Successful trader and best-selling author Leon Wilson knows how to make a living trading on the sharemarket. He also knows that because trading requires discipline, time and self-education, 90 per cent of those who attempt it will fail within two years.
In concise and clear language, The Business of Share Trading, second edition, shows how you can take control and profit from an active sharemarket portfolio. From developing a plan and financing your capital investment, to setting up a home office and keeping accurate records, this newly expanded edition offers step-by-step guidance to all aspects of running a successful trading business.
Updated to reflect the changes that have occurred in the industry over the past decade, the Business of Share Trading contains everything you need to know about:
Fundamental, technical and combination analysis
Dealing with brokers, data suppliers, ISPs and information sources
Trend trading, break-out trading and reversal trading
Trade entities and exits, position sizing and stop-loss management.
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Before we race off and spend our hard-earned money on the best, flashiest whiz-bang software, sign up for a live data-feed and send off a fax requesting the latest Ferrari price list, we need to sit down and take a reality check. Most books dedicated to trading the markets only cover the strategies and processes involving the act of actual trading. In my opinion, this is of secondary importance when first starting to delve into the stock market and its potential. People first need to discover if they are genuinely compatible with the beast. You would not give a moment’s thought to becoming a professional fisherman if you suffered from chronic sea sickness, any more than you would become a high-wire walker if you were scared of heights. When it comes to the stock market, most people charge in head first, never considering the consequences and possible ramifications of their actions. An emotion called greed can be blinding at this point in time.
The sad fact is that most people are not psychologically or emotionally capable of dealing with the everyday rigours of the stock market. For these people, the chance of successfully surviving long term in the marketplace is virtually nil. In nearly all cases, this fact is usually discovered only when their trading account has a zero balance, or their partner is living back at home with Mum. People need to be brutally honest with themselves: strengths and frailties need to be evaluated fully prior to embarking on the journey. Ask your partner for his or her honest assessment of how they think you would manage long term. You must be realistic about yourself and your personality and, if appropriate, elect to place your money in a managed fund rather than cruise into the stock market armed only with delusions, misguided hope and an overzealous ego. The stock market does not have free trial periods or money-back guarantees. There are no medals for being the world’s fastest bankrupt. For accomplishing such a dispiriting goal with zeal and tenacity you will receive a small mention in the public notices, though it is probably not the recognition you are looking for. The mental torment of losing an entire life’s savings can be insurmountable for many people.
My intention here is not to scare you away from the stock market — quite the contrary. What I am endeavouring to do is encourage you to examine the stock market as it really is, and not as it is sometimes portrayed by those who have little factual understanding or real-time involvement with it. Looking at the stock market through rose-coloured glasses will be fatal to your finances. You have to be realistic not only about the market but, even more importantly, about your own personality. You and you alone will make all the decisions, and only you are responsible for them.
If you are indecisive or are unable to admit or accept you have made mistakes, then this is definitely not the investment path for you. The market will not wait for you while you make up your mind. It is not your partner’s fault if there has been an 80-point drop and you are still holding stock, any more than it is your broker’s. The responsibility for your market trading activities rests solely with you. This is one career where blame cannot and must not be allocated to someone else. If admitting to, evaluating and acknowledging mistakes is not really your style, then disaster is imminent.
People who survive in the stock market long term analyse their successes and their failures to the same degree. One is enjoyable, the other is not, but both must receive similar degrees of scrutiny. Read the following list and tick either ‘Yes’ or ‘No’ beside each character trait. If you cannot tick ‘Yes’ for all of them, or genuinely believe you can’t change your line of thinking to score a ‘Yes’, give it away here. Put your money in a managed fund and sleep easy.
Questions for you
Can you self-correct? Yes
No
When mistakes are made, you are the one who must analyse where it all went wrong, and you are the only one who can implement the correct solution.
Are you disciplined? Yes
No
Records must be kept for taxation purposes, a trading plan must be stringently adhered to, and comprehensive details of trading activities must be kept in order to evaluate current and past performances.
Are you self-motivated? Yes
No
There is no-one to drag you out of bed on a cold morning and no boss telling you to examine the latest trading journal. If trading is to be your business, it must be treated as such. You have leisure time only when you are not required at the office.
Can you manage consistent failure? Yes
No
All traders experience periods when nearly every trade entered turns against them. This is an unavoidable element of trading.
Are you confident? Yes
No
Are you a person whose confidence can be easily sapped? Trading requires confidence in your own ability and the systems you have in place.
Do you have the ability to learn from others? Yes
No
Reading books and attending trading seminars are the easiest ways to expand your knowledge base. If you are one of those people who reads two books and becomes an instant expert — yes, the dreaded ‘know-all’ — you must mark this question ‘No’. (Better still, ask your partner to answer this one on your behalf.)
Are you focused? Yes
No
Every time the sun shines, do you spend the day peering out into space dreaming about the beach and your new surf rod? You must be very focused and single-minded when trading the market. You can worry about the latest tides and phases of the moon when your office is closed.
Can you manage stress? Yes
No
The markets can cause plenty of this. For instance, the 2008 global financial crisis (GFC) caused incredible volatility and major price corrections. Your portfolio can be decimated in minutes and you must be able to act clearly and rationally in such situations, even if your heart is racing.
Are you a realist? Yes
No
Both pessimists and optimists will eventually go broke. You must be realistic about the market and its present path, the appropriate actions you need to take and the income you can realistically expect to receive from your activities.
Can you leave your work at the office? Yes
No
Even though as a trader you will work from home, treat your workstation as your office. You must be able to give yourself and your partner an opportunity to discuss issues other than work. Your partner should not suffer just because you had a lousy day at work.
Can you accept full responsibility for your actions? Yes
No
Some people have a tendency to blame someone or something other than themselves for every disaster and negative occurrence that affects their daily lives. By allocating blame to someone or something else they delude themselves into thinking the onus of responsibility rests with a third party. If this is you, then you need to lose this mindset immediately. The upside is that you receive 100 per cent of the accolades when you get it right. Responsibility must be accepted as a full package when trading — you cannot pick and choose where liability sits.
Can you survive without people contact? Yes
No
Trading can be the loneliest business on the planet. Do you crave people contact or need a hectic work environment and office chatter to function at full throttle?
Do you freeze or procrastinate under pressure? Yes
No
If you have a tendency to freeze or procrastinate when the pressure is on, then give it away now. Trading is often easy and well defined by trading rules; however, things can and do go pear-shaped, and on a semi-regular basis. You must be able to act promptly and in accordance with your trading plan, regardless of what is unfolding around you.
For those of you who glossed over this checklist — or, worse still, skipped it completely — I am disappointed. The honesty of your self-appraisal today will be directly reflected in your bank balance tomorrow. If you think that this task today is too painful, then try to imagine how you will feel when it has all gone down the gurgler because your ego got in the way and you didn’t deem this process necessary. You will have to face reality at some point in your trading career.
All traders must face the inevitable. This is a condition of your rite of passage to successful trading. You can face it now or in the bankruptcy court later. It might as well be today, while all of your funds are still intact.
Now that you have assessed your own personality, you need to consider what you are up against — the dreaming that takes place when you initially discover this hidden secret called the stock market, and the mythical image sometimes projected of it. Many people initially imagine abundant wealth and suddenly feel all warm and fuzzy. Now, there is absolutely nothing wrong with feeling like this and looking up to the clouds, as long as your head is not among them. Dreams and desires are what drive people to achieve their life’s ambitions; they are the fuel of motivation. However, you cannot evaluate clearly if your vision is blurred.
