Improving my plan...

[bevan118]

If anyone has an opinion on improving what i'm doing please don't hesitate to give your input.

At the start of the year I stumbled across some information on trading and investing which sparked my interest and I decided that the only reason I had not learned anything up to that point was because I assumed I was not intelligent enough to make money investing/speculating. I think people who know nothing generally assume that buy & hold is the only way and the thought of a recession puts them off investing.

Since then I've decided as a young person with a bit of potential that i'd like to fulfil, I had the time and patience to educate myself. My plan was/is to read books or study any sources of information on all the aspects I could think of a person might use to safely extract money from the market, because I wanted to at least have a basic knowledge of all subjects before I could justify concentrating on the few that really make sense to me and that I understand. Then I would use what I learned to write down a strategy that made sense to me, open a couple of demo accounts, then once i'm used to how to operate the platforms upgrade to micro spread betting/forex accounts with as little capital as I can use to implement whatever strategy i'm using the same way I would a larger amount of capital, then when i'm happy, pump all the money I can afford to lose into my new found passion...

currently I am at the point where I have read most of the famous trading books e.g. reminiscences of a stock operator, technical analysis of financial markets, come into my trading room, trading in the zone, how to make money in stocks, market wizards... the list goes on. What I am looking for is a good book on how to understand what's on a companies balance sheet and how to interpret that information with reguard to current market sentiment, and also information on the global economy and how to interpret major economic indicators.

Trading fascinates me, and i'm going to have a go at it, and if at first I don't succeed I will study really hard to work out what mistakes I made, and how I can try again without making them again. Basically once I start it's going to take many years of failure for me to decide it's not for me. But the fact it's a game where if I win someone else loses ( and that someone else is probably not an uninformed, novice 22 year old bricklayer) and there are transactional costs on top of this fact makes me...
A) want to fully prepare myself and be aware of everything that I should be and..
B) Invest aswell as trade, from what I've learned investing is a lot less psychologically demanding and probably better suited to an under capitalised person just starting out, and something that with the power of compounding interest can be incredibly rewarding over the long term to someone who starts out young, also I think that having more money invested in much longer term non-leveraged positions will get me used to having money at risk and not having to check how it's doing every 5 minutes. I have also heard a lot about the merits of well chosen mutual funds.
For these reasons I think my plan is now to continue to develop my trading methods and begin implementing them in micro accounts, but then invest a more substantial amount of money in much longer term positions before increasing my trading stake, this would also give me a much longer period of time speculating with small amounts, as I would have to add money I can afford to lose, as I earn money I can afford to lose. I enjoy my job, do OK and have no aspirations to give it up for a while so no issues except time there. Doing this would help me get used to how the markets work and adapt my methods to what I learn from experience before risking larger amounts. I don't yet know as much about well chosen long term investments as I do about swing/position trading, day trading doesn't interest me too much and I don't think i'd be very good at it even if the rewards are substantially higher for those that succeed in that endeavour.
Any advice on improving my plan or pointing out things I may be missing, recommendations of sources of information on how to understand balance sheets and global economic circumstances, and any advice on longer term investment strategies or books on the subject would be greatly appreciated.

many thanks
Lewis

 

[mfdoom]

Because a stock has a strong balance sheet, does not mean you're going to rake in fat stacks. Keep it simple and view it as a sport. Football is a simple concept, and reading every book about football does not send you to the NFL. Knowledge in the market comes from intuition, so set up a small account after paper trading and trade things like break outs. If the price breaks resistance, buy, and when the market phycology turns negative, sell. Even if you blow up the small account, the knowledge gained is priceless and cannot be found in a book. A house is built brick by brick.

 

[bevan118]

Yes I completely appreciate this, the same way I know you could read as many books on bricklaying as you like but when you pick up a trowel the best you can hope for is not to drop it, you're going to make a mess regaurdless lol. When I do progress to demo/micro trading I think I will learn more in a couple of months than I have in a year of reading, my theory is that someone with a little prior knowledge of the task in hand will get to grips with things quicker, I believe your best asset is your brain and mine isn't that of a genius so I should prepare myself the best way I can think of, and I have the time, i'm the sort of person who can't justify ignoring a way of doing something unless I know a little bit about it. what I asked about balance sheets wasn't because I think they're the "holy grail" it's just that I've found good sources of information on everything else I wanted to study.. William o neills CANSLIM strategy intrigued me and to further study how I could use that to develop a trading method I would have to understand a balance sheet better than what I do..

