A Beginner's Handbook Part 1 of 3

[PristineTrading 10]

Good Morning All:

 

For the next three weeks, I will be looking at things that beginning traders should know as they start this business. Don't be surprised however, if some of you moderately experienced to very experienced traders don't find a few interesting tidbits; Even if they serve as nothing more that review.

 

A Beginner's Handbook Part 1 of 3

 

Welcome to trading. Are you new to this field? Or is it called online stock buying? Or is it day trading? Or is it investing? Well let's get a few terms straight. This will be the first of a three part series, "A Beginners Handbook".

First, at Pristine, we consider 'buy and hold' something that is no longer a term that should be applied to the stock market. Do this if you like in real estate, bonds, gold, but not stocks. It implies a long-term buy and hold with your eyes closed approach that should no longer be used in the stock market. The term 'investing' is fine as long as it does not mean 'buy and hold'. There is nothing wrong with long term holds. We believe in swing trades and core trades that could last for months or years in some cases. However, they are 'managed'. As traders, we do not close our eyes hoping all will be all right. Traders are educated in technical strategies and discipline. They become self-sufficient

Most of today's large cap companies are in the technology area. These companies are subject to having their main product replaced by a new technology very easily. Long ago, it required many years for any company to start up a new car company and over take General Motors. Today, anyone can create software in their garage that can revolutionize how something is done and put a competitor out of business. Look at the company Iomega, for example. They are the makers of the infamous zip drives that appeared on computers years back. The current technology at the time was storing information on 1.44 meg disks. They came out with a system to store 100 megs on a disk, and got contracts to put their drive on every major computer. Sounds like a company you can buy and hold forever, doesn't it? It is, until someone discovers that the same information can go on a CD and have it cost much less. At that very moment in time, literally overnight, Iomega is out of business; unless it has other products to sell. The rule is 'change or become extinct'. This example is found over and over again in everything from video sales to computer chips.

When practicing 'buy and hold' (as opposed to long term trading), you are relying on news and announcements and fundamental data. Many of you have probably already discovered how worthless this process is. To the extent it has a valid use; it is never to take the news or information at face value. Take a look at Amazon's recent earnings. You can look wherever you want, the comments were the same. "Results from Amazon (AMZN) ... also disappointed the Street".

 

 

 

If you are relying on news to make decisions, it must be time to get short AMZN, right?. However, take a look at what happened after the dismal report was out. There was no other news. Those of you that already know this see this happens all the time.

 

 

So if 'buy and hold' is out, what do we do? You hear stories all the time about all of the 'day traders'. You look around you and you don't see many. You may not even know any besides yourself and those you met at a seminar. Unfortunately, the term 'day trading' is often misused by the media. There is a large group of people that we call 'online investors'. These are the folks that use their computer in place of their telephone to call places like E-Trade, Schwab, etc. and place their orders. They are typically managing their savings or IRA money, and are typically untrained. They were plentiful during the bull run of the 90's, and often were wrongly called 'day traders'. They did not need to be trained because they made money buying stocks in the late 90s no matter what they did.

 

Most of them are all gone now.

 

We consider our selves 'traders', but this does not include the much larger group of 'online traders' mentioned above. Traders use technical analysis to find, enter, and manage trades. That applies to long or short term trades. Those that are focused on trading and exiting by the end of the day with that account are called day traders. We consider traders people who spend a good part of the day with the market. Those who are trained to manage positions that may last from several minutes to several months. While we believe that 'buy and hold' is a dead term, we do use many time frames to hold stocks, the longest of which is a 'core' position. While a core positions may last for months (or years), it differs from investing because there is an exact exit strategy planned for a core position. We also use a 'swing' time frame. This is one that may last from 2-5 days. We also use tactics that would have us holding a stock overnight one time, or exiting the same day. Sometimes exiting part of a position only minutes after entry.

 

So if you are going to trade, how do you buy stocks? If you are trading only a few trades a week, and limiting yourself to swing and core trades, using on of the 'online brokers' is fine. The time it takes to have your order filled is not very fast, but for occasional long-term trades it is acceptable. If you are going to be trading more often, or trading in and out the same day, you will want to use a 'direct access' broker. This is a broker that lets you see all of the market participants, where they are buying and where they are selling. You then place your own order on your computer screen and many of these orders will have instant executions. By instant I mean instant, usually within a fraction of a second. If you need a broker, or not happy with your current broker, consider Mastertrader.com. It has the best rates and service, a variety of platforms, and you earn points to use at Pristine for services and seminars.

 

So, you know what you want to do, and you have selected a broker. Now you need a computer and an Internet connection. Again, for occasional swing and core trading, any machine that can access the Internet will do. If you are going to be active intraday, you will need to have something better. You will need a computer that is competitive with the current top of the line computer, or is at least current with the technology within the last 12-24 months. You will want a fast Internet connection. You need to be looking at Cable, FIOS, Satellite, or T1-3. Depending on where you trade, you will have to evaluate which of these is available and most effective for your money. You will need to have a working knowledge of computers, as your time with the computer will be extensive whether you want it to be or not.

 

So now you are ready to trade, right? Well, no not really. The biggest distinction I made earlier was that 'day traders' are educated in trading strategies and disciplines. This will be the focus of the next Lesson, how to start out trading when you have no education or experience in trading. I will discuss how to build that education as you go, without using up all of your capital.

 

Closing Comments

 

There is perhaps no greater occupation to have than that of a professional trader. Yet, few achieve that title. Few achieve, even thought thresh hold is not that high. In terms of cost and education, most anyone is capable. You have to set yourself apart, and be different. That is part of what we will talk about next week. Until next week, good trading.

 

Paul Lange

Vice President of Services

Pristine Capital Holdings, Inc.