Lessons from the Pros

Stocks

Preparing to Trade Live

Initially, while you are familiarizing yourself with the stock market, the computer system you will trade on, and the trading style you feel most comfortable with, it is recommended that you trade on paper – writing down where you would get into and out of a trade while watching a market window or a chart or both. This way you will get comfortable with what is happening on the screen, without worrying about actually performing a trade.

Some trading systems offer real time demo trading, however, there is a world of difference between that and live trading. It must be clear to the beginner that demo modes are for testing trading styles, practicing execution key strokes, and getting familiar with the software, regardless of whether it is receiving real-time data or not. This is for a few important reasons.

Order filling in demo trading mode is based on random order execution and does not simulate logic much less reality. To get your order delivered on demo may take more or less time than when live and, thus, indicate a filled order at a very different price level. It is very easy to cheat the demo trading system by bidding or offering into a stock that would otherwise be impossible to be delivered at that price on live mode. A trader’s decision-making skills will be radically different when real money is involved. Until you have traded live, not invested, you do not appreciate this human psychological fact.

Laptop sitting on a desk with the word strategy on it.

Demo mode is best used to:

  • Get familiar with all aspects of the software: indicators, charts, confirmation messages, settings, etc.
  • Practice and perfect the use of all execution keys, including those to change share size.
  • Observe the Level II information, the movement of market makers, ECN’s, and prints (time and sales numbers).
  • Correlate price movements on a stock with market or sector movements.
  • Learn exactly what momentum looks like on the Level II screen.
  • Observe the different types of stocks and different ways of trading based on spreads, volume, velocity and momentum.
  • Place realistic orders relevant to the current activity and velocity of price movement. Know when to use market orders and when to use limit orders. Be aware that there are many different trading simulators available, but all of them will provide perfect fills on your orders based on the prints. In reality, a market order, and/or others, may not get filled so ideally, and on a stock whose price is rapidly changing, you should allow a realistic degree of slippage in both opening and closing a position.
  • Observe chart pattern formation.
  • Practice decision-making skills and discipline.
  • Practice simulated trading with the help of the software. Try to set up only realistic trading scenarios. Keep in mind that you will have a tendency to do in live trading what you practiced while on demo mode. Keep demo trading as realistic as possible.

Practicing Execution Methods

  • Because prices change quickly on the NASDAQ, getting familiar and perfecting the use of the execution method is of prime importance in being able to close a trade when you want.
  • Whether it be the keystrokes or the Point & Click operation, execution of the trade is a paramount skill. If you can save an average of only a nickel on two trades a day, by the end of one year you would have accumulated over $25,000 (based on trades of 1,000 shares).
  • Practice the execution paths regardless of your trading style. You must know them cold.
  • Establishing Realistic Short-Term Goals. To expect to make instant money as a novice trader is unrealistic. Give yourself some time to learn your way around the trading world and test your skills. If you are patient, diligent and determined enough (and you stick to the proven rules), the market will eventually reward you. However, just like most successful people in any field, you have to pay your dues.
  • Your initial goal should be to establish a solid trading foundation through constant reinforcement of the proven trading rules. It will be the time to test your discipline, diligence and determination to succeed. The learning process in this field is not easy to cope with.
  • You must organize your thoughts and learn to control your emotions in order to think clearly, and practice sound judgment.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.