How to Become a Private Trader

No one will hand you a certificate that proclaims you to be a private trader.

No one will give you a nameplate for your office door and a key to the official Private Trader Executive Elevator in order to mark your bona fides.

There's no Master of Private Trading degree from Harvard. There's no Private Trading Standards Board enforcing good practices.

You lack the support systems that lawyers and doctors and MBAs and plumbers and electricians enjoy. As a private trader, you set the rules, you enforce the standards and your certification lies between your eyes.

Private trading is very much an Ayn Rand sort of activity. Or perhaps in a more romantic vein, it's like Kwai Chang Caine, the Shao Lin priest, wandering alone through the American Old West.

To be a private trader is to be one of the freest people on Earth, and one of the most self-responsible.

You're on your own.

A private trader (1) trades (2) on his or her own account.

To trade is to actively manage your money. Many people, perhaps most, watched their retirement accounts sink at a nauseating pace in 2008, and responded by not opening their account statements. The traders, by contrast, responded by moving money out of stocks and into bonds or cash, and then moved back into stocks when after the decline had ended. "Buy and hold" is not a strategy for private trading.

The private trader is neither a "master of the universe' for some Wall Street firm, nor a broker, nor a pension fund manager. The PT is an individual entrepreneur seeking profit in the markets on his or her own account.

A private trader can be a day trader, flipping positions as the price changes minute by minute, but can also work to capture the stately monthly moves. The PT can trade stocks and their options, but also futures, forex currencies, even bonds and mutual funds in a retirement account. And the trading account can be huge, running into the hundreds of thousands of dollars, or a modest nest egg of under $5,000.

It's not the size of the trading or the object traded that's important. What counts is the trade itself.

I've known many people who paper trade, and many more who trade in their dreams. I've known only a few willing to sit down and embrace risk in the act of trading for profit. Only those in that final group can truly call themselves private traders.

To practicalities. A trader needs a tool kit.

1) Money.

Not a lot. You can open a mutual fund account for a few thousand dollars, and trade in and out to capture monthly trading signals. A few thousand more, and you can trade individual stocks and options in a brokerage account, where the real fun is.

2) Trading account(s).

For mutual fund accounts, be sure to know the rules and penalties for moving money in and out of funds. Avoid companies with onerous restrictions.

For brokerage accounts, look especially for good charting capabilities on real-time prices, with a good strong suite of technical indicators, and look for a newsfeed. You can pay much less attention to information about revenues and other balance-sheet information. Those latter are more for the buy-and-hold crowd.

I use E*Trade and ThinkOrSwim as trading platforms, and like them both very much.

E*Trade offers some banking services, which is important if you use your brokerage account as your main checking account.

ThinkOrSwim is simply the awesomest options trading platform in the known universe. Seriously awesome.

3) Charting and technical indicators

A good charting application will allow you to screen stock prices from minute-by-minute moves up to the monthly moves.

It should allow you to do candlestick charts, which are the most information dense presentations of prices.

It should provide a decent suite of technical indicators. Actually, there's no need to go overboard. But at least, you want moving averages (simple and exponential), momentum indicators like the money flow index and the relative strength index, Bollinger bands, the MACD and the Stochastic. And frankly, the more indicators the better. You won't use most of them, but it's good to have them if you need them.

A good free online charting service is BigCharts.

4) Knowledge -- Learn! Learn! Learn!

You can get some of that learning here. I love talking about trades, the theory of trading, the practice of trading -- all things trading. Looking over my shoulder is an education, and I'm always upfront about what I did wrong and what I did right. You can learn from my successes and failures.

In the past few months, just as a sampling, I've written about the behavior of signals, the happy side of economic collapse, ways to handle a trade gone bad, the gambler vs. gardener approaches to trading, lessons learned in a gold etf trade gone sour, when to exit a covered call, technical indicators, the nature of price trends, longer-term trading, both as a decade review and a practical exercise.

Also, Tiger Woods.

Some of the education essays were keyed on specific trades; others were more focused on theory. That's in addition to the daily Morningline and Watchlist that track the markets and my journey through them. And the Lookahead, which helps reboot your brain for the ever-present tomorrow.

Other weblogs, like Jeff Kohler's Options Addict, also provide excellent hands-on education.

Books. Here is my reading list for new private traders. Some of these are a bit old, but they still have great value.

"Short-Term Trading in the New Stock Market", by Toni Turner. Good for perspective on trading the way I do it -- open a position, close it and don't hang around for sad farewells. Some nice introductory material on technical analysis, as well.

When you feel more comfortable getting deeper into technical analysis, this book is a good survey of the many methods used: "Technical Analysis Explained", by Martin Pring.

All the basics of stock options, and more: "Options as a Strategic Investment", by Lawrence G. McMillan. It's a huge door-stopper, but what a pool of great information.

For day-to-day reference, to keep you focused on the difference between an iron condor and a bull put spread, "The Bible of Option Strategies: The Definitive Guide to Practical Trading Strategies", by Guy Cohen.

Novice strategies: Show Me the Money: Covered Calls & Naked Puts for a Monthly Cash Income, by Ronald Groenke, covers techniques that are generally considered to be suitable for options novices. They can be most profitable of techniques.

And for a deep look at options, their nature and underlying math theory, "Option Volatility and Pricing: Advanced Strategies and Techniques", by Sheldon Natenberg.

Also, covering similar ground from a different point of view, "The Volatility Edge in Options Trading: New Technical Strategies for Investing in Unstable Markets", by Jeff Augen.

Fundamental analysis as practiced by Warren Buffett: "Buffetology", by Mary Buffett. My style of days-trading differs wildly from his buy-and-hold (actually, his buy-and-own), but he has a useful perspective on what it is that underlies the symbols that we trade.

Basically, the Buffets and other fundamentalists provide the sea in which private traders swim. Read it critically. Think about what's to like and not like about Buffet's approach.

And you can click on the "Browse now" link under "Books for Traders" in the left column of this weblog to find the latest from Amazon.com.

The Chicago Board of Options Exchange has a huge amount of knowledge and free online courses regarding options.

The education company InvesTools has excellent programs (although they are expensive) and the broker ThinkOrSwim has awesome discussions on Wednesday and Friday after market close.

5) Trader's Mind

More than any of the other tools, a private trader must develop the right mind. It's a way of thinking that says,

• Details matter
• Results measure success
• Failures are education
• To win is to act
  

The last item is a bit obscure. It means that if you quit trading after the shock of a failure, then you'll never have another success. You've got to be acting -- trading -- in order to win.

Or as my poker-playing ancestors in Oklahoma and Wyoming used to say, "You cain't win if you ain't playin'".


That's my take on how to become a private trader. No one gets there in a single step. But it's well worth the journey.