June 17, 2013
What does it take to move from paper trading to using real money?
Paper trading serves a purpose. It give the trader a chance to go through the motions and to gain experience
–Entering orders, including understanding what constitutes a suitable trade
–Managing risk, including when to hold and when to exit
–Making profitable exits, learning when it pays to leave money on the table and eliminate the risk of holding
–Learning to use the broker’s trading platform
One objection to paper trading is that no real money is on the line and that the undisciplined trader may not treat the position as if it were real. When that happens the trader loses out on the opportunity to get a feel for risk management and the important decisions that are involved. I have to agree that this can be a problem for some traders. However, once you can handle the order-entry system and understand the strategy, it does not pay to remain in paper-trading mode much longer, unless you are making specific trade experiments (to learn from the experience).
I know that trading one-lots may seem to be a chicken’s way of trading. However, be assured that it is not. Whatever your bankroll, it is important to trade small position size when getting started. For many beginners, that size is a single-lot. If you have more money (say 6 figures) to deposit into an account, then it’s okay to begin trading with 2- or 3-lots. But there is no need to do any more until you have a feel for ‘real-world action.’
Suggestion: Until you know for a fact – because you have proven that you can take appropriate action when necessary (when real cash is at risk) – that you will not be stubborn and that you will reduce risk (or exit the position) when risk has moved beyond a level where you are comfortable taking that risk – do not increase position size.
If you decide that an appropriate number of contracts for a given strategy is 10 (for example), it is best to move from 1- to 2-lots for a month or two. Next move to 3- or 4-lots. Do not go all the way to your desired position size immediately. Some people who have trading experience (but who are new to options) will be able to move to full size quickly. However, new traders may not realize how frightened they can get (it truly depends on your own personality), and there is no reason to subject yourself to an uncomfortable risk just because you lack patience.
You have the rest of your lifetime to trade. My advice is to take steps to get where you are going. Try to get out of paper trading and move into the world where real money can be earned or lost. But have the patience to increase position size slowly.
June 13, 2013
Advice is cheap and bad advice is vastly over-priced at zero.
However, good advice is often available with no cost and no obligation. I’m sharing some of that advice today. I am not the source, but it is so useful that I feel obligated to pass it on.
There is a problem. Most people tend to shy away from good investment advice because they often believe that they can do better by taking their own course. And maybe you can. But not as a beginner. The earlier you begin, the better your chances of facing retirement with adequate funds.
Here are a few excerpts from rock-solid investment advice from R. P. Seawright who publishes an excellent blog (Above the Market).
I encourage younger traders to read the whole post. It is never too late, making it appropriate for traders of all ages.
Establishing Your Top 10 Investment Default Settings
Every investor — personal or professional — ought to have a clear investment plan based upon appropriate personal considerations, goals and outlooks and every investor ought to stick to that plan unless and until something significant changes. But there is a crucial component of the investment process that gets surprisingly little attention: our investment default settings. We can use them when we aren’t sure what to do, when we’re deciding what to do, when our circumstances have changed but our plan hasn’t (yet), or when we’re just starting out.
The idea here is that we all have default settings — known and unknown, acknowledged and unacknowledged — and that those defaults greatly influence how successful we are and become. Having the right default setting in defined contribution plans make a big difference.
What follows are my suggested default settings.
1. The most important thing you can do is save
2. Invest you must
3. Start Passive
4. 60/40 is a decent start. Asset allocation is a really big deal.
5. Be a cheapskate
6. Tax efficient is better
7. Don’t forget to re-balance
8. Keep it simple stupid (KISS)
9. Have a very good reason to change course
10. Haste makes waste
The details are worth your time.
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