START TRADING 101 | Lesson 8
Ready For Your First Trade? Do THIS if You Feel Nervous!
Are you ready for your first trade? 🙂
You should be!
But the first trades are like everything that we do the for the first time. We are not sure if it will work and we tend to worry a lot and be a bit scared. First bike ride… first time behind the wheel.
That’s very normal.
I felt the same with my first trades. You already know that most of my first trades ended up in disaster – it was not a pleasant experience. I felt discouraged and humbled. The market had taught me my first lesson, at a great cost.
It was not only the loss of money that hurt… my pride was hurt, badly. I thought as a tech-savvy engineer that I could do no wrong. “Pride comes before a fall” the saying goes, and in trading that is very, very true.
I was nervous, uncertain about what to do, and at the same time overly confident in my abilities. That’s not a good way to start trading, but little did I know at the time.
The difference for you is…
The good news is that there is a major difference between you starting with trading and me starting.
You are starting with a system in place. And it’s not just any system – it’s been tested and proven many times over, not only by myself but by successful traders over decades.
You have spent a lot of time over the last seven lessons to get where you are now – so congratulations for your hard work. It will make things so much easier, and it will dramatically decrease your risk of having a bad start (like I had).
There is some bad news though.
A system can only help you trading if you let it help you.
If you are overconfident and constantly ignore your own trading rules, then you will lose a lot of money. Overcoming your own weaknesses can take years of effort (I have been there, and I am still learning).
And it has been the same with ALL successful traders.
Most of them spent decades improving themselves – and not their system. Every time they listened to “hot tips” or deviated from their system rules, they failed – and learned a new lesson on how to become a better trader. Usually, a very costly lesson.
So, what can you do to help yourself for a better start? Read on!
Assemble your system
First, let’s assemble your trading system into a single, easy-to-use software.
Convenience helps to use something consistently. In the lesson worksheet, I will go into more details about how to build an example trading system spreadsheet, so make sure you check it out.
I am using spreadsheet software for my trading system, and for this example, I am using Google Spreadsheets. You can use any other software, but remember that you need a way to get stock price data.
Google Finance helps a lot with that, and it’s integrated into Google Spreadsheets.
All course lessons are in a single spreadsheet file – it has 7 sections (one sheet each) in the order of doing each trade. Here are the system components:
- Instructions – that’s like a To-Do list, as a reminder how to use the system
- Trading Rules – your system rules and settings all in one place
- Shortlist – your part of the market you like to focus on
- Time Slice – the place to review a part of your shortlist, including a chart
- Candidates – a table where you list the stocks you want to buy
- Portfolio – a table of stocks that you bought already
- Trade History – a list of your completed trades for later analysis
Let’s have a quick look at each part.
This is like a very brief To-Do list on how to use this spreadsheet, especially in which order to use each sheet.
It’s a reminder on how to use the system. After a while, you will not need it anymore, but it helps to read it a couple of times.
Here you should write down your trading rules and system settings.
Settings are used throughout the spreadsheet for calculations, so make sure they are up to date. Rules are telling you what to do and what not to do.
Make sure to document if you break a rule.
That will help you to investigate later what went wrong. And trust me, things will go wrong when trading – that’s the nature of the game.
This is the list of your preferred stocks that you created in Lesson 3.
You should update it from time to time, but you don’t need to do it very often. I suggest maximum once every 6 months.
That is the most important part of the system. It’s where you decide what to buy and how much, at what risk.
In this sheet, you keep a list of candidates.
These are the stocks that you decided to buy and for which you already created a buy and stop order with your online broker.
These stocks should not show up in your time slice anymore, but they are not yet in your portfolio until you receive a written confirmation from your broker that the order went through.
Here you keep a list of all stocks that are currently in your possession.
These are the stocks where you should check about their stop prices from time to time.
Once you have closed your trade, i.e. you have sold a stock from your portfolio, it will move to this table – your trade archive.
In the beginning, it is not very useful, but once you made more trades you can analyze them and come up with ideas on how to improve your system.
It is important to have accurate data, so spend a few minutes for each closed trade to make sure you capture everything that happened. You can (and maybe should) leave comments for each.
Tips for your first trades
Your system should now be in place – that’s a great way to get started.
But what about the other part? Our built-in biases and psychological weaknesses? Every person is different and you will need to figure yourself out eventually.
But here are some tips that help to get started:
Use a To-Do list
Write your own quick to-do list… the things you need to do for each of your trading sessions.
