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The Trading Teacher
When I studied the principles of investing
in university, I was taught that the price of a share reflected the
value of the company. With fundamental analysis, there are many methods
on how one can analyse the financial statements of companies to find out
whether a share is a good or a bad investment. You can conduct
horizontal and vertical analyses on standardised financial statements,
which are just fancy terms for comparing numbers. You can calculate
certain financial ratios to get a better understanding of a company’s
liquidity, working capital management, its ability to remain in business
over the long term, and its profitability.
I applied these concepts when I started trading the stock market. Soon I
found that if I wanted to trade shares in a timeframe of less than three
months, decisions based on these analyses were not useful. I did not
want to buy shares only to receive dividends. I wanted to trade for
capital gains.
I was dissatisfied with my knowledge, the tools and the methods that I
had to trade the markets. With my desire to trade a timeframe shorter
than three months and my strengthening belief that emotions greatly
impact on trading, I began to search for different approaches to buying
and selling shares.
I went back to one of my textbooks in university. I wanted to know how
else I could analyse the markets. From the passage I read, I learned
that one can analyse the markets in one of two ways: fundamental
analysis and technical analysis.
I bumped into a newspaper ad one day for a trading seminar. While
reading through the ad I saw the words: technical analysis. An expert
trader was going to speak on the exact topic I was interested in
learning. It was a free seminar and everybody was welcome to come along.
So I called a friend of mine and I asked if he would be interested in
attending this trading seminar. He was.
The seminar was organised by a business selling trading courses: courses
to instruct people on how to trade the share market. When we arrived, we
were led into a small room. There were about thirty people. The
spokesman was apparently a veteran trader who wrote two books on
trading. Let’s call him Bauer for the purpose of this article. Bauer had
a very strong presence. He was a huge, tall man with a clean-shaven
head.
I was on the front row seat trying to listen and understand every word
this man said. It was his teachings that planted the seeds of how I
eventually grew as a trader over the years. Many times, I heard his
voice in my head, reminding me of the lessons I learnt from his books
and the lessons I learnt from him that day. I will try to enumerate the
lessons I learnt from this man to help you the way they helped me.
This man had my attention from the very beginning. “The share market is
a game where people try to steal money from other people. That is the
objective of the game and it is legal”, he began. I wondered what the
professionals in Wall Street would have thought about that statement if
they heard it. I smiled. I liked him already.
He continued: “If you are going to join this game, you are essentially
given permission to steal money from other people and in exchange, you
are okay with them stealing your money also. Some of the brightest
people in the world will be playing with you. Therefore, if you are
going to war and fight an army with real weapons, you better make sure
you do not go there with a plastic gun.”
He said that people rush to the markets to lose their money. It sounded
laughable but I guess it was the only conclusion one can draw from the
fact that most people begin trading without sufficiently preparing and
educating themselves. Of course, most of us do not put on a trade with
the hope of losing our money; however, that is what we are effectively
doing when we trade without adequate preparation.
“They just cannot wait to lose their money. They do not bother learning
about the market first. They think it is easy. Most people know that
they need training before they can fly a plane or perform surgery, but I
do not know why they think it is easy to make money trading”, he
exclaimed. He was quite emotional about it.
“Trading is hard”, he declared. Only about 5% of people know how to
trade profitably. And so the probability of finding someone else who
knows what they are doing is very, very small. “Do not rely solely on
the advice of your brokers, your fund managers or whoever else. Your
best hope for success is to educate yourself. The sooner you do that,
the better off you’ll be.”
“When it comes to buying and selling shares, there is no such thing as
investing. What people normally refer to as investing means long-term
trading to me”. When people hold on to their investments for five or
more years with the intention to sell later, then all they are
effectively doing is trading…just with a longer time frame.
“Do not buy shares solely for the dividend payments. They offer you
measly rewards”, he said. “Do trade only with the purpose of making
money from capital gains. Buy low, sell high and that’s how you should
make your profit.”
At the time, I was juggling between the concepts of short-term trading
or investing for the long-term. I did not know whether I was taking the
right approach by attempting to make short-term profits. He made his
stance on the matter strongly.
He asked us if we knew what drove prices up or down. Remembering what my
lecturer said in university, I responded, “the price moves up and down
close to the intrinsic value of the share”.
He turned his attention to me and asked, “What share are you trading?”
“XYZ (I changed the name for the purpose of this article)”, I replied
quite happily. Perhaps I could squeeze a tip or two from him about the
stock.
“Do you know what the intrinsic value of XYZ Company is”, he asked.
I nodded my head sideways and muttered, “no”.
“I’ll tell you what the value of XYZ is… it is zero!” He barked.
I was taken aback by his response. Zero? Then what are we paying money
for when we buy a share? I thought. Then he clarified himself.
