Trading
by
Phil Madsen
My trading journey began in October 2008, when I made some haphazard trades while knowing little about it. Those trades taught me both the high rewards and high risks of the trading game. Realizing I was playing with fire, I settled down to study and practice. Fifteen months later, in January 2010, I am an entry-level trader, optimistic about the future.
As an entry-level trader, I am beginning with small amounts of money so I can learn from my mistakes without getting badly burned. I also continue to paper (practice) trade to refine my skills and test certain strategies in a risk-free environment. As my trading skills and account balance grow, larger amounts of money will be placed at risk, but I will never place money at risk that Diane and I could not live without if the entire amount was lost.
It took well over year to move from my early interest in trading to trading with real money for real results. Now that I am trading live some of the time, it is time to stop speaking publicly about it.
I am not trading to attract an audience or entertain others by writing about it. I trade to make money. To minimize distractions and stay focused on that which produces trading success, I now trade in isolation with nothing more to say about it than what you see here.
You may see me blogging about the time I spend trading on a given day or night. You will not see me talking about specific trades, experiences, methods or results. (See also: A Word for Traders and Trader Wannabees.)
Kindly note that when I say I am "trading," the word includes the considerable work done before, during and after a trade is made. Just as our expediting business involves much more than physically transporting freight, trading involves much more than placing buy and sell orders.
The step-by-step story about my journey into trading is shared below for those who may be considering trading as something for them. If you are such a person, know that trading is not gambling and it is not easy. While trading is potentially lucrative, it is also potentially disastrous. Indeed, 95 percent of the people who trade are net losers. Trading is a serious and risky business that should be approached as such.
It is January 2009. Diane and I are truck drivers, specializing in expedited freight transport. We are in the midst of a severe global recession that has significantly reduced the amount of available freight, and along with it, the revenue potential of a one-truck expediting business, like the one Diane and I operate.
Slow freight means more free time and the opportunity to choose how we will use it. Instead of letting this new-found free time slip by, my choice is to invest it in learning a new money-making skill.
Regular readers of my daily blog know I have developed an interest in day trading. Day trading has nothing to do with expediting or truck driving. It is unlike anything I have seen or done before. It is not something I can teach or easily explain to others. If you are interested, I am the last person you should listen to about how to do it.
I made my first few trades in October 2008, and lost more money than I gained, though it is a small amount. Getting one's butt kicked in the high-risk options and futures markets is a common experience among beginning traders. Indeed, 95 percent of all traders become net losers over time, and for now, I am among them.
So why do I continue?
First, I find trading to be a fascinating and potentially lucrative endeavor that can be done in the truck. When Diane and I are making money by hauling freight, we are doing just that. When we are sitting and waiting for freight, I can use the time to trade.
I do not recall what sparked my interest in trading or moved me to make my first few trades. Whatever it was, it was not well thought out. The emotional experiences of those early trades frightened me; I mean really, really frightened me.
When my first trades produced high-percentage gains, a nearly overwhelming rush of greed rose from within that I have never felt before. That scared me. What is a supposedly good Christian guy like me doing feeling, physically in my body, such a rush of pure greed?
When I traded again to make more money but ended up losing what I made before, I literally panicked in front of the computer screen as I frantically bought and sold, trying to get out from under a whipsaw market that was eating me alive. It was a true out-of-control panic, also felt physically in my body, unlike anything I have felt before.
Thoughts came to mind after the emotions passed. The greed rush led me to wonder if that is what leads some people to get addicted to gambling, or more specifically, get addicted to the emotional rush that gambling can provide. The panic led me to think about what an animal must experience in its last helpless moments as another animal pins it down and eats it alive.
These rushes of greed and fear shook me up. As I thought them through, I felt blessed to have the good sense and self control to begin with small amounts of money and then to step back to think about what I was doing after losing my early gains. Many people turn to God when they are frightened and shook up. I did so here and thanked him that I did not become addicted to or destroyed by a foray into trading that could have brought both about.
I have since gathered my wits and enthusiastically poured much of my spare time into study and practice trading (also known as paper trading). Several brokers provide free software that enables practice trading to be done using real-time market data. Books on options trading, futures trading, day trading, trading psychology, strategy, technical analysis, trading systems and the stories of the highly successful traders are widely available. I have been reading those too.
With the benefit of hindsight, the emotional extremes experienced in my early trades were some of the best things that could have happened to me. The intensity of the greed and fear I felt scared the hell out of me and helped me understand that trading is a dangerous game. I learned that I was not immune to the emotions of trading. It opened me to take trading psychology very seriously, and to listen with humility and full attention when successful traders talk about it.
Some of the books advise against day trading and I understand the reasons. I choose day trading over other styles because it fits well into the life we live on the road. Not knowing when we must be committed to our expediting work or when I will be free to trade, day trading is the ideal choice because I do not need to keep a trade open when I am unable to manage it.
