Daytrading seminars,
trading books, television commentators and radio
advertisements are filled with promises of easy money in
the stock market. With just a little bit effort and a
fistful of dollars, you too can be enjoying the lifestyle
of the rich and famous.
We know in our hearts that
this is not true and yet everyday people put their
hard-earned money down on the hopes of finding their path
to financial freedom in the stock market. This is the same
feeling that sheep have on the way to being
sheared.
You should remember that
anytime you begin a new venture your easy money and that
you can expect to pay a price in time effort and money to
learn how to survive in the trading game.
Your education begins with
an honest assessment of the kinds of risks you are likely
to face. You should be writing a business plan as a traitor
in order to account for these risks and the way you intend
to manage them so that you have a fighting chance of
breaking even in your first year as a traitor and then
surviving long enough to learn how to make
profits.
At a minimum you should at
least consider how to address the following kinds of
risks:
1. Psychological risks:
these are the challenges that your ego and peer pressure
and family situations can bring to trading. If you're
trading family money, or trading in public, or trading for
any reason other than to make money to feed your family
then you run the risk of getting in your own way with your
poor psychology. The stock market acts in a way to cause
the most pain to the most number of people based on herd
psychology. If you do not work on your psychology than you
will be a herd animal offering your money to the
carnivores. Conduct self assessments into your strengths
and weaknesses, take trader psychology profiles to
determine what manner of strategy is best suited for your
psychological makeup and conduct routine daily journaling
to itemize your performance and learn from your
mistakes.
2. Market risks: there's no
way to avoid the risk inherent in the market, because it is
precisely the risk which provides the opportunity for
reward. You therefore must become a master of the specific
dynamics of the market you have chosen to trade. How
volatile isn't? Who are the major players? What are the
cycles associated with the instruments you intend to trade?
What are the rules for capitalization, leverage and
clearing of traits? What are the seasonal risks associated
with fewer trading targets?
3. System risks: these are
the risks that are inherent in particular trading
strategies that are designed to achieve an edge in certain
markets. There are risks associated with mechanical trading
systems, just as there are risks with intuitive or
discretionary systems. Knowing your system well means that
you can identify the explicit risks as well as the implicit
risks with each strategy. With a healthy dose of humble pie
and a conservative nature you can work to minimize these
risks.
4. The risk of nonlinear
events: any system can be back just long enough to give you
a sense of how it should perform in the kinds of markets
that have already occurred. The hidden risk of back testing
is that you may experience discontinuous events which
changed the correlation numbers for your systems are in
portfolio engineers study the past in order to find the
relationships between different asset classes. When
nonlinear events or catastrophes occur, it is normal for
these historical correlations to change dramatically and
you can find out where you thought you were hedged in fact
you are double he exposed.
The short list of risks
only begins to scratch the surface of the kinds of
challenges awaiting a traitor in the world of the equity
markets. If this shortlist is intimidating then you have a
fighting chance to be able to survive in your first year.
If these risks don't concern you at all and chances are
you'll be seeking employment elsewhere.
Respect the game, respect
the markets and acknowledge the real risks waiting for you
on the road to financial freedom through daytrading. Good
luck and good trading!