“Price is only a perception – it is people’s perception of what they
think the value of the share price is”.
“The key to success in trading is psychology”, he continued. Psychology?
I thought. How did psychology get involved in this? “The stock market is
like an opinion poll. It is a measure of what people think is going to
happen. If they think the price will go up, you will see an upward
movement on the chart because there are more buyers so the sellers
increase their price because some of these buyers are willing to buy at
higher prices”, he explained.
He then used an example to explain a typical trader’s behaviour when he
trades without a system. As he explained it, I recognised my own
behaviour in his demonstration.
This was all a revelation for me. When I was buying and selling shares I
wondered what type of people were on the other side of the trade because
collectively, they were pretty smart. Now I know. It was people like
Bauer who were on the other side of those transactions, doing the exact
opposite of what I was doing, using similar methods like the ones he was
using. They were looking at the share market with a philosophy and an
approach that were completely alien to me. Traders like him were making
all the money and traders like me were losing.
I shook my head in disbelief that other people saw things the way they
did. I felt excited knowing that there was another alternative, another
approach in analysing the markets.
“What you need, is to develop your own trading system.” He exclaimed to
everybody in the entire room. “Without a trading system, you will fail.
I guarantee you. This trading system must be something that is suited
for you and you only. Even if I give you my trading system I am certain
that you will fail to make money, because my system is not designed for
you. It is designed for me. That is why you need to learn how to use the
tools and acquire the skills needed to be a trader”.
I accepted his advice without fully understanding this concept of
matching a trading system to suit the trader’s own personality. It
lingered in my mind for a long time. The wisdom of his advice became
apparent to me as I slowly learnt more about the nature of trading.
Bauer diverted our attention to the charts on the screen projected from
his laptop. All I saw were lines, curves, rectangular boxes and more
squiggly lines. The tools of a professional trader: I thought. I was
being shown the tools that my market ‘adversaries’ have been using to
‘clobber’ me with all this time. My heart was beating faster than usual.
I was in awe. I wanted those tools.
I asked Bauer what program he used to analyse the markets. He told me. I
also asked him how many indicators he used. I had read enough about
technical analysis by that time to know that technical analysts use
indicators to analyse share prices. There are many indicators to choose
from so I wanted to know how many of those are used by professional
traders. He started counting his fingers. ‘Seven’, he said.
I think many people there had not really read up on technical analysis
but I had done my homework and by that time, I was pretty much the only
person in dialog with him, asking him questions. I wanted to gain as
much knowledge and wisdom he was willing to give me.
Then I heard one of the most important lessons I’ve learnt which
minimised my losses during my early years of trading: “Trade so small
that it is almost a waste of your time. Assume the next trade is going
to be the first out of a thousand trades you are going to be making in
your life. Even though your profits are smaller, your losses are smaller
too. There is no need to rush. Do not worry about getting rich too
quickly.”
He was suggesting that novices like me should trade using small position
sizes. That means to buy small number of shares at the start. I was
intrigued. I did not know a person should trade that ‘small’.
Eventually, the seminar ended. I grabbed the booklets and brochures
given out by some of the staff. In one of these brochures was the name
of the program he uses. They were selling the software with the courses
they were offering. I could not afford the entire package but I knew I
had to buy the same charting software Bauer used. I decided to learn as
much as I could about how to use charts and graphs to analyse the
market. I needed to develop my own trading system.
As for my friend, he said he had a car loan to take care of first. He
would look into trading shares later when he had a little more money to
set aside.
A couple of days later, I got a call from the organiser of the seminar,
telling me that based from the questions I had been asking that night, I
was the type of person that would most benefit from their education
package. Bauer was asked to demonstrate the need for trading education
because he traded the markets. In the process, he was selling the
courses well. Bauer seemed knowledgeable and experienced. He has
enlightened me and probably several other people in that room about how
much there was to learn. I was sold. I just could not afford the courses
at the time but I wanted them so badly that I asked the sales person on
the other end of the line if I could work for them in exchange for the
course.
I did not get to do the course but I bought the software from a
different distributor at a cheaper price. I also bought the two books
Bauer wrote. I figured that I could acquire the skills and wisdom
through self-education. I learnt a lot from those two books and from
using the software. Having that opportunity to attend that seminar was a
‘gift from the heavens’, as far as I was concerned. Wherever you are,
Bauer, I thank you. You – and others like you -- have made me recognize
the value of passing on knowledge and experience for others to follow.
About the Author: About The Author:
Marquez Comelab is the author of the book: The Part-Time Currency Trader
. It is a guide for men and women interested in trading currencies in
the forex market. Discusses analysis, tools, indicators, trading
systems, strategies, discipline and psychology. See:
http://marquezcomelab.com His
other articles are also published at
http://thefreedomtochoose.com
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