A successful trader is like a fish swimming upstream, against the current. Commissions, slippage, and expenses keep pushing you back. You must make enough money to overshoot these three barriers before making a dime.

There is no shame in deciding trading is too hard and walking away, just as there is no shame in being unable to dance or play the piano. Many beginners jump in without thinking and get financially and emotionally hurt. It is a great game, but if you leave, better do it early.

If you decide to trade, read on, because in the following sections we will look into psychology, trading investing tactics, and money management. But first, we must talk about the practical aspects of trading-how to open an account, choose a computer, and start collecting data.

Size Matters

Making or losing money in the market depends in part on how much you put into your account. Two people can take identical trades, but one

will grow equity, while the other will bust out. How could this be if they buy and sell the same quantity of the same stock at the same time? Suppose we meet and decide to pass an hour tossing a coin, playing heads-or-tails-heads you win, tails you lose. Each of us will bring $5 to the game and bet 25 cents on each flip. As long as we use a fair coin, by the end of the hour we will be about even, each with about $5. What happens if we play the same game and use the same coin, only now you start with $5, while I bring only $1? You'll probably end up taking my money. You are likely to win because your capital provides greater staying power. It would take a string of 20 losses to bankrupt you, while for me a string of just 4 losses would be fatal. Four losses in a row are much more likely than 20. The trouble with a small account is that it has no reserves to survive even a short run of losing trades. Winning trades are always interlaced with losers, and a short losing streak wipes out small traders.

Most beginners start out with too little money. There is plenty of noise in the markets-random moves that defy trading systems. A small trader who runs into a noisy period has no safety cushion. His longterm analysis may be brilliant, but the market will do him in, because he does not have the staying power to ride out a losing streak.

Back in 1980, as a greenhorn amateur, I walked into a Chase bank around the corner and drew a $5,000 cash advance against my credit card. I needed that princely sum to meet a margin call in my depleted trading account. A beady-eyed cashier called the manager, who demanded my thumbprint on the receipt. The transaction felt dirty, but I got the money-which I proceeded to lose within a few months. My system was correct, but the market noise was killing me. It wasn't until I got my trading account into a comfortable high five figures that I started making money. I wish someone had explained the concept of size to me in those days.

Trading a small account is like flying an airplane at treetop level. You have no room to maneuver, no time to think. The slightest slip of attention, a piece of bad luck, a freaky branch sticking out into the air-you crash and burn. The higher you fly, the more time you have to find your way out of trouble. Flying at a low altitude is tough enough for experts, but deadly for beginners. A trader needs to gain altitude, get more equity, and buy some space for maneuvers.

A person with a large account who bets a small fraction on any given trade can stay calm. A person with a small account grows tense knowing that any single trade can either boost or damage his account. As the stress rises, the capacity to reason goes down. I saw the best example of how money can twist a player's mind while teaching my oldest daughter to play backgammon. She was about eight at the time but very determined and bright. After a few months of practice she began beating me. Then I suggested we play for money- a penny a point, which in our scoring meant a maximum of 32 cents per game. She kept beating me, and I kept raising the stakes. By the time we reached 10 cents a point she started losing and soon gave back every last penny. Why could she beat me playing for little or no money but lost when the stakes increased? Because for me $3.20 was pocket change, but for the kid it was real money. Thinking about it made her a little more tense and she played slightly below her peak level- enough to fall behind. A trader with a small account is so preoccupied with money that it impairs his ability to think, play, and win. Other beginners bring too much money to the game, and that is not good either. A beginner with too much capital goes chasing after too many rabbits, becomes careless, loses track of his