I should also mention sleep. While dedicating much of my spare time to trading, I am not dedicating sleep time. Regarding safety, sleep management is one of the most important things we do as truckers. The same applies to trading. Trading when I am tired is a near-certain way to lose money. Sleep management comes first, in trucking and trading.
The 95 percent failure rate among traders means nothing to me. My focus is on the 5 percent who succeed. I am reading their stories, learning how they think and act, and changing my thinking and behavior to emulate theirs.
When it comes to seeing, feeling and thinking about the markets, winning traders have common characteristics that losing traders do not have. These characteristics are openly discussed by winning traders and can be learned and made one's own. That is an exciting concept. It means the success enjoyed by winning traders can be mine too.
In addition to the risk of loss, trading carries the risk of success. Diane and I have talked about the success risk. What if trading works out well enough to match or exceed the money we are making as expediters? Will we give up expediting and follow the money into trading?
The answer is no. We love being out on the road and trading can be done in the truck. For the foreseeable future, we will continue to haul freight when it is available and trade when it is not. Stay tuned. Updates will be posted as appropriate.
After trading for a time, and essentially breaking even over a number of trades, my interest in trading waned. After letting it sit for a few weeks, the interest revived and I returned to my studies.
I intended to resume practice trading but the brokerage company I was using made some changes in its services and relationships that raised concerns. I am now researching other brokers and their trading platforms. (A trading platform is the broker-provided computer program used to research, make and manage trades via the internet.)
When I started, my focus was on day-trading stock index options. Futures trading is now being considered, as are trading styles other than day trading (swing trading and position trading). While I will likely re-focus on day trading, taking a wide detour to explore other trading instruments, markets and strategies is good to do. Once I settle on a beginning strategy, I won't have to wonder about the others and second guess what I am then doing.
I remain confident that I can become a winning trader but have not yet developed the ability. To that end I am reading and re-reading a number of books on trading, checking out various brokers and their trading platforms, and working on my trading plan. Diane and I have set trading money aside and accepted the fact that I may lose it all. Losing this money will in no way affect our other accounts and financial goals.
That's a heck-of-a-way to start, eh? Commit a significant sum of money that you must be also willing to throw out the window, and pour a significant amount of time and effort into something you may be unable to successfully do.
A trading account is now established with a broker that offers services and support specifically designed for traders (vs. buy-and-hold investors). This broker's trading platform is more than full-featured, it is massive, and is taking some time to learn. The user's guide is over 700 pages long. It includes a great deal of information about features I will never use. It will take a while to find and absorb the information that applies to me.
This is tedious and time consuming work but my motivation is strong. In recent weeks, our carrier imposed a rule that Diane and I find highly objectionable. This is the first time in six years that our carrier did something that made us mad for more than a day. While we worked out a solution, and it does not appear that moving to another carrier will be necessary at this time, the experience drove home the fact that we have only one source if income; namely, expediting.
Before we got into expediting, we had two incomes as each of us worked separate jobs. If something happened to one, the other could carry the load while the first became again employed. As a one-truck, owner-operator team, if something happens to our health, the truck or our carrier relationship, it immediately affects us both. The unwelcome rule provided a wake-up call.
It is now urgent and of vital importance to develop a second revenue source that can sustain us both if it comes to that. Trading will be that second revenue source.
Since my interest in trading took hold, I have always expected to make more money as a trader than as a trucker, while continuing to enjoy our trucking life and work on the road. Nothing I have learned so far suggests that to be an unrealistic goal.
That is not to say I am going to rush into the markets and expect to walk away with instant profits. Trading does not work like that, at least not over the long term. It is to say that I am pouring as much time as I can into this. Whatever the obstacles to successful trading may be, and whether they reside in my mind, heart, or out in the markets; they will be overcome.
While money is now deposited in my new brokerage account ready to trade, I will paper trade first, to develop a winning trading system and the confidence to stick with it. I am not starting from scratch but building on the experience gained in previous months of study, practice and a number of real-money trades.
Paper trading is a great resource. I know of no other business in which you can first practice with play money in real-world conditions. If you open a corner store, delivery service, bowling center, insurance agency, or over-the-road trucking business, the only way to know if you will succeed or fail is to jump in for real and then succeed or fail. Paper trading provides the opportunity to practice first. It differs from real-money trading because the emotions of real losses and real gains also differ. That is why when you trade for real, it helps to trade only with money that you can also throw out the window and not miss.
I have set no date to resume real-money trading. I already know how to minimize losses and be a breakeven trader. (Technically, I am a net-losing trader but the losses are small enough to round to breakeven. I need only a tiny gain on my next trade to be a net winner. Such a trade would leave me at essentially the same level I am now — breakeven.) Before jumping back in with real money, I will paper trade and refine my trading plan for as long as it takes to become a consistent net winner on paper.
Doing so may require months of work as I struggle to discover and clear my mind of that which blinds me to trading success. Or it may come quickly because of the better trading tools my new broker provides. We will see.
Crossing a learning-curve milestone of sorts, I now spend more time paper trading than I spend studying about trading. The trading platform software is working well and I grow better at using it by the day. I have settled on trading FOREX (foreign exchange, forex, FX, 4X). The idea is to trade well in this market before trying others.
