Phase One - Getting Started
Phase Two - Learning the System
Phase Three - Paper Trading
Phase Four - Trade with Small Numbers of Shares
Phase Five - Increase Share Size
The first thing that most people want to know when they start out is, “How long will it take until I am making money?”. I can't answer that. Some people are making great money after the first month, and some people never make money. That's the harsh reality of trading.
There are a couple things I have noticed through the years, that set the winners apart from the losers. The first is an ability to take things at face value and keep stops. I know how simple that sounds, but as you progress through the learning process you will find it is far more complicated than you ever imagined.
It requires humility. Not everyone can admit, “I was wrong”, without a moment's hesitation. It requires maturity, resolution, confidence, and it requires a calm control over one's emotions. Not everyone can remain logical and pragmatic when fear, greed and hope have you in their powerful grip. So how long does it take to learn that kind of self-awareness? Some children are wise beyond their years, while some people go to their graves without ever knowing who they are. It's really up to you.
The second thing that sets the winners apart from the losers is a structured, disciplined, systematic approach. They choose a method, stay focused, and stick with it. That, I can help you with. It is my hope that this education plan will offer you a guideline and help you on your way.
This plan is set up in five phases. You will need to go through each one at your own pace. How much time you spend at each phase is up to you, and will depend on a lot of things like your aptitude, how much time and energy you put into your education, and your level of self awareness. Do not progress to a higher level until you have achieved a satisfactory level of competency, or successful trading percentages at your current level.
Later, if at any time your percentages drop, you find yourself in a losing streak, or you suffer a large loss or lapse of discipline, take one step back until you have again built back up your competency and confidence. And as always, let me know if you need help or have any questions.
Shawn Wolff-Klug (aka Gimmie) firstname.lastname@example.org
PHASE ONE – GETTING STARTED
The very first thing you need to do is open your accounts, set up your trading platform, set up your charts, and start becoming accustomed to the tools you will be using. Next, you will want to get your feet wet. Start by simply observing the movement of stocks throughout the day, noting the way the market and news influences those movements.
A. Setting Up Your Trading Software
If you are serious about trading and want to be effective in a highly competitive market, you are going to need professional tools. This includes a direct-access broker that is oriented towards traders rather than investors and offers a professional-level trading platform. It also includes a market data service that provides real-time streaming stock quotes and charts, including tick charts. Minute charts are too slow if you intend to trade high-momentum news stocks. A lot can happen inside a minute.
Your broker will usually offer market data service as part of their services, but very often the charting capabilities are inadequate. You usually get what you pay for.
I use RealTick by Townsend Analytics (www.realtick.com) to provide my market data, so the charts you will be seeing in the chatroom come from that service. No, I don’t get any money or even a discount for recommending them, and yes, I realize they are expensive. We use RealTick because it’s the best.
I also use Interactive Brokers (www.interactivebrokers.com). The commissions are cheap, the platform offers a lot of possibilities for customization, and the executions are nearly instantaneous. As far as service goes, they aren’t holding your hand a lot (although they do have a lot of online seminars), but that’s not really what I need in a broker. Fast executions and fair commission prices are pretty much my priorities. Ken has several accounts with different brokers if you want to ask for comparisons.
1. Read any information and complete all tutorials provided by your broker and
market data provider.
2. Learn how to set up a Level 1 quote screen. Level 1 is a list of stocks that
includes streaming information like the Bid, Ask, Last Trade, High of Day,
Low of Day, Open Price, Total Volume, etc.
3. Learn how to set up your charts. You will find the Cat System Setup here
(If you have RealTick, I am always available to send my pages to MTrader members
and help you set that up)
4. Learn how to set up your simulator and execute orders.
B. Observing Stock Movement
1. Choose three focus stocks that have high average volume and a consistent daily
range. Suggestions: QQQQ, SPY, AAPL, AMZN.
2. Observe your focus stocks on Level 1, paying attention to the volume and price
Spend some time simply watching how stocks move, noting the pace of trading
activity and how it changes throughout the day. It will usually be very fast in the
early hours, then slow during lunch, and speed up again in the afternoon. Get a feel
for the volume changes.
Track the price activity of your focus stocks throughout the day. Watch the Bid and
Ask, and note the size of the “spread” between the Bid and Ask. Focus on the
current price in relation to the High of the Day and the Low of the Day. Note the
daily “range” between the High and Low.
3. Observe the charts of your focus stocks. Note which times of day direction changes
occurred and the size of each swing.
C. Finding Momentum
1. The market and individual stocks are often propelled by news, so it is important to
keep up-to-date. Start each day by looking for any potential market catalysts,
market-shaking news, or economic reports. You can find this information on any
financial television channel like Bloomberg or CNBC, or you can find the information
online at a financial site like http://money.cnn.com/ or http://www.marketwatch.com/
2. Most mornings around 9:45 - 10:00 ET, economic reports are released. Some of them
can create sharp market reactions, so its important to note which reports are coming
up. You can find calendars of upcoming reports at Yahoo! Finance or Briefing.com
3. For each of your focus stocks, you should be aware of any news or upcoming
earnings reports affecting the stock. You can find that information and research your
stocks at http://finance.yahoo.com/ or http://www.briefing.com/
4. Practice identifying early momentum.
Momentum is usually started by a catalyst - news. News itself however, does not
move stocks. People's reactions to the news is what will move the stock. As
momentum traders, we are simply following the crowd, watching and reacting, riding
their waves. This means we are not trading the stocks as much as we are trading
To find momentum, we need more than just a news catalyst. We need evidence
that the market is reacting to that catalyst. That evidence will be in the form of
"volume" and "price movement". We need the combination of both to indicate
A large price move with no volume means the price was manipulated and few people
are actually interested in trading it. Large volume without much price movement
means there is not a clear consensus about direction. Without both volume and price
movement together, the follow-through will be unpredictable.