Many thanks for your advice

 

[timsk]

Hi Lewis,
Welcome to T2W.

Your post covers a huge amount of ground - so it's tricky to know where to begin in terms of advice. I've picked out a couple of (what I think are) key points to comment on . . .

. . . I assumed I was not intelligent enough to make money investing/speculating. . .

Being really, really smart is generally very useful and, indeed, is essential if you want to play with the pros in the investment banking world. However, it doesn't automatically mean you'll be a successful trader or investor. Many members would argue that humility is a more important asset than a super high IQ. Anyway, you're clearly not stupid - so you've nothing to worry about as a retail trader - trading your own account.

What I am looking for is a good book on how to understand what's on a companies balance sheet and how to interpret that information with regard to current market sentiment, and also information on the global economy and how to interpret major economic indicators.

I may have misunderstood your post, but I sense you're confusing trading with investing. They have things in common, yes, nonetheless they are very different beasts. Would Mo Farah perform well in a 100m dash? Would Usain Bolt perform well over 10,000 metres? Trying to be a trader and an investor simultaneously when starting both from scratch really is making a tough job that much harder. This forum is exclusively about the former. If you want advice about investment, then check out bespoke sites devoted to the subject such as The Motley Fool.

Market sentiment - and how to guage it - is primarily a trader's tool. It's often the bane of investors lives because the markets don't do what they 'should'. By that I mean XYZ stock has a fantastic balance sheet, no debt, full order book, brilliant PEG and EPS ratios etc., yet still the bloody thing goes down! Others may disagree but, as a rule of thumb, I'd say that sentiment is a short term and fickle indicator which can be of value to traders. Conversely, generally speaking, it's difficult for long term investors to use it to their advantage.

. . . from what I've learned investing is a lot less psychologically demanding and probably better suited to an under capitalised person just starting out. . .

Well, that all depends on how it's done! Investors are long the market, which means they tend to struggle in a bear market - unless they've got deep pockets and can continue to add to their holdings as prices get cheaper and cheaper. If not, psychologically, it can be a tough gig to watch the value of your investment drop day after day. That said, I take your general point and you're quite right that many traders do struggle with psychological issues. To combat this, you have to find a style and approach that you're comfortable with that doesn't cause you angst. Traders that are jittery nervous wrecks with finger nails bitten to the bone are usually trying to trade in a way that goes against the grain (for them), and trading large size with too much leverage.

For these reasons I think my plan is now to continue to develop my trading methods and begin implementing them in micro accounts, but then invest a more substantial amount of money in much longer term positions before increasing my trading stake

As a plan, this is fine. However, for the reasons already given, I think you'd be wise to focus on trading to start with and don't worry about investing until such time as you've got a bank or building society account that's bursting at the seams. Apologies if this sounds patronising - but I'd guess that's probably quite a long way off!


Good luck.
Tim.

 

[bevan118]

Hi Tim

Thanks very much for your time and advice, it has helped arrange a lot of thoughts floating around my head

I agree that trading and investing are completely different beasts and to learn both at the same time is making a hard job harder. Given that trading is where my fascination lies and is what I have studied most up to this point I agree the sensible thing to do would be to focus on that to a point where I have a plan and am actively trading.

What may help explain my interest in both trading and investing is that I do have an amount of money worth investing, but it is money I have that I have not earned and because of the nature of trading and all the literature I've read about it being a battle with better informed professionals combined with an immense psychologically demanding battle within your self when it comes to controlling emotions and managing risk, I am only willing to risk money that I have earned myself, but because of my new found interest in financial markets I can't help but think I should put it somewhere it's going to accumulate more than the 2.5% interest it's currently getting, and I would be willing to put it into lower risk lower return investments, I think there is merit to the idea that there are global companies with brilliant business plans who have well established well marketed products very unlikely to be competed away, that over the course of my life as they implement their good business plans and gain more customers as the population increases, will give me a better return on average, especially when you consider reinvesting any dividends they may pay on top of that, but I certainly wouldn't do anything without a thorough study of that side of the market, I respect this is a trading website and wrong of me to come and ask for investment advice as such.

I think you are right that I should solely focus on trading to begin with and in that case there is much less I need to learn about before studying the markets themselves and trying to develop a plan that has an edge that I understand, and begin implement it with solid risk management

Once again thanks for your advice and time!