The 3 Cornerstones of Successful Forex/Stock/Options Traders
A while back, I wrote about Forex trading on this blog. That was over 2 years ago, now that I look back on it! A few things happened in the interim, namely that I got really swamped with my business and didn’t have a lot of time to trade. Also, the Forex company I was working with went under and then re-established itself, while one of the top traders there started his own business. Stuck, and not having much time to research what was the best option for me, I let it go.
I took an intro class and talked to several Forex traders, including at least 2 people I know personally who have made over $1M in Forex trading. So, as a client asked me on the phone a while back, “Erica, I read your blog and I just wanted to know…is Forex trading a good way to make money?” My answer is YES…but with some major caveats.
After studying Forex for a while and doing some trading myself (although unfortunately never doing real money trading, as the trading platform company I was using went bankrupt), I came to the conclusion that you can make serious money with it. 2005 was an interesting year to trade — this year would have been even better. Let’s see, bet that the dollar will lose value, go long, and you would have made a huge return this year!
One myth I would like to bust about trading is what some tell you: “Oh, it will only take 15 minutes a day to trade.” Well, right, that’s true — after you’ve spent a lot of time learning how to trade, picking a trading platform, learning the intricacies of your particular trading platform, and reading the news. The trade ramp-up period is a good month or two of reading and studying at least a couple of hours a day. I spend another hour a day reading economic news, and mostly from sources that I hand-pick, not general news sites.
What does it take, then, to be a successful trader? I don’t think a successful trader is necessarily the crazy-stressed type of person you see on TV or in the movies. (But then again, most geeks don’t wear pocket protectors either! 🙂 ) I’ve thought about this a lot, talked to others who are successful, and talked to many who have not been successful, and I’ve picked up some interesting patterns. Here are my 3 cornerstones of successful traders:
1) Successful traders love to read. This is the #1 trait I’ve seen in successful traders that doesn’t really show up in unsuccessful traders. You have to have a passion for reading. Why? Because there is so much information out there that you have to sift through. News sites, newspapers, blogs, trading books, economics books, pundits, trading newsletters, trading forums…the list goes on, and on, and on. Don’t be intimidated, though. If you love to read, and enjoy learning new things, you have two of the basic skills it takes to be a good trader.
2) Successful traders are quick to discern patterns and cut through the bullshit. If you’re interested in trading, you’ve probably read the old adage that good traders don’t trade with their emotions. I’d take this a step farther. It’s not just about cutting out emotions, although that is a part. It’s about being able to sniff out patterns and realize why other people are saying what they are. In other words, to be a good trader is to be somewhat of a psychologist. If someone is saying the real estate market can only go up, who are they? What do they have invested? I use the real estate market as an example since I follow it as a hobby and I’m amazed at the amount of crap that gets spewed by people who want to sell you a house or a mortgage. Of course the market can only go up from here, because if it goes down, you won’t want to buy a house, and they won’t make any money!
Mainstream news stories often try to offer a “balanced” viewpoint, which stinks to high heaven to me. On one side you have an economist who works for a company that doesn’t care much where the market goes, because they make money either way, and he’s saying this country is headed for a recession. On the other side you’ve got someone from a home mortgage company saying no, of course the economy is just fine, and please won’t you spend that money, because some of it might go into his pocket? This is ridiculous and you, as a trader, have to be on the lookout for biased news sources. I strongly advise you to stay away from the Reuters and Associated Press articles as a trader and dig deeper. I will write another blog entry on this that goes into more detail, but for now, just be aware of the bias that goes into “balanced” opinions in the mainstream news. Do a web search on the people in the article. Who do they work for? What incentive do they have to say what they do? Take this into consideration when you make your trades.
3) Successful traders are quick to admit they’re wrong, and equally quick to do the opposite of what most people would. Keeping your emotions out of trading is good, yes, but equally important is keeping your ego out of the trade. Set your stop losses correctly. If you’re in a losing trade, don’t try to save face or convince yourself it’ll turn around. There are always winning trades to be made. Get out, cut your losses, and move on.
On the other hand, I also see traders quick to succumb to groupthink. For instance, last week a trading newsletter I subscribe to recommended buying a November option put on Standard & Poor’s Depository Receipts (traded as SPY.) To translate that to plain English, the newsletter was recommending I buy an option to sell SPY shares at a certain price (that’s what a “put” is), which means he thought SPY was going down. “November” just means those options to sell the shares will expire this month, so the newsletter writer also thought SPY was going to head down in a major way soon. There was no doubt in my mind that this was a risky play. He’s saying the S&P Depository Receipts, an index made up of major names like Microsoft and Bank of America, is going to go down in a major way. Aren’t we in a market that’s going up pretty quickly?
Nevertheless, I executed the trade in my trading software, and lo and behold, the option price doubled in the past week. I picked up about $400, and I’m still in the trade, so it could get better. The most I could have lost was about $400, so it was a low-risk play.
Sometimes betting against everyone else is the right thing to do — as it was last week, when the market was volatile based on conflicting reports of better jobs (a small positive) and the Fed saying they didn’t want to lower interest rates again (a huge negative.) But you have to know why people are betting the way they are. Then, when you think market sentiment has gone too far in one direction, you can make a lot of money going the opposite way. It’s tough to time the market, but don’t let anyone tell you you can’t do it. The market, ultimately, is made up of people — and people tend to follow other people. Watch the market, read the economists’ comments, and make your own decisions. There’s no better test than to figure it out yourself and learn.
The #1 mistake I see people make is to get talked out of the market. I often hear, “It’s impossible — the only companies that make money in the market are huge corporations.” Hogwash! Sometimes big corporations are in trades to hedge their bets, and often they can’t move as quickly and as nimbly as you. Witness the corporations stuck with near-worthless subprime mortgages who can’t sell them because it would set off a firesale chain reaction in the market. Can you beat the market? Only if you think you can, and only if you ignore those who tell you you can’t. If you study, learn, and devote time to it, yes, you can make money…a lot, or a little, and you can start with as little as $200 or so.
I plan to post more about trading in the future. This is an exciting time to trade, and I hope you can get into the market and play. Feel free to post your results or questions here, and I’ll do my best to answer them.