Prepare to Trade
by Mike Mc Mahon of

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 on demo-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 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.

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 (Market Maker window), 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 in 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 realistic relevant to the current activity and velocity of price movement. On a stock, whose price is rapidly changing, allow a realistic degree of slippage in both opening and closing a position. Know when to use Market orders and when to use Limit orders.

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 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 a 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 business 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.

Beginner Trading Scenarios

What to do when:

- You bought the wrong stock. Don't sell it just yet. Quickly make an assessment (you might just make money!) to determine if the trade is going for you or against you. First, determine the spread and possible exit points. Check the Prints and see if you are getting appropriate signals. Regardless, if it is going up, let it run, offer into the momentum and take a quick profit. Consider it a gift. If it is not going your way, exit quickly. Do not waste time rationalizing or justifying the trade

- The computer system goes down. No system is immune to occasional bog-downs. Whether the sources of the problem is with the brokerage, the data source or with the entire NASDAQ itself, avoid trading until it is fixed. If you had an open position, do not panic. You will not only cloud your judgment, but you may also make a fool of yourself. Know what open positions you have and write them on a piece of paper. If you wish to exit that position, write down a specific buy or sell order (stock symbol, market or limit order, buy or sell, price and share size) and hand it to the licensed broker in the office if you are trading in an office, or phone in the order execution.

- You are showing a substantial profit and don't know what to do. Believe it or not, many people have trouble closing-out a profitable trade. It is a greed problem. If you are showing a large profit and you are a beginner, you got lucky. Go ahead, take the profit! To wait, just to see the profit disappear, is a classic beginner's mistake. Don't end up saying, "I should have sold when I was up".

- The trade is not going in your favor. There is only one thing to do – Get Out! You can't win 'em all. As a reminder, a big and costly loser usually starts-off as a small one. Generally, if you are out more than one point you are in real trouble.

- Somebody told you to short this stock. Do not act upon it! Observe and see what you can learn.

- You are in a situation where you cannot concentrate. Do not trade.

- You have more than 3 losers in a row. Step back, relax and see what you did wrong. Avoid trading to "make back the money." Trade one at a time. A new trade now should have little relevance to your last trade.

- You have 60 tickets in the middle of the day. You are over trading. Practice your decision-making skills with quality decisions, not how many trades you can fire-off. Even after becoming an ace at execution skills, you must continue to practice and learn because as previously stated, the financial world is always changing. Keep ahead of the game and your trading will be profitable!

Online Trading Academy - Professional Trader Education Article by Mike Mc Mahon, Lead Instructor - OTA

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