The Right Foundation

Now you must have seen those celebrities in magazines with full make-up looking  perfect and sometimes with a “natural look” revealing they, like us, have skin imperfections and are mere mortals….only with the better foundation.  I remember my excursion to get a good one – I swanned into the counter of one cosmetic company and met 30 different kinds — at least!  Liquid, pressed powder, moisturising, de-aging, oil control, covers uneven skin tone, long-wearing, natural skin-perfecting,  mineral enriched, matte or  luminous finish,  full or sheer coverage  and etcetera.  The beauty consultant probably saw how overwhelmed I was, so she just told me to give one a try.  With just a few trials we found the one I am happy with, e.g. liquid formula to even skin tone for normal skin  type with luminous finish in honey – now that’s genie in a bottle! 🙂

It reminded me that to get it right in Trading, one has to get the right foundation. (Literally and figuratively).   You need to bring together what you want and what you have to set a good basis for doing your Trading business.

Know What you HAVE

Consider what you HAVE that affect your trading:

1.     Psychology

2.     Risk Tolerance

3.     Resources

• Time
• Money
• Skills

4.     Market Beliefs

PSYCHOLOGY

Personal Beliefs — Imagine the result if you go on Trading or any pursuit and believe that YOU CAN WIN! You would be so full of energy and enthusiasm that you do any work to be done the best you can! You would get roadblocks but it doesn’t stop you because you know it is still in your path to success, you only need to learn to get around it! If however, you think you are “not good enough”   (“I don’t have the right education”, “I am not good in math”), then this will limit you and you have to change that. You have to believe what will be supportive of what you want to achieve.  Believe  that there are always opportunities in Trading.  Believe in abundance.  This is deep, spiritual  stuff right here!

RISK TOLERANCE

I mention “trading” to friends and they say  “It’s risky”.    If you think of it though, everything has risk.  You could be enjoying an ice cream cone with the risk of drips on your nice clean shirt.  You would still eat ice cream right? Just need to be careful.

Anyway, I thought when I started, you have to take high-risk trades to get high-rewards.  I have good news though — Low-Risk   trades is what makes successful traders.  This is what you can do to be careful:

a.     Measure Risk –  when considering a trade, measure if  the Risk is worth taking.  I follow the professional traders’ rule of thumb  that you only enter a trade with the potential to give you 3 times what you risked.  (I will tell you later how ).  So say you are risking $100, then the reward potential should be $300.  You need to be careful not to just enter a trade  — if the reward potential is not there, it is not worth the risk.   Step away.

b.    Know  WHAT is the risk of the investment so you can decide if  it’s alright with you. For example :

• small companies (either small-caps or penny stocks) — usually get listed in the stock market to get funding for growth.  They are cheap so you can get in with only a small investment (say at 50cents your $500 can get you 1000 shares)  and could skyrocket in value compared to your investment e.g. could reach $1 in a year so 100% gain.   However,  there could be no earnings, and/or  lots of debt.   Also due to small number of shares, could be hard to get in and out so less opportunity to trade.  Worst that could happen is you lose your entire investment.  REWARD :  Growth
• big companies  (called big caps or blue-chips) — could provide  income by paying regular dividends, would have cash/assets that exceed debt (at worst their assets can pay their debts and whatever is left is distributed to shareholders), usually also grows by buying smaller companies or start other ventures, have large number of shares which make it easy for traders to go in and out of trades (liquidity) ensuring you have plenty of opportunities.    REWARD: Growth, Opportunity and Income

I consider the bigger companies LOW-RISK so they are the ones I trade, in addition to growth, income and opportunity I can apply strategy for protection, further lowering my risk  and increasing returns/income (I am talking about  Options on Stocks – fun stuff for later!).  Big companies could fail too for various reasons usually relating to management – e.g. ENRON, Nortel, OneTel etc.  so you still need to be careful and monitor regularly.  From learning about the markets you could also formulate other  “low-risk ideas”.