It could be something like this:
- Download transaction receipts from brokerage
- Move closed trades from Portfolio to Trade History (if any)
- Move opened trades from Candidates to Portfolio (if any)
- Delete previous Time Slice Table
- Go to Shortlist and move new stocks for review into Time Slice Table
- Review each stock, check for buy signals
- If there are buy signals, prioritize them and select your favorite
- If your trading rules allow, create orders for your new candidate with your broker
- Move new candidate into Candidates table
- Save your spreadsheet and close your session
By following the same workflow every time, it will become routine after the first couple of trades.
It improves efficiency and saves you a lot of time!
Make a trading rules placard
It sounds a bit strange.
Make a placard? But it’s a proven way to keep you on track!
Write down your trading rules in a couple of easy to read sentences and print them out on a piece of paper. Tape it up next to your computer so you can read the rules every time you are in a trading session.
Seeing the printed rule makes it so much harder to break 🙂
And it also reminds you that you have a system in place that supports your trading style. Every little helps!
Reduce your risk settings for your first 10 trades
Losing money is part of doing business in trading.
But that still makes it a painful experience. For your first 10 trades, turn down your risk percentage that you decided upon.
This will make the first trades easier. Yes, trading fees will have a stronger impact – but that’s OK. We are talking about going easy on psychological triggers, and it’s worthwhile to start on the low side.
The question is, how low?
It depends on your system setting that you decided upon. Let’s say you decided in your trading rules that your risk setting should be at 0.5%. With a portfolio of $50,000, that would be a risk of $250 for each trade.
Turn this down to $100 per trade.
After you finished your first 10 trades and you feel confident about your results, reset it to its original settings.
Experiment with this until you find the setting you are happy with.
Watch the Market and Sector Trends
Check periodically how the entire market is moving.
Is the S&P-500 index going up? Or is there a major downtrend currently happening?
Also, how is each market sector doing in comparison to the rest of the market? How many stocks are trending up and how many are trending down?
If most stocks are in a downtrend, then it might be wise to hold back. Either wait until another major uptrend starts, or trade with a reduced risk setting.
Don’t check your portfolio all the time
Every stock price has noise that obscures the actual trend.
Price fluctuations are normal, and being in the negative for newer stocks in your portfolio is normal.
But if you check every 5 minutes how your portfolio is doing, all you do is stressing yourself up over noisy price wiggles.
There is nothing you can do about fluctuating prices.
Your aim is to catch a major trend, which takes time to develop. I do not check on my current portfolio more often than once per week, sometimes I leave it for 2-4 weeks unchecked.
The less I do, the better I feel and the better the system performs. Usually being ignorant is dangerous. But if you have a system to take care of things… then ignorance is bliss and helps to reduce stress.
This is often a difficult thing to accept – especially for someone who spent a lifetime of sucking in more and more information, becoming a true expert in his/her field. For those of you who believe that more information is better than less information, think about it this way:
It’s not more information. It’s just more noise.
And that usually does more harm than good.
Don’t talk about your trades, ignore rumors, tips, and business news
Everybody who is interested in stocks just loves to talk about stocks.
And that’s fine, it is fun for some time. However, I have never made any additional gains by listening to such chatter.
The few “hot tips” about a “sure-fire up-trending stock” I put into action only made me lose money.
And the same goes for rumors and business news.
Why is such information usually not helpful? Because it feeds on the same thing that makes your portfolio value fluctuate – background noise.
News companies make their money by churning out “information” (which they call “news”) – every day, every hour, every minute. And how often can you say, “it’s a long-term uptrend” to your readers without making them feel bored?
The least stressful way to do a trade is to make your decision, create the orders and then let the system do its job.
There is no need to interfere – in fact, interference usually results in making matters worse. So why discuss it or keep reading up more about it? Once you made your choice, move on.
There is always another trade coming.
Last, not least… be patient.
Rome was not built in a day, and neither will be your wealth through trading.
It is always possible to have a series of losing trades; in fact, it is highly likely that this will happen. That does not mean there is something wrong with your system – maybe the market is in a downtrend, or maybe it’s just bad luck.
You need to stay in the game to capture the big winning trades.
Changing your system frequently or stopping to trade altogether to wait for “better times” is usually a mistake – because nobody can truly know when such better times actually start!
If you feel too much pressure because of a series of trading losses, reduce your trading frequency or reduce your risk setting, or both.
But don’t stop trading unless it’s an emergency – for example, if you are in a situation that makes you feel like being on an emotional roller coaster.
