HOW DO I START? By Daryl Guppy TRADING METHODS Protecting your DISCRETIONARY TRADING capital, growing your capital and finding the best return. This trading style puts the trader in the driving seat. The Where and how to start are trader assembles a collection of his preferred indicators, assigns a level of importance to each, and then makes a decision based on common questions. Some his understanding of the indicator readings and trading signals. people examine their current This inevitably involves some subjective judgment, and this opensjob with its heavy time the door for error. The trade is managed in the same way, and this demands and decide that the requires a high level of confidence. life of a share trader sounds Mechanical Trading seeks to remove human intervention - easy in comparison. We look and hence subjective behaviour - as much as possible from the trading equation. Typically such systems rely purely on at some common questions mathematical relationships, although in establishing many systemsabout becoming a full time there is subjective human input to determine the most desirable share trader. outcomes. Trade management requires discipline and a great deal Perhaps this is the of faith in the system. The temptation is to second guess the wrong question. Like any trading signals. skilled profession, full time Intuitive Trading develops from experience, and should not share traders are relatively be confused with the gut feelings used by novice. Experienced rare and they tend to work for traders are subconsciously aware of certain patterns and market institutions. Full time private set-ups. When they see them they act intuitively drawing on many traders are rarer still. It is a years of trading experience. This requires a high level of confidence and skill and trades are managed with certainty. These skilled profession, but unlike many professions, it also trading processes are difficult to explain. The Intuitive Trader by Koppel examines these issues in detail. offers a part time component. In this newsletter our emphasis is on developing The skill can be applied to a discretionary trading approaches. single trade, or to multiple trades. Many people use trading as a part time occupation that delivers a full time income. I believe this is a useful approach. When I started trading I was working full time on a contract position. I was on call 24 hours a day, seven days a week, with formal office hours from 7am to 6 pm. Time was at a premium, and I knew that I would prefer to work at a job that was not quite so time demanding. The shift from earning money to making money earn for you is important. Unless you accept that the objective is to make your money work for you, then your approach to the market is most likely to be a gamblers approach, looking for quick money. The trader develops a different view of the world, and the relationship between capital and income. The typical example of this difference is between those who want to immediately develop a replacement income for their wages, and those who want to use trading to supplement their income. The latter group focus on the most effective use of capital. They are not after a big hit – the gamblers approach. They look for the best return on their capital rather than focus on the size of the dollar return. When I first started, trading provided a very useful supplement to my income generated from my savings. Bank interest may have delivered an extra $2,000 a year. Active management of market investments may have delivered $10,000 a year, or more. Trading was clearly the best use I could make of my savings capital. The chart shows some sample returns. The simple trading returns are those achieved by students in my recent 8 week trading course. They made their selections in lesson 1 at a time when they knew little about trading the financial markets. We applied a simple trend trading strategy. It was their management of the trades, on a weekly basis, that delivered the results. It was an effective use of their capital. Pursuing a part time occupation is not the same as turning it into a full time occupation. An extra $10,000 a year on top of my wages was a welcome bonus. It came from just a few hours a week, squeezed in between other job commitments. If I did not around to opening a new trade because I was too busy, it did not have a significant impact on my standard of living. If a trade took longer to develop than I expected then the lack of cash flow did not disrupt my weekly grocery shopping. As a part time trader, I did not have to rely on the income generated from trading. Full time trading is an entirely different beast. There is no regular income from wages. Suddenly the pressure increases because many people feel the need to see a regular weekly income from their activity. They do not like dipping into their savings to meet the weekly food bills. They believe they have to make a certain amount each week to at least match their old wage income. The tendency to gamble becomes much stronger as some trades are closed early simply to generate cash flow. This pressure is even greater if you do not already have a substantial level of savings which you can draw on for living expenses when necessary. In my case, when my three year contract finished I was making enough from part time trading to not have to worry about looking for traditional work. I took on full time trading only after I was able to prove that I could already make a living from it. You become a full time trader by graduating from a part time trader when your trading income is equal to or greater than your current wage income. In this situation you will have already accumulated sufficient savings to make full time trading, with its irregular income flow, a real possibility of success. But you do not need to become a full time trader to enjoy the benefits available from trading the market. Most people are able to very successfully use part time trading to provide an excellent supplement to their existing income. This may reduce the pressure to take on overtime, or make longer unpaid holidays are realistic option, or even hasten the drift towards part time work. These possibilities are all achievable when wage income is supplemented by part time trading income. This approach is the most appropriate for most people, and for most readers of this newsletter. It is also a vital first step for those who aspire to full time trading. Trading success is possible, but it is not for everyone. Treat it as a serious part time occupation first, and then make the transition based on success.