Notes from a Newbie: The Power of Practice
May 27, 2018
Welcome back traders to another episode of Notes from a Newbie. I hope you have been enjoying this blog as much as I have! This week I want to talk about the power of practice, how it has changed me as a trader and why it is so important to what we do. So as I mentioned a few blogs ago when I first started this journey I was only Tier 1 approved with TD, meaning I could only trade covered calls and cash secured puts. So for the first month or so that is exactly what I did. I put on several covered calls, but found myself executing quite a bit of day and swing trades, buying and shorting the stocks outright as my options were limited. Well as time passed and my knowledge of options and option strategies grew larger (relative to my inexperience), I realized that I was handicapping my strategy options. Plus for the most part what I was doing was not really working. I needed to add some weapons to my arsenal and change my approach. So I did just that, I got online and applied for an upgrade and just like that I had an arsenal at my disposal!
Side Note: If you are not Tier 2 approved and want to do the same, it really is just that easy. Do yourself a favor and give yourself some options, it really has made a world of difference.
Now for any new trader this can also be very dangerous! Options are nice, but also come with a new set of risk, and if not properly used can have you worse off than you were before. So knowing this, and because one of the reasons I am doing this blog is to help hold myself accountable, I did what every new trader is supposed to do. Any guesses? That’s right I PRACTICED! Now this was not an easy thing for my eager self to do, but as I preached in my first blog, practice is essential to success. And it was one of the best decisions I have made to date.
I decided that the first thing I wanted to do was reset my paper trading account to mirror the capital in my live account. I have found this to be very effective, and helps me follow the same rules that I would follow in my live account and gives me an accurate idea on how my live account would react to the same trades. Anyone can paper trade a 200k account, but if your live account is 10K you will probably not trade it the same. My philosophy going in was that I wanted to do find 5 or 6 trades either bullish or bearish and apply a strategy to each of them. My goal was to test buying long calls or long puts and bull/put, bear/call spreads. I figured once I have some confidence in placing these trades then I can move on to the Iron Condor or more advanced strategies.
So I did just that. I bought calls of AMD prior to its run-up, placed bull/put spreads on BSX and TWTR, a bear/call on CMCSA and a naked put on X. Any guesses on how I did? If you guessed a 30% return in 30 days than you are the big winner! Now keeping in mind that this was a paper account I was both excited and a little disappointed that I didn’t just jump in live with the same trades. But the confidence it gave me to go find and place similar trades live was irreplaceable. Now I am no sucker nor a fool, and I know it won’t be that easy all the time, and a little luck went a long way, but hey I was going to give myself a little credit. The only downfall was that they ALL worked! Now I am sure you are asking yourself how this is a downfall, so let me explain. See the problem with them all working was that I was never tested on my ability to effectively manage them if they decided to go against me. The only decision that had to be made after I placed the trades was when to take profit, a good problem to have if it always worked out that way. But as we all know it doesn’t. And as luck would have it I would in fact get that test, but this time in a LIVE trade. I will breakdown that particular trade next week as it is still in-progress, but I will tell you is my reliance on coaches and trust in technical analysis has kept me from making mistakes.
So I took my new found confidence and arsenal of weapons to the battlefield and put them into action. Now like every good trader should do I adjusted my strategy based on my market bias and leaned on our great coaches and resources to help me make decisions. I had a bearish bias on the broad market at that time so I went out to find some good bear picks. The first credit spread I made was a bear/call spread on DHI, I figured I would start with 1 and see how it works out, as I was still in some Covered Call trades as well. So I entered the trade following all the rules and it worked to PERFECTION! DHI continued to drop and within 2 weeks was at my profit target so I exited the trade and moved on to find another. Nothing feels better than putting practice into action and being successful! My first successful credit spread just might rank up there with my first kiss, hey don’t judge me!
Now I have made several other trades since then using Long Calls/Puts and Spreads, but most are still in progress so I will save the analysis of those for another time. My point being that my confidence level going into that trade was sky high because based on my practice I trusted that it would work. I applied the same rules, used the same TA indicators, identified the trend, identified support and resistance, CHECKED EARNINGS, position sized according to my risk tolerance, and placed the trade. After that I sat back and trusted the system, and what do you know it actually worked. So what do I want you take away? Well here you go:
- Learning how to practice strategies by paper trading has been a game changer for me. I said I would get better at practicing and I am committed to doing just that. The confidence it provides is invaluable. Anytime I am hesitant about what I think I see or what I should do, I always use my paper account to verify. The losses hurt way less and wins feel just as good. Use your paper account as confirmation just as you would use a candlestick in a trade.
- Trade your paper account as you would trade your live account. It doesn’t make sense to trade one recklessly with capital you don’t have, train like you fight!
- Train management techniques, work through all the “what if” scenarios and practice them in your paper account. I can assure if you don’t the market gods will help you learn the hard way.
- Put your practice to work, once you gain the confidence in a strategy then go apply it live. Start small, manage your risk, manage the trade and follow the rules. It really is just that easy.
- Get permissions to trade advanced strategies. Don’t handicap yourself, give yourself options and ammo to fight. Equip yourself with the tools to be successful.
I will leave you with this quote:
“There is no glory in practice, but without practice, there is no glory”
See you next week, good luck in your trading endeavors!
See you all next time,
One Reply to “Notes from a Newbie: The Power of Practice”
Thanks Randal for this blog. Thanks for sharing your experience – I was especially drawn to the idea to match the capital in the live account with the paper account to curb the possibility of recklessness thing I have 200K to practice (I don’t have that much, yet). I will apply what you’ve suggested here. Pretty cool!
Comments are closed.