Why would you want to document your trades?
Because… so you can figure out why you screwed up.
Losing trades are inevitable – period. So, don’t feel bad about it – it’s nothing personal, just business. But that does not mean that there is no room for improvement.
There are two ways to improve performance:
- Make fewer mistakes (i.e. break fewer rules of your system)
- Tweak trading system parameters
The first one is easier to spot than the second one, though it’s not easy to fix. But before fixing things you need to know what’s broken.
Trading is not about conquering the markets – it’s about conquering and understanding yourself. And the first step towards becoming a better trader is to recognize your mistakes.
You have set your trading system rules by now. There are many ways to circumvent them, for example:
- Buying more stocks than your risk setting allows
- Not setting a Stop Price
- Buying more often than your rules allow you
- Selling prematurely, i.e. not letting your trailing stop close the trade for you
- Shifting your stop price downwards, accepting higher potential losses
- Buying stocks that are not part of your shortlist
- … the list is endless!
And there are much more.
Why do we tend to break our own rules?
Usually, because someone talks us into it (“hot tip” from a friend who heard “things” about a company), or because we are stuck with belief about this trade (“it went down, but it will recover for sure”).
It happened to me, and it will happen to you. That’s OK. But I will ask you to do ONE thing:
Usually we know that we are about to break a rule… so if you know, just commit to it.
Be honest with yourself and mark this trade as one where you accepted to break a rule. That’s all. Take responsibility for doing so – after all, you don’t need to admit it to anybody else but yourself.
Write down what you did. Say “Yes, I broke a rule”. In the comment, describe what you did differently from what your system suggested to you.
I am not telling you to do that to torture yourself or to stop yourself from doing it. Far from it.
Breaking your trading rules is like testing the water; try and error is a proven way to learn new things. And after doing it many times, you will understand more about yourself and your trading system, e.g.:
- Breaking that rule is costly and you should stop doing so
- Breaking that rule improved performance and you should adjust your trading rules, i.e. make it a new rule
Either way, you need data to know what you did differently. Take the time to document so you can profit from it (either by making more money or by reducing your losses).
Having that data allows you to analyze what happened (good or bad) and adjust either your behavior or your trading rules.
Trading wisdom of market wizards
I will finish this lesson with some timeless advice from market wizards.
Memorize them and use them to your advantage. It’s a collection of DO’s and DON’T’s that these traders learned over decades of trading (usually at great costs).
Follow the Trend
“The trend is your friend”, goes the saying. When everybody is selling, it’s not wise to buy, because nobody knows how much lower prices can go.
Let Winners ride and sell off losers
Only pricing and time will show if your decision to buy a stock was a good decision.
If after some time the price does not go up or is in a decline, don’t waste your time and money. Sell and move on. If prices are increasing, don’t sell prematurely. Make the most of the trend.
Don’t average down
Means, don’t throw good money after bad.
Buying more of the same while losing money means losing more money. Instead, bail out and look for a better trade.
Always put a Stop Price
Have something in place to limit your losses and stick to it.
Keep your risk below 2% of total portfolio value
Risking more than that makes you a gunslinger – and taking too high risks is a sure-fire way to get you out of trading, by going bankrupt.
Prices are never too high to buy
Strong trends can push prices to levels that have never been seen before.
A price is above its highs does not mean that it cannot go higher (just think about Apple stocks).
Likewise, a stock that is falling in price does not mean it’s cheap and a good buy. It could keep falling for a long time and never recover to previous levels (just think about Blackberry).
It’s the end of the course – and a new start for you
Congratulations, you have made it to the end of the Trading 101 course.
While it is the end of the course, your journey with trading has just begun. I encourage you to jump in and start with trading. Take it easy and keep your risk settings low to get started and see how it goes.
Trading is a life-long journey of learning new things, especially about yourself. It has its ups and downs but it is always exciting.
Once you finished your first 10 trades, send me an e-mail and let me know how things are going. I love to hear back from you.
And one last thing: I prepared a trading system template with Google Sheets for you. Check the worksheet on how to build it and adjust it to your own needs.
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Get the Lesson 8 download:
Click on the image or button below to get the 20-pages PDF file.
In this lesson worksheet I show you in detail how to build your own trading system spreadsheet:
- Create your trading rules
- Shortlist your favorite stocks
- Time Slice Review and Price Chart
- Candidates List
- Portfolio Monitoring
- Trade Archive