind as well as the quality of your method. In the markets, almost anyone can make a good trade, but few can grow equity.
You’ll also soon realise that, in addition to commissions, slippage – the difference between the price at which you place your order and the price at which it is filled – is a bigger expense. And by the time you’ve picked a stock, don’t assume it will continue to behave the same way forever.
Companies change, and you must stay on top of your picks. Oh! I have so much to write to you, but time and space limits me. I hope to hear from you.
Sincerely yours. The Big Joker.
Mwanyasi is MD, Canaan Capital