RESOURCES

Think of your available time, money, skills that you can use to do your trading business.

1.     Time

a.     First, you would need to spend  time to LEARN to trade – this would including getting market knowledge,  creating a system to guide your  decision-making, how to place your trade (online or broker) and ensuring you trade effectively with a psychological and business plan.  I will share them here so don’t worry 🙂

b.    Second, you need to know the timeframe you would be comfortable to trade.  Starting out, I recommend to adopt a “short term” timeframe for trades (few days to a month or so) .  Day trading requires a lot of skill and knowledge that one can only learn over time, while if you go “Long-term trader” right away  you’d tend to be slack and lose focus to do the “trading tasks” and possibly lose interest and lose money that way.

c.     At actual  trading, the time requirement is minimal.   I do short-term trading and I would normally prepare to enter a trade at a “quiet time”– this would vary from person to person but for me this would be weekend or early in the morning (when I wake up to give the baby some milk) I spend between 10 to 30minutes reading on news and doing my analysis, when a trade is already in place and I only need to monitor it, I check  the broker’s website, takes 1-3 minutes each time while I could be at the shops or with the kids at the park or at home or workplace.    I adjust my activity  according to the market, if it’s too volatile I monitor more closely.   If I am not comfortable I don’t  open a trade.

2.      Money – This is a big topic so for now let’s just focus on what you need to think of when you start to trade.

a.       Allocate.  You need to keep the money for trading / investing separate from any savings or any living expenses or commitment for that matter.   To trade profitably, avoid any pressure on your capital or “unrealized profit”.  Some people recommend investing 10% of your income etc.  I leave it to your judgement to assess your overall life situation.   But listen up! Starting out, honestly, I recommend allocating an amount that you can afford to lose.  Scary but, Trading being a  “fast game” you might not have the  self-control for most part of it and lose your capital.     I know  because I did it and got totally wiped out.  (Nope I didn’t cry over that.  OK maybe just a little bit… )

b.    How much?  Here in Australia I look around banks advertising  “Term Deposit”  offering 6% per year for a minimum deposit  of  $5,000 for 12months.   So if you are chasing  a Return of more than 6% you should have more than $5,000 right?  Starting out I recommend going from this amount although I will discuss  other considerations later.

So say in summary, minimum trading capital is $ 5000 that you can afford to lose.   For readers in other countries,  I will look up (your) markets and post a recommendation.

3.  Skills – you would find that the following are helpful in trading

• computer skills
• research skills (finding information and making it easy to refer to)
• math skills

If you do not have the above skills (or any you need for that matter), learn them.  I didn’t think I’d be proud to admit one day but I was made to take “Remedial Math”  after a college admissions test that I passed showed that I have too many mistakes in the math section (hehehe ).   I had to sit an extra class at lunchtime to learn arithmetic and percentages.  In Trading these are  basic math skills needed,  then some statistics to help you advance.  I used to have a blank look at the mention of “Standard Deviation” but a very good teacher (Ken Long from a Van Tharp Institute workshop I attended) showed us what it is used for and then it became really interesting. So just think as you get more knowledgeable you will appreciate what this seemingly complicated math is all about.

TOP TIP : You can practice basic math skills a lot during shopping  when reading  signs  like “Buy 1 Take 1” and “30-50% off”  🙂

MARKET BELIEFS

OK so markets do go up and down, sometimes slow, sometimes  too fast it’s crazy  — I don’t pretend to know all of the reasons  (it’s not that important – tell you in another post) but I can tell you this: there are ways to profit in Up or Down markets or even sideways market.  Dr. Van Tharp is fond of saying “you don’t trade the markets, you trade your beliefs about the market”. So improve your market knowledge from where you can form beliefs that you can use in your trading.   It helps to  observe  a “real” market (not the supermarket)  – just look at the chaos!  Different people are there together  with different purpose bringing different things (resources).  Like in the financial markets – there are the individual “mom and pop” investors, day traders, long-term investors, fund managers, the governments also get involved, some may buy and hold, others are hedgers (want to protect values of their assets), speculators (hold positions according to their expectations of rising or falling values).    Markets also have a rhythm, there is a lot of activity say at the start, closing, or at  the end of the week. One of my beliefs (from what I’ve observed on one stock I trade) is that its price tend to go down by Friday afternoon.   Funny it is like one of my favourite thing to do at the markets which is go to the flowers section near closing time because they tend to sell at big discount, sometimes give it for free.  🙂