I was originally disinterested in FOREX but came around to it because it meets my needs. FOREX trading goes on 24 hours a day, Sunday evening through Friday afternoon. On those days, I can trade for a few minutes, hours or days at a time.
With my paper trading demo account, I am gaining experience in various techniques and refining my trading plan with the lessons learned. In general, I am pleased with my progress and growing understanding of the trading game.
I have no idea how long it will be before I again trade with real money. It makes no sense to do so until I know I can make money on paper by practice trading. That will take as long as it takes. To that end, I am in front of the computer as time permits. With the recession continuing and the freight being as slow as it is, there is plenty of time to trade, and I am happy about that.
After months of study and practice trading, I have developed a system that I think will work. To find out, more practice trading is in order. What is different now is that I am no longer practicing to learn the software or gain entry-level familiarity with the market. I am paper trading to test a specific system over a number of trades and gauge the results. This puts me less than 100 paper trades away from real-money trading — assuming, of course, that the 100 trades produce a net win.
One hundred trades may sound like a lot, but in day trading, several trades may be made in a few hours. Some may call this scalping. To me, it matters not what it is called. It matters only that it works. If this system does not work, I will return to the drawing board as often as necessary to develop one that does.
I am so very anxious to again trade with real money, and so not ready. This leaves me wondering how much longer it will be. Every time I get to thinking that I will soon be trading live, I discover a new level of ignorance or another essential task that must be completed before moving ahead.
When I wrote above that I was less than 100 paper trades away from trading with real money, I forgot about the need to update my trading plan. I have learned a great deal since I wrote my first trading plan. What I thought would be a minor plan revision turned into an entirely new plan-writing project.
If you have been reading my daily blog, you know I have been pouring a ton of time and energy into my trading plan. While the end is in sight, the plan is taking me into another aspect of trading that requires still more work — back testing. That means spending many hours using my broker's software to pull up old data to see how my now better-defined strategy would have worked at various times and market conditions.
A huge part of me wants to say to hell with all this stern advice from allegedly successful traders about self control and knowing what you are doing as a trader. I have a feel for trading, don't I? Why not just jump back in? While not happy to admit it, the wiser part of me understands that I have more work to do.
Trading is proving to be far more difficult than I thought it would be when I first caught the scent. It requires much more work than I then believed and it is taking far too long to get started. It seems like every time I climb a hill, the only thing revealed at the top is another hill to climb.
I keep climbing because I believe that I can become a consistently profitable trader. That is a strong incentive when you think about it, and think about it I have.
Trading plan progress has been made, a strategy has been developed and I am close to beginning real-money trading. However, with the freight picking up, finding free time to trade has become an issue. See my August 8-10 blog entries for information about my trading plan progress and my August 29 blog entry regarding our decision to take some time off the road to trade.
Well, here I sit. A full year has passed since I made my first few trades. Progress has been made but I am not yet the successful day trader I envisioned myself to be when I began writing this page 10 months ago.
I have not even looked at the markets in recent weeks but am doing something more important. That is clearing the crap out of my life that stands between me and successful trading. I talk about that in my September 24 blog entry.
The time we then took off the road was costly but also well spent. Day trading requires many hours of screen time — time in front of the computer watching the markets and the trades you make. I believe I can run a trading business and expediting business side-by-side, but to do so, the time to trade must be created. To that end, our expediting business must be streamlined and non-essential activities must be trimmed.
In our years on the road, I have accumulated dozens of started but unfinished projects. Clearing out the crap means completing some of those projects and abandoning most. I cannot point to any trade numbers that suggest progress. I can point to the rapidly decreasing number of projects that, when completed or eliminated, will clear the path to a more streamlined expediting business, clearer thinking, and more time to trade.
Much of what is falling by the wayside is not crap. The projects were worthy when conceived and remain so in their own right. But they get in the way of trading, so out they go. On October 19, I named this effort Operation Streamline and described it in my daily blog.
Having made good progress in my Operation Streamline, and still having more to do, I resumed practice trading. I found that after not doing it for a while, trading is like many other skills. If you do not regularly do it, you get rusty. Like bowling, sharp shooting, billiards, and remembering people's names, the more you do it, the easier it is.
The kind of trading I intend to do requires a certain amount of screen time. Whether it is practice trading or live, I need to keep at it, not on and off, but on a regular basis. For that reason, I will be balancing my free time between trading and Operation Streamline.
My journey is over, or about to begin, depending on how you look at it. Live trading is about to begin. See the summary above for more.
Update: February 16, 2010
Much of what I talked about above has to do with day trading. As I gain trading knowledge and experience, swing trading and position trading are making sense too. My risk management skills have grown. I am now more skilled at using stop-loss orders and more patient in letting a trade develop. It has become OK for me to leave a trade on overnight and even for weeks or months if that is what it takes to let the trade develop. That frees me from a lot of screen-watching time; time that can be used to explore additional commodities and markets.