"The Path to Becoming a Trader "

Neil A Costa

I recently received a fax from a gentleman who is keen to learn how to trade, however he did not wish to waste time and money doing so. He clearly understood that hard work and study are prerequisites for success in any field, but also understood that trial and error can be an expensive approach when starting out on such an important journey.

If you are in the early stages of your trading journey, my response to Marcel may be of assistance:

Dear Marcel

Thank you for your fax.

You ask:

If you had to start in this field, what do you feel are the best steps to take from getting the first information to the start of the trading. I mean with the books, how to develop a system (or to buy one), where to get the information about the markets and to start the first real trade.

In essence, you are asking for an efficient and effective path to becoming a trader.

Marcel, I have spent more than $100,000 buying books, courses, videos etc over the last twenty-five years. Most of it was wisely spent - some not so. Also, when I started, it was a very different world. Today, you can undertake courses that simply did not exist then, and they can give you much of the knowledge you need in a very short time. This can allow you to trade sooner, and thus start to generate profits (and manage risk) sooner. There is an opportunity cost associated with waiting to find the perfect system and/or with trading an inferior system.

There are a number of decisions that you have to make before you get too serious about learning to trade. These include deciding on your likely trading vehicle and your trading time frame.

Trading vehicles include stocks, futures, options and warrants. Trading time frames can be intraday, daily, weekly or monthly.

My advice to people starting off is to trade the stock market, as your chances of becoming a profitable trader are much higher than for those trading the derivative markets, and to use a weekly time frame. Colin Nicholson, in his excellent presentation at the October 2000 Australian Technical Analysts' Association (ATAA) Conference, outlined research which showed that a shorter time frame can reduce your overall profits due to the impact of the extra transaction costs.

Professional Association(s)

One can gain an enormous amount of knowledge for a very small outlay by joining an association such as the ATAA, the Australian Investors' Association or the Society of Technical Analysts of New Zealand. Such not-for-profit associations provide members with an enormous amount of knowledge via presentations, videos, journals, and newsletters.

Books

A couple of years ago I decided to put the details of my investment library on a data base. I did this after I had bought the same book twice - I had purchased more than 900 books, and I was starting to forget whether or not I owned a particular book.

I suggest you start a list or a simple data base of the books you buy and read, and always make a summary of the key points you read. It is the making of this summary that will assist you in the learning process. I still possess summaries of trading books that I made 25 years ago!

Also, keep in mind that many books cover similar territory, so when you are starting off, it is wise to read one or two general books, and then some more specific books. The following are some excellent and very readable books to start with.

Le Fevre, E., Reminiscences of a Stock Operator, John Wiles and Sons, 1993 (first published in 1923.)

This book is based on the life of the legendary market master Jesse Livermore. (See the article on www.marketmasters.com.au under 'Trading Articles'.) It is written in the form of a quite exciting story, but contains a mountain of market wisdom. I know of no other book that is more widely quoted in trading and investment circles.

Schwager, J.D., Market Wizards, New York Institute of Finance, 1989.

And

Schwager, J.D., The New Market Wizards, HarperBusiness, 1992.

• They ALL have a proven trading method;
• They have the patience to wait for their system to give them a signal, or they do nothing;
• They are prepared to work hard and study;

And so on.

Having read those introductory books, I would read one or both of the following. These will give you an excellent overview of technical analysis and trading:

Krastins, I., Listen to the Market, McGraw-Hill Book Company, Sydney, 1991.

Elder, A., Trading For a Living, John Wiley, New York, 1993.

Stock Market Books

Gann, W.D., Truth of the Stock Tape, Lambert-Gann Publishing Company, Pomeroy, 1923.

Gann, W.D., 45 Years in Wall Street, Lambert-Gann Publishing Company, Pomeroy, 1949.

Books on the Psychology of Trading

It is wise to read at least one good book on the psychology of trading before commencing to trade with your own money. My three favourites are:

Bernstein, J., The Investor's Quotient, John Wiley and Sons, New York, 1993.

Douglas, M., The Disciplined Trader: Developing Winning Attitudes, New York Institute of Finance, New York, 1990.

