Lesson One: From hope to Zen
“Equity trading has changed radically for the individual investor over the last 10 years when I first pulled the trigger on a miniscule stock trade.” Dave
It was 1990,
and I noticed LA Gear seemed to be going straight up. I would watch it, at lunch, at the brokers office near my employer’s building located in Bala Cynwyd, PA. My co- workers wondered where I disappeared to instead of joining them in the lunch room. This was before the advent of inexpensive and accurate real time quotes over the internet. Day by day, I would join the elderly men watching the overhead stock ticker and taking turns at the quote machine. The atmosphere back then was very similar to the off track betting parlor. Finally, I had saved $1000.00 to open a small account at the brokerage house. I remember agonizing whether or not to risk these hard earned funds in a market. All the gentlemen at the brokers advised not to buy LA Gear as it was sure to reverse and plummet, wiping out everyone foolish enough to buy it. Several of the regulars, even suggested that I sell the stock short as they were doing, even as they would watch it go up every day and continually moan their losses. Finally, mustering the nerve, I placed an order to buy 50 shares at the market. I had no idea what a limit order was at that time. The order was quickly filled at 20 and I watched with amazement as the stock rapidly climbed to 25 in the next 30 minutes. I had just made $250.00 in 30 minutes…..unbelievable! This was almost as much as I made, after taxes, in an entire week as a trainee claims adjuster. I quickly sold, taking my profits, and returning to the office with a large ego.
I continued to watch and trade LA Gear when it looked like momentum was taking it up and I would sell when the stock stalled. I built my modest account base up over the next several months, doing what is now referred to as ‘day trading’.
After this initial success, I was convinced that I was invincible and could easily beat the market using intuition and some very fundamental technical tools. This is when my studies lead the way to ‘options’. I quickly absorbed all that I could concerning these esoteric trading tools and decided that options on the OEX index would be the easy way to earn millions in the market. It’s easy, I thought. All one has to do is correctly predict the direction of the S&P 100 and purchase either a put or a call depending on the direction. There was no way I was going to loose! I had never had a loosing trade and I was convinced I never would. I was going to be rich!
My first option trade involved 10 calls on the OEX. That first trade doubled in equity the first day. There was no doubt in my mind: I had this trading thing conquered. I then decided to go short next, by purchasing puts. I doubled up on my position and purchased 20 puts . The market started to go down, then it was like someone flicked a switch: the market skyrocketed upward! My puts plummeted; soon worth only one-eight. All my gains were lost and I was shocked. That was my first lesson in trading. This experience humbled me. I started, what would become a life long study of the financial markets.
Trading is both the easiest and the most difficult way on earth to earn a living. I have created this column to guide beginning traders so that you may avoid the costly mistakes which I have made. After ten years, I have reached the conclusion that self control is the key to success.
A Zen like state of mind
Through the years, and through my trading experiences, I believe that one’s mental state is crucial. A ‘Zen’ like approach to trading provides one with the most success and enjoyment. Allow the market to tell you what to do. Do not have any preconceived ideas. This will be most difficult to understand if you have never done trading or practiced ‘Zen’ before. It takes practice to master this Zen like mental state. Once this is mastered, trading becomes like breathing; almost unconscious flow of buying and selling. There is no such thing as a good or bad market, the market simply is. Markets do not do anything to you, you take action in them. What is important is how you react to what the market tells you. There is a constant barrage of information flowing from the markets on a moment by moment basis. The traders job is to filter the profitable information from the garbage and then act swiftly ad decisively on that information.
The second most important key to your market trading success will be learning how to take a loss. “What??? Take a loss? Me, never!” you say, “I thought after you got this Zen thing down, you would never have a loss…!”
Not true, even the top traders in the world markets make unsuccessful trades; and sometimes, multiple bad trades in a short period of time. Cutting your losses immediately by keeping tight reigns is critical. Believe me, selling at a loss is much more difficult than selling at a profit.
No room for hope
.Hope is a traders worse enemy. Your position declines in value so you hope it rebounds, the next day or hour it is down even more, now all you want to do is break even. You keep hoping for a change in trend but it keeps going against you. What started as a small loss becomes a major loss and your confidence is shot. Not a good position to be in.
Remember to have a mental stop as to when you will sell and only move in one direction. The direction of the trade.
….next lesson: Fear and Greed ~ The account killers