Every now and then I am asked by a would-be-trader about the best ways of learning about trading and where they should get started. The internet has its advantages and unfortunately disadvantages where there is so much information (good and bad) that it is difficult to know where to start and where to not be ripped off. There are literally thousands of courses available to beginners to learn how to trade with some even selling the premise of trading successfully with less than an hour’s work per day.
I am sorry to say but you can’t be successful at anything for less than 1 hour a day. Clearly my measure of success doesn’t equate to others.
For me though it’s hard to go past some basic information (a cheap book or free content on the internet) and then as they say in sport “getting in the game”. Any experienced trader will tell you that success, especially trading for a living, is just as much about controlling your emotions as it is about good analysis and research.
Some initial paper trading can be useful to master the art of analysis and research to see how well your predictions perform. But there is a huge difference between being a great analyst and being a great trader, both have completely different skill sets. That is why investment banks and hedge funds employ two entirely different teams to execute both tasks.
I have seen it myself first hand within investment banks where great analysts don’t possess the skills to execute their predictions. While their eventual predictions may ring true, the course on the way to those eventual predictions is littered with volatility, market gyrations, emotional stress (good and bad), and economic swings to name just a few. Having the skills to deal with all those issues when there is real money on the line is what turns good analysts into great traders.
Learning those skills unfortunately cannot be learnt or taught with fake paper trading. You need real valuable paper – money – on the line to learn and understand your own emotions and how to deal with them, particularly when your prediction is being tested by market volatility. Every trader experiences times when their own forecasts and expectations for a trade are steering off course and the questions of doubt surface and the difficult hurdle begins of what to do next. Do I sell my entire holding? Do I reduce? Do I buy more and average down? Do I exit and attempt to buy back in at even lower levels? These are just a handful of questions that appear when a trade is heading in the wrong direction. Just as many and difficult ones appear when the trade is going the right way – where do I sell? Do I buy even more? Should I take profits on a portion of my holding and at least lock some profits away? Could the trade perform even better than initially thought?
The way a trader responds to these questions and the ultimate actions that follow determine how effective the trader is. Unfortunately paper trading and the potential for hypothetical losses don’t create anywhere near the same emotion that the risk of losing real money does, so traders need to start trading as soon as possible to develop the necessary mental and emotional strength great traders possess.
It doesn’t matter how many courses you have completed and how many dollars you have spent in the process of learning the art of trading. Until you get in the game you can’t assess how good a player you are. In theory and with hindsight everyone is brilliant.
It reminds of an experiment that was once conducted in motorsport to see if an above-average driver was able to attack one of the most feared corners on the Laguna Seca racetrack in the USA (known as the corkscrew) as he was able to do on a Sony Playstation game. This particular section of the racetrack is known the world over for its undulation and turns and takes a great deal of commitment to successfully complete. The driver had no problems completing the course and this particularly difficult section on the video game in a stunning time. However, with the same car (as in the video game) the same driver could not even come close to setting the same time as the video game and regularly spun during his tackling of the “corkscrew”. The fear of crashing plus the g-forces created through the “corkscrew” in real life were overwhelming that his concentration was lost mid-corner and on most attempts he doubted whether he would be able to complete the section at the speeds he was meant to be travelling at. In essence the video game was nothing like the real world because in the video game, there were no risks.
Traders don’t need to risk their entire savings to experience the emotional swings that traders need to overcome and develop sound mental strength. But it does need to be enough that pain is felt when mistakes are made but not so much that you lose your shirt.
Trading is a game you can’t learn successfully from the sidelines. I believe beginners learn more in a month trading a small pot of $10,000 then they will spending the same amount on a six-month course. As they say “practice makes perfect” and without practice you have no chance of even coming close to perfect.