Hi; As an engineer, I had the same response to trading that you did. With engineering, if you have a 60% success rate with your projects, you are quite a hazard to the company.
For a mathematical type, the secret to overcoming this alteration in work behavior is statistics.
Also, I would like to point out that during your learning years, you should trade much less than 100 shares on those longer term trades. I don't know what the other guys have in mind when they tell you to trade small, but I would go with 5 shares. This is enough that there is a chance you might cover your commissions, but not enough to cause any sort of emotional responses to your situation. Just remember to ignore the money, if you can, and don't minimize your effort to make your trading better merely because you are only trading 5 shares. This needs to be a game, but it needs to be a serious game, played by the rules, played with care and thought, and played as hard as possible.
Towards that end, when learning, always calculate your gains and losses on a per share basis. Keep track of your wins and losses by the day and week, and categorize your trades. This will put you into a mindset that should be similar to the situation you will someday be in when you try to steal money from the other guys.
Be creative. Experiment. Learn not to pick tops (or bottoms). But make it a hobby until you have mathematically proved your skill.
Later, when it seems that you are regularly making a good number of cents per share, go big. Play 10 shares per trade. You will have many false starts. Go back to 5 shares when these happen. When you are finally, really, a decent 5 share trader, go to 10 shares, and keep on increasing as long as things are working.
P.S. I Don't believe most of the tales of traders who average $5 per share per trade. My observation is that they must be extremely rare. Warren Buffet probably does it, but he holds for very very long times. The vast majority of professional traders that hold less than 3 days or so earn an average of less than a dollar per share, my guess, assuming they are trading big boys. As a scalper, I count it a great day when I bring in 10 cents per share. The street is very smart, and doesn't leave low-hanging fruit out where it is easy to collect. This is not the South Pacific. Others comment on these outrageous statements?
P.P.S: For the mathematically inclined, the proper way to scale a random walk with time is by the square root. Consequently, I would expect something like the following table of typical average stock profits over various time frames for good traders (trading something with volatility between DELL and MSFT):
10 minutes: 1/16
40 minutes: 1/8
160 minutes: 1/4 (2 hours, 40 minutes)
640 minutes: 1/2 (1.6 days)
2560 minutes: $1 (6.6trading days)
In other words, in order to be averaging a profit of $1 per share on MSFT, you probably need to be thinking in terms of holding about a week or so.
Naturally, stocks move more than the above table would imply. But remember that you will not be always on the correct side of the trade, buying the lows and selling the highs. Fortunately, in order to make a good living, performing such a miracle is unnecessary. The above guide would have to be scaled according to the volatility (not the price) of the stock you trade. In addition, these are intended to be what you should hope your average can attain, not where you should exit your profitable trades.
Again, I know that the above targets will seem very small to those with grand dreams (AKA greed) and low computational skills. The fact is, that only God knows the future of security prices. Note that the above numbers are relatively small compared to the natural volatility of the stocks. For this reason, your trades will show a very high standard deviation compared to your (presumed positive) average return. This is normal (pun). This is why you will need to generate lots of statistics (i.e. trades) before you can reject the null hypothesis of random chance. There are plenty of examples of traders who beat the averages for a while, overtraded, and burned out their account.
Also, my suggestion for a 5 share initial trade size for longer term trades would scale as one over the square root for shorter time scales. Thus, you are allowed to trade larger share size on the shorter time scales, as they have less random walk risk. Here is a table of suggested beginner share sizes. Again, the stocks are assumed to be something like DELL/MSFT:
10 minutes: 100
40 minutes: 50
160 minutes: 25 (2 hours, 40 minutes)
640 minutes: 10 (1.6 days)
2560 minutes: 5 (6.6trading days)
I know that everybody who reads this is going to laugh, but this is the way it is. So pros, give me some backing...
-- Carl |
