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Disciplined Trading – A Beginner’s Handbook  – Part II

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disciplined trading

Disciplined Trading – A Beginner’s Handbook (Part II/III)

Last month, I started part one of a three-part series to help beginners with disciplined trading, and maybe some ‘veteran’ beginners also. I talked about the difference between a ‘buy and hold’ philosophy and properly understanding and managing all trades with technical analysis. I talked about how things have changed, and how most ‘fundamental’ criteria are not very helpful. We look at charts for the truth and manage because things can change quickly in today’s environment.  Here is part two.  In this issue, I want to expand on those things and discuss what time frames you may be interested in trading. In addition, there is a need to understand how this works, and how to read the ‘language of charts’.

Author: Paul Lange – Part II/III

I briefly touched on the concept of time frames last issue. It is an important topic and is the next item that needs consideration before you begin trading/investing.  Concepts of ‘trading’ and ‘disciplined trading’ can be used to help people who are looking to better manage their IRA.

They are also useful for people trying to build wealth by swing trading investment money, and for people trying to produce income by trading on an intra-day basis. This last category includes traders that usually receive the name of “day traders” or “scalpers”.

Tips on Trading – The Active Trader

If you are going to be active in the markets, it is recommended that you maintain 2 separate accounts for trading. These two accounts will have different goals and objectives. One account is a ‘wealth building’ account. It is for core and swing positions.

Core positions are positions based on weekly charts and can last from weeks to months. They have stop losses and entry points like any other trade. Targets may be set as an objective or left to an exit based on raised stops as the stock moves up (or lowered stops as stocks move down in the case of a short). Swing positions are based on daily charts and can last from 2 to 5 days.

trading starts with timing

This wealth-building account is important to capture the major moves in the market. These are moves that may elude the trader who goes home flat every night. Gaps and large extended moves will benefit the swing and core trader, but will often only aggravate the intraday trader.

The second account should be ‘income producing’. It consists of day trades (ranging from minutes to all day), and ‘scalp’ trades. Scalp trades are a specialized form of trading. They are designed to make money from very small moves in stock by using large share sizes and very tight stops. These strategies help to keep income flowing, even at times when the market may be moving sideways, and not generating income in the wealth-building account.

Once you have decided on your time frame, it is time to begin. Not time to begin trading, but rather a time to begin figuring out exactly what strategies you want to use to capture price movement. Trading is one of the most challenging endeavors in which one can participate.

Unfortunately, most traders will spend more time getting educated in flat screens before buying one than they will spend getting educated in trading concepts before buying a stock. Most traders do not feel the need to get educated in trading. Most traders also fail.

Have you ever wondered why? 

No one would try to be a doctor or a lawyer without the proper schooling. Yet for some reason, new traders feel that this is an ‘easy to conquer’ profession. The truth is that some of the smartest and most successful people often have the most difficult time trading. Continuous success before trading often translates to overconfidence and stubbornness while trading; this is a bad combination.

You have to be able to admit when you are wrong and move on quickly. Successful people often become perfectionists; this is a quality not suited for trading. Good traders don’t insist on getting them all right. The goal is to make money. Doctors often want to ‘save the patient’ at all costs. In the market, sick stocks are ‘killed off’ quickly.

What about your roadmap?

Do you know, right now, what strategies you want to play in this market? This month? This week? Today? Do you know what strategies you want to play at different times of the day? How to handle all of the market maker tricks and reversal times? You see, the market is designed to extract money quickly from the unknowing. It is a game where very many supply much money to the very few. What side of this equation have you been on?

You need to develop a trading plan that outlines your total business plan when it comes to how you want to trade. Also, you need to outline the strategies you want to use, and when you want to use them. Same, you need to outline money management rules. How much will you risk on that scalp, and how much on that core trade? Do you know how much can you afford to lose in one day? To do this, you need to begin to understand trading and all the concepts it involves. This is the single most important step, and I could go on for hours. Yet, the vast majority of new traders do not have a plan.

The first seminar plug coming is over 6 weeks

Everyone has a different level of money and time they can devote to learning the ‘language of charts’. I had some people mad at me because I already taught my three classes one time and they didn’t even know. The schedule is on my website, I assume people know. If not, I have synthesized all the knowledge I have of technical analysis, my ‘language of charts’ and offer it in 3 one day classes.

They are taught on 3 consecutive Saturdays, every 6 weeks. They are very economically priced so people who want to learn can learn. If you have taken classes from me before you may qualify for the retake program. They teach how to handle your IRA to how to day trade part-time or full-time.

There are those that continue to pay the market every day, only they often walk away with very little education. Some traders lose more money in a week than it would take to get a good start on education. Don’t be one of the people with the mindset of, ‘When I make enough money trading to pay for a seminar, I will take it then….’ Think of the logic in that statement. The training must come first, or it will never come.