Know What you WANT

1.   Have an Objective.  When I started out, I just thought I “want to make money”.  To help define that, think :

a.     What is it for? A holiday or buy a car? Monthly income?

b.    How much?

c.     When do you need it?

As regards to your capital :

d.    Do you want to make as much money as you can?

e.     Do you want to ensure you only lose a certain percentage of your accumulated capital (capital and profits)?

f.     Do you want to preserve a certain percentage of your original capital?

As regards to your business:

g.    Do you want to manage your own money and few other family/friends? Or just yours

h.     Do you want to be a professional money manager?

i.      Do you want to be a mechanical trader or fully automate trading systems?

j.      Do you want to just protect the value of your business / other assets

Dr. Tharp’s book “Trade Your Way to Financial Freedom” has an excellent section about writing your Objectives to START your Trading. After all, if you don’t know where you want to go,  how can you get there?

2.    TIME. Do you want to trade actively or prefer a slower pace?  There are some markets that lend to “fast” trading, like the Foreign Exchange market (or FOREX). If you don’t care for fast-paced trading then stock market might be better suited, and that also varies according to stock  etc.

3.     MARKET.  Do you want to trade a particular market because of your interests? (e.g. From your travel or other business)  Back when I was starting, I didn’t know that you could trade Country-specific funds, I thought at that time if you have any such interest you can only trade Foreign Exchange (or Forex for short), now there are even Country Exchange Traded Funds ( ETFs).  If you migrated to another country like I did  you must be  aware of  US Dollar against your currency, that could be a good fit for you.    If you prefer to trade something familiar you can start by trading “household name” companies like your bank, the retail companies you shop in,  what you pay bills on e.g. electricity / phone, the makers of the goods you use e.g.  software or PC or even everyday items like milk or food items.

LAST BIT – PROMISE!

If you are still reading this,   I’m happy for you and let me just wrap it up here.  Most women I know don’t want anything  “risky”.   So here’s my  hard-earned wisdom on getting “the right foundation”  for low-risk trades.

1.  There is a lot of  money to be made in Trading, but like anything in life, you have to earn that by developing your skills and taking responsibility.

2.  Give yourself time to learn.  At the start you will make mistakes, keep learning and improving.

3. Aim to preserve 80% of your capital.  Also around halfway of hitting this mark (or after 5 trades whichever is safer for you) it’s a good  time to check how you are doing (performance) and make adjustments to how you trade.

4. Only do low-risk trades. If you  lose  sleep over it,  it’s not low-risk enough for you.

5. Aim for a monthly income target,   it is a measure of how good your skills have become (your consistency).

6. First do mechanical trading, even doing calculations by hand, it reinforces your learning.

7. Devote at least 2 hours per week to learn, you sure can do more but contrary to what others might think, Trading is not just theory and numbers.  A lot of it is behaviour, so go, observe and learn from LIFE .   Picture someone who got angry and done something they’d regret because they lost control.    You will understand later how Life relates to Trading. (Hopefully  🙂  )

8.  Trade Short-term timeframe,  does not put much pressure on yourself and the trade could still move in your direction.

9.  Trade what is interesting / easy for you to understand and offer you the most protection.  For most people this is the stockmarket.

10.  Start with minimum of $5,000  — if you don’t have this amount, build it up while you keep learning.

Whew, long article,  give yourself a treat and chew on this one for a while.

I’m  catching up on sleep.

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