The Process of Identifying Strategies to Test

This blog is designed to help new traders and those who have yet to become profitable understand what it takes to become consistently profitable. It’s a good idea to read the Introduction to Preston’s Mentoring Blog and to watch the 01/29/20 video “Consistently Profitable Trading: It Does Exist” prior to reading this entry.

Becoming a consistently profitable trader is NOT easy, but it IS worth it. And it DOES exist.

In my last blog post I finished the Seven Steps to Profitable Trading. So now let’s start at the beginning, or at least where most people start: getting investment advice from a co-worker, getting stock tips from your sister, watching CNBC and Bloomberg, reading Barron’s, opening a brokerage account, buying stocks, etc.

I doubt it’s a stretch to say that most people start their trading careers by doing these kinds of things, and not necessarily in that order. At least that’s what I did. And it was because I didn’t know anything else but what I heard in the media and from friends and family: buy stocks, hold them and hope they go up in value. Of all the products available stocks were probably the easiest to understand, and the most accessible.

Starting with stocks is fine, and I actually recommend it for its simplicity, but this is when you really need to jump in and start educating yourself and looking at ALL the different vehicles and strategies out there. And then you need to start studying and testing as many as possible, and as carefully and quickly as possible.

When I began gathering information and educating myself in the world of trading and investing, I heard lots of, “Don’t time the market!” and “Don’t waste your time and money on daytrading or options or anything with crazy risk like that!”

To tell you the truth, it made me want to time the market, daytrade and learn options even more. But that’s just my personality.

It’s important to understand that EVERYTHING has risk. You can lose money trading any kind of vehicle or strategy. To make money you just have to find the strategies that work for you, put the right trading plans together and know your environment. Simple, right? Ultimately yes, but it takes time and lots of hard work.

Do you want to trade equities intraday, holding them from minutes to hours? Do you want to hold them overnight for longer swings, basing your decisions on chart patterns, price levels, indicators, etc.? 

Do you want to position trade, holding equities for months to years, basing your decisions on charts and fundamentals? 

Do you want to trade futures all day and all night? 

Do you want to develop automated systems?

Do you want to trade options straddles through earnings? Or do you want to hold market-neutral, positive theta, “complex” options spreads, like iron condors and butterflies, for weeks to months at a time?

These are just a few of the many choices out there. But, again, I believe it’s always best to keep it simple. Starting with stocks is absolutely fine. Just don’t stop at the buy-and-hold approach; study all the different ways people trade them.

Don’t just start reading balance sheets and listening to conference calls, start learning technical analysis and understanding candlesticks, trendlines, moving averages, etc. Study swing trading and, yes, the dreaded intraday trading too. 

I have a friend who leans toward value investing, so he helps me understand balance sheets and P/E ratios and EBITDA. It’s fascinating and every now and then might come in handy, but I lean toward swing trading and technical analysis myself. We both make money in the markets, so to each his or her own.

When educating yourself, don’t stop at just stocks. Start learning about ETFs, ETNs, futures, futures options, commodities, stock options, index options and anything you can get your hands on. Education in this industry is absolutely vital, no matter what the subject matter is.

When I learned technical analysis and options, I studied day and night. I read the material over and over again because I really wanted to fully understand the concepts. I would never have become profitable without doing this.

Paying for strategies and courses can be expensive but it can also be highly valuable education. Just remember that there are volumes and volumes of free information on the Internet too. You just have to take the time to find them.

Start seeking out trading communities and others who have more experience than you. Join chat rooms and read blogs (like this one). Read books about trading. Employ coaches and mentors.

And no matter what strategies you choose to start with, make sure you really work toward understanding the fundamental concepts of each type of vehicle and strategy. When you’re ready to test them, paper trading is a great way to start (most brokerages offer paper trading, which is trading with fake money).

But once you actually start trading the strategies in the live market your education gets some extra juice for sure. Your heart starts pumping; things are real now. And losing money is real. That’s why you should ALWAYS ALWAYS ALWAYS start with the smallest risk allocation possible. 

Even losing small amounts can be stressful, and it’s important to understand that it simply takes a while to get used to the idea of losing money. But it’s just part of the business.

This is the stage where you really lay the educational foundation of your trading career, so it’s a VERY important one. It’s best to look at it that way and keep reminding yourself of it, because it can be easy to start feeling lost and unsure of yourself. 

So make your EDUCATION the number one goal when you’re looking around for strategies to study and test. Ask yourself at the end of each day NOT whether you found that strategy or strategies that will make you lots of money, but whether you actually LEARNED something new or really started to understand a concept that may have been eluding you.

Before you know it you’ll start to feel much more comfortable with many of the essential concepts and the learning process will begin to accelerate for you.

And that will get you closer to finding the strategies that show success and match your personality. These are the strategies that you can potentially build a career on.

That’s when it starts to get really exciting. 

Get in there and learn!