Stanton, H., Let the Trade Wins Flow (Self published - phone 61 3 6225 1910).

Other Specialist Books

Once you have a clearer sense of direction with regard to the trading vehicle(s) you are going to use, and the types of chart you will use, you can then read some books that go into greater detail on these topics.

For example, if you decide to use candlestick charts, you may care to read:

Bedford, L., The Secret of Candlestick Charting, Wrightbooks, Elsternwick, 2000.

Stockmarket Courses and Seminars

There are courses and seminars on the market that can give you an excellent market education and can teach you effective trading strategies. Some courses are outrageously expensive and these should be avoided - at least initially. I have paid big money for one or two courses, and am very disappointed with the value for money I received.

I have yet to see any evidence to suggest that the more expensive stock market courses (upwards of, say, AUD$2,000) are any better than the less expensive courses. Many include bells and whistles such as data and software, but when you isolate the price of these items, they are usually much more expensive than if you had purchased the data and software separately yourself.

An excellent course on technical analysis is that offered by the Securities Institute of Australia (SIA). Details of this course can be found at www.ataa.com.au.

The SIA course gives students an excellent grounding in technical analysis. It does not, however, give a specific trading methodology.

It will probably come as no surprise to find that the course that I recommend is the one that I wrote - Stockmarket Master. It is the result of an enormous amount of research and has proven to be very popular. For more information on Stockmarket Master, go to www.marketmasters.com.au, and see 'The Secret to Making Big Trading Profits', or contact me and I can send you a letter which outlines the course in detail. David Fuller, the keynote speaker at the October ATAA Conference in Sydney described one stock selection method taught in the course as "an explosion waiting to happen" and mentioned that the other one is an excellent way to select stocks which are "likely to lead an entire bull market".

The following are people, listed in alphabetical order, who regularly conduct stock market trading and investment seminars and/or technical analysis seminars that I consider to be of a high quality, based on the feedback I have received:

Louise Bedford (Candlestick Charting; Options Trading)

David Fuller

Dan Gramza (Candlestick Charting)

Colin Nicholson

Dr Harry Stanton (Psychology of Trading)

Garnett Znidaric (Preparation of a Trading Plan).

(There are no doubt many other good presenters, however I have heard nothing but excellent reports about the five presenters listed above.)

Software

If you plan to trade the stock market, you need software to assist you with stock selection and trade management. The key to making money trading any market is to find a strongly trending market. In Australia alone, one has a choice of more than 1,200 stocks. As a consequence, it is not difficult to find strongly trending stocks most of the time.

Realistically, only a fool with a great deal of spare time would attempt to hand chart 1,200+ stocks, so some form of software is highly recommended. Most excellent software programs sell for less than AUD$700.

Three very popular programs include Market Analyst II, MetaStock and Insight Trader. I have never used Insight Trader, but it was developed by Dr Bernard Chapman - a person for whom I have the greatest respect. MetaStock is excellent. I have, however, paid for MetaStock many times through upgrades over the years! At this point in time the software I recommend for someone staring out is Market Analyst II - mainly because it is easy to use, very powerful and the upgrades are free. Also, the developer has been very willing to add indicators used in the Stockmarket Master course to the software.

Conclusion

Marcel, if I were interested in learning how to trade today, without spending enormous sums of money or paying a huge opportunity cost by waiting until I have read hundreds of books, I would:

1. Read a few of the books that I recommended.
2. Become a member of my local technical analysis association.
3. Consider purchasing a proven trading system - NOT a black box system. (Designing and trading your own system when you lack knowledge is the trading equivalent of building and flying your own airplane based on the reading of a few books. You risk losing a great deal if you get just one important detail wrong.)
4. Once you are trading and generating consistent profits, consider undertaking the SIA's technical analysis course. This course contains an enormous amount of distilled wisdom and is a very efficient method of getting a broad, yet detailed, market education.
5. Finally, remember that your development as a trader is an ongoing journey.

I wish you ever success with what, I am sure, will become a most enjoyable and rewarding journey.

Kindest regards

Neil A Costa

"For more information on how you can maximize your trading profits while strictly controlling your risk, click here..."