Normally news comes out after the market closes or before it opens, and the
momentum will be seen in pre-market trading. So we want to look for high volume
pre-market, and a nice gap between the previous day's closing price and the current
day's open price. That is how we find early momentum, and that momentum will
generally follow through after the market opens, setting up our early trades.
PHASE TWO – LEARNING THE SYSTEM
During this phase you will be learning a system for trading. You will begin to bring structure into your observations by learning the variables that affect each stock's movement. You will begin to look for trade opportunities, entry and exit points, and learn to set stops. And you will also need to learn when not to trade, which can be one of the hardest lessons of all.
I find this to be the most neglected phase. People often jump right into trading on the simulator (or even risk money) before they really understand what they are looking for.
I know its exciting when you first get an account. You are anxious to start practicing and pushing buttons. But before you can practice, you need to learn exactly what it is you are practicing, right? Otherwise you are just ingraining bad habits. You need to learn the system, before you can practice the system. Remember, your future trading success depends on building a proper foundation.
A. Start a Journal !
1. Education Journal
If you take your education seriously, its important that you go about this in an organized, methodical, structured, disciplined way. Keep notes on everything you are learning. My journals are in paper notebooks and very messy, but I find that if you write something out in your own words by hand, it will cement it in your mind.
2. Trading Journal
As you start to look for trading opportunities, you will want to track them in a journal. This will be your most valuable resource to track your progress and figure out what’s working, what isn’t and why.
B. Learn and Practice the System
Read through each of these tutorials. If any of them are not clear, ask me and I will go over them in class, showing you charts and examples.
1. Learn the Cat System for finding direction changes.
2. Learn about Gimmie's Four-Chart Set-Up
3. Learn Gimmie's Trading System: Predictability Prerequisites, Timing,
Trade Setup (Entry, Stop, Target).
4. Learn about Pivots.
5. Learn and practice going through the Pre-Market Preparation routine.
6. Create your own "Checklist of Trade Criteria", and run through that list for every
trade you are considering.
7. Learn Gimmie’s Ten Trading Commandments. Modify them to meet your own needs
and commit to them daily!
C. Participate in Class
I find that the more actively involved people are, the faster they learn. If they hover in the back of the class and never speak up, then I don’t know what they are doing or how to help them. So try to put yourself out there and ask questions. I am always happy to go over your trades with you and help figure out where you might be going wrong. You are never bothering me, no question is too basic, and the group is very supportive.
PHASE THREE - PAPER TRADING
In this phase you will begin simulated trading, or “paper trading”. Using the skills you learned in Phase Two, begin determining entry and exit points for your trades, and recording the outcomes in your Trading Journal.
Your broker should provide execution simulation software that is identical or very close to the real thing. The more realistic your paper trading, the more you will learn from the process, so take this seriously. Do not get sloppy and make simulated trades that you would never consider if they were real. And don't get cocky. If you will not be trading a million dollar account, then don’t set up a million dollar simulated account. I also recommend keeping your records in points during this phase and focusing on success rates, rather than dollar amounts.
It is true that paper-trading lacks that element of emotion that is often responsible for early losses, but it is still the best preparation you can get before going live. You want to make those inevitable initial mistakes on paper to preserve your portfolio as much as possible. Posting your trades in the room is highly recommended and often helps add some emotion. Posting publicly adds an element of peer pressure, helping you to define your trades and keep your stops. It also allows us to help you if we can see what you are doing.
Do not overlook this phase and start off trading real money. This is a common mistake that can have disastrous results on your portfolio and confidence. You need this time to build good habits and learn to apply the methods. Go on to the next phase only after you are paper trading at a very high success rate.
PHASE FOUR - TRADE WITH SMALL NUMBERS OF SHARES
When and ONLY when you are comfortable with your abilities, feel you know the system inside-out, and are happy with your overall paper trading averages, should you move on to this phase.
During this phase you will begin real executions. Do not trade more than 100 shares to start off with. Trust me on this one. It will take a period of time and adjustment to get used to executing live and dealing with the unexpected flood of emotions that almost always accompanies this phase as you put real money on the line. Your percentages will drop off at first from your paper-trading percentages, so make sure that your paper percentages are high before you go live. After you have adjusted though, and gotten used to executing, the good habits you built up on paper will kick in, and your percentages should again climb.
I would mentally set aside an amount that you are prepared to spend during this adjustment period. Consider this part of your business start-up costs, and it will greatly relieve the pressure during this critical phase. Remember that your priority during this phase is building good habits while preserving your portfolio. If you are serious about making a living trading, this is an essential step.
PHASE FIVE - INCREASE SHARE SIZE
Once you are trading 100 shares at a high success rate, move gradually into larger shares. There will more than likely be another adjustment period with larger shares, as the emotions that come with a larger risk intensify, but the good habits you built with small shares quickly take over. Once you have accomplished this, you are on your way!