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Asher's Letters to
Samech - Part 4
BS"D
Hello Samech,
Well, this time you've
stopped me cold.
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First, it was
"too much information, too fast".
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Then, you want to know
"everything", so you'll have a fighting chance.
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The more you learn,
the more you are excited to start, but the more you learn, the more
you realize how unprepared you are.
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Making good bucks
trading full time is where your "head and heart are at".
Be that as it may, you have a family and a full time job to boot.
You dont have anything like a grubstake to live on until you get the
hang of trading. Hey, you haven't even set aside a comfortable
trading account. (Not good, you'll be thinking about money all the
time instead of thinking about trading properly.)
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And to top it off,
you're worried about conventional trading wisdom inhibiting the
"developing of your own style"! I take it you've been
reading "Market Wizards", or following some of the bluster
in the various Forums. Get real!
Have you forgotten the
first rule of childrearing?
Do you not want to raise a
child that will stand up for his beliefs and against injustice in
society? Paradoxically, to do this effectively, you must first teach the
child to understand society's limits and rules. I.e. Lesson 1:
"No!"
A Doctor must complete 4
years of undergraduate studies and 4 more of medical school studies.
Internship and residency follow this, 3 years. After successfully
passing major medical examinations; the doctor can commence a lifetime
of further study and practice.
A CPA must complete 4
rigorous years of university Business, Law, and Accounting studies.
Internship follows this, 1-2 years. After successfully passing
major Unified CPA Examinations; the CPA can commence a lifetime of
further study and practice.
An Architect must complete
4-5 exhausting years of university Drafting and Architecture studies.
Internship follows this, 1-2 years. After successfully passing
major Architectural Examinations; the architect can commence a lifetime
of further study and practice.
Trading is a profession, a
science, and an art. Seems to me that it is fair to conclude that
similarly, there are three stages in the professional learning curve of
a trader:
For a foundation, you
need to study commodities and futures, technical analysis, trends,
support and resistance, Fibonacci, Elliott Waves, options, exit
techniques, entry techniques, target setting, order placement, risk
control, money management, and the list goes on!
Ideally, along the way
you will attach yourself to a mentor, a master trader who suits your
trading preferences and style.
The essence of any
internship is observing the master (trader). Read what the mentor
suggests that you read and diligently do what he/she requires (daily
paper trading drills, for example). In todays world of hi-tech, this
will probably wind up a "virtual" mentorship, but before
going full time it would be of inestimable value to sit side-by-side
for some period of time and trade together with your mentor (every
newby's dream!).
Now you are armed and
ready to start your new career. Impeccably, emulate the master trader.
Cautiously gain experience and expand your style and your account.
Study. Study. Study.
A few years ago, I heard
Joe Ross, a famous trader, author, and teacher tell the story of his
trading internship. His trading mentor (his uncle, I believe) assigned
him the grinding full time endeavor of practicing nothing but order
placing, for a year. He gave orders, out loud. To a tape recorder. To
his aunt. To his mentor. Day in and day out for a full year Joe
simulated placing orders, before ever putting on a single trade!
BTW, apparently, even the
mythical trading genius, Gann studied the markets for ten (10 !) years
before putting on his first trade.
NEXT !!!
Let's evaluate some of the
results of your Reality Principle (RP) inventory we did last letter:
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You are somewhat short
funded, opening your trading account with between $5,000 - 10,000.
Since you are planning to trade options, having such a small account
is not quite the kiss-of-death that it would be for straight trading
of other types of instruments. Mainly because unless you sell naked
options you dont squarely face the silent killer, Drawdowns.
The most you can lose on a trade would be the price you paid for the
option.
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For now, you are
preparing to become a successful part time trader of options.
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Again, without getting
into it right now, options are best traded medium to long term, so
that's going to be our time frame. We're medium/long term part time
options traders.
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Many aspects of your
RP (including account size, experience, and comfort zone) suggest a
goal of gentle to moderate equity growth, at relatively low risk -
at least till you build up your account, experience, and confidence.
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Most traders view the
markets with a Bull trading mindset (to make money the market has to
go up). It demands flexibility to do what you once did so
successfully { Samech, soon we'll have to share the story of
"Samech's Optiontrading System" with those who are
following our discussion }, but this time to do so also in a
Bear market (make money when the market goes down). In many ways, a
bear market presents altogether different market characteristics to
deal with than a Bull market.
As an option trader, you
can actually make money selling the market going up (sell a Call) and
by buying the market going down (buy a Put)! That's in addition to
buying the Bull (buying a Call) and selling the Bear (selling a Put).
The possibilities are awesome!
Interesting Option
Highlight of the Day =]
;-)>
The market value of
Calls responds almost immediately to upward movement of the price of
the underlying instrument.
Response in the
valuation of Puts to downward movement of the price of the underlying
instrument is delayed.
It has been conjectured
that this is due to the fact that most traders view the markets with a
Bull trading mindset. They are thus anxious to jump on any Bull
activity, but tend to ignore Bearish activity. This tidbit will be of
use later when we start constructing option strategies.
Commodities vs. stocks
remains a big question for you. You keep chirping, "Commodities is
gambling." I don't know who put that one in your head. Assuming
trading commodities is gambling, how do you avoid the same conclusion
about stocks? Perhaps highly leveraged investing might challenge your
comfort zone, but that is a personal, psychological thing and hardly an
objective truth.
Either way, I am going to
proceed to discuss trading from the perspective of commodities, because
I prefer them.
Stock trading, by nature,
requires more attention to fundamental analysis. Stocks are arguably
less amenable to technical analysis than commodities. Why do I say that?
Without going too deep right now, heres the short of it:
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Basically, I view
technical analysis as the study of market price-activity charts,
graphically depicting patterns of mob behavior and psychology.
Measurement and analysis of mob behavior is most reliably gained
from examining a large sample size, taken from a large population.
Stocks in general, and stock options in particular are just too
thinly traded (small sample from a small population) to give such
smooth observable results as observed with commodities.
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Slippage is directly
proportional to the trading volume and open interest in your
instrument. The thinner the market, the greater the slippage.
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Consider, on the other
hand, T-bonds. T-bonds are so heavily traded that under technical
analysis the market can be observed to behave in almost textbook
fashion (most of the time!). Dont get me wrong. To trade T-bonds
without giving due attention to fundamental input (read: Greenspan
speaks!) is suicidal.
Anyhow, most of the option
stuff is basic to both types of instruments, stocks and commodities,
equally.
I'm gonna recommend a
thick text book and a website for you to read. Then we can talk without
me having to get entangled explaining things that others have said
better already! To encourage your hunger for more information, lets
start building your trading library. Either of the following two books
will give you the grand tour of technical analysis and belongs on your
desk:
or
Start reading
"Phantom of the Pits", tonight. Its a fascinating, well
written, online book, full of real-life insights into trading. When I
first stumbled onto it, I stopped trading for a full year to re-assess.
Read it now, so you wont need to unlearn your trading habits and
attitudes later. FREE!
http://www.webtrading.com/phantom/preface.htm
Get to work, cause I'm
planning to recommend some more books and give you lots more links in
future letters!
Be well. Love to all,
Asher
Strategic
Option
Grid
does what $1500 programs don't !
Asher's
Letters to Samech, Part 5
Back
to Asher's
Letters to Samech, Part 3
Trading
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