 

Disciplined Traders: A Beginner’s Handbook

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Disciplined Trader

Disciplined Traders – A Beginner’s Handbook

Author: Paul Lange  –  Part I/III

For the next few days, I will be looking at things that disciplined beginning traders should know as they start this business. Don’t be surprised, however, if some of you moderately experienced to very experienced traders don’t find a few interesting tidbits, even if they serve as nothing more than a review.

Are you New to trading?

Welcome to trading. Are you new to this field? Or is it called online stock buying? Is it day trading? Or is it investing? Well, let’s get a few terms straight. This will be the first of a three-part series, “A Beginners Handbook”.

First, for a long long time, I have considered the term ‘buy and hold’ something that is no longer a term that should be applied to the stock market. You should feel this way also. Do this if you like in real estate, bonds, or gold, but not stocks.

It implies a long-term buy-and-hold with your eyes closed approach that should no longer be used in the stock market. The term ‘investing’ is fine as long as it does not mean ‘buy and hold’.

 

There is nothing wrong with long-term holds. I believe in swing trades and core trades that could last for months or years in some cases.

However, they are ‘managed’. As traders, we do not close our eyes hoping all will be all right. Traders are educated in technical strategies and discipline. They become self-sufficient.

Self-sufficient, Disciplined Traders

What does Disciplined Trading mean? Among other things, it means not relying on other’s people’s opinions or wonderful news sources, once they know what they are doing.

A lot of today’s large-cap companies are in the technology area. These companies are subject to having their main product replaced by a new technology very easily. Long ago, it required many years for any company to start up a new car company and overtake General Motors.

Today, anyone can create software in their garage that can revolutionize how something is done and put a competitor out of business. The list of companies this happened to is endless. The rule is ‘change or becomes extinct’.

This example is found over and over again in everything from video sales to computer chips. It will not end in the lifetime of anyone reading this.

‘buy and hold’  vs. long-term trading

When practicing ‘buy and hold’ (as opposed to long-term trading), you are relying on news and announcements and fundamental data. Many of you have probably already discovered how worthless this process is. You never take the news or information at face value.

So if ‘buy and hold’ is out, what do we do? You hear stories all the time about all of the ‘day traders’. Then, you look around you and you don’t see many. You may not even know any besides yourself and those you met at a seminar or expo.

Unfortunately, the term ‘day trading’ is often misused. There is a large group of people that we call ‘online investors’. These are the folks that use their computer rather than consulting a broker or consultant.

They are typically managing their savings or IRA money, and are typically untrained. Same, they always multiply exponentially during the later part of bull market runs. They all but disappear after major market corrections.

 

 

 

Traditional Or Online Trading?

We consider ourselves ‘traders’, whether buying and selling during the day or for the longer term (or anywhere in-between). Traders use technical analysis to find, enter, and manage trades. That applies to long or short-term trades. Those that are focused on trading and exiting by the end of the day are called day traders.

Day Traders

Day traders are people who spend a good part of the day in the market. Those who are trained to manage positions that may last from several minutes to several months. Holding stocks for ‘days’ is commonly called swing trading, and holding for weeks/months is called core trading.

While a core position may last for weeks to months (or years), it differs from investing because there is an exact entry and exit strategy based on technical analysis planned for a core position.

Just like swing trading also relies on specific technical strategies for entry and exit. Exiting when down 10% is not a strategy. It is a last-ditch money management concept.

how does a disciplined trader buy stocks?

If you are going to trade, this is the million-dollar question: How do you buy stocks?

If you are trading only a few trades a week and limiting yourself to swing and core trades, using one of the ‘online brokers’ is fine. The time it takes to have your order filled may not be that fast, but for occasional long-term trades, it is acceptable. If you are going to be trading more often, or trading in and out the same day, you will want to use a ‘direct access’ broker.

This is a broker that lets you see all of the market participants, where they are buying, and where they are selling. You then place your own order on your computer screen and many of these orders will have instant executions. By instant, I mean instant, usually within a fraction of a second.

So, as a disciplined trader, you know what you want to do, and you have selected a broker. Now you need a computer and an Internet connection. Again, for occasional swing and core trading, any machine that can access the Internet will do. If you are going to be active intraday, you will need to have something better.

You will need a computer that is competitive with the current top-of-the-line computer or is at least current with the technology within the last 12-24 months.

You will want a fast Internet connection. Most people today have sufficient internet due to Cable, FIOS, and Satellite. You will need to have a working knowledge of computers, as your time with the computer will be extensive whether you want it to be or not.

…Or have a friend close by

So now you are ready to trade, right? Well, no, not really. The biggest distinction I made earlier was that ‘day traders’ are educated in trading strategies and disciplines. This will be the focus of the next Lesson, how to start out trading when you have no education or experience in trading. I will discuss how to build that education as you go, without using up all of your capital.

There is perhaps no greater occupation to have than that of a professional trader.

Yet, few achieve that title. Few achieve, even though thresh hold is not that high. In terms of cost and preparation, almost anyone is capable. You have to set yourself apart and be different. That is part of what we will talk about next time.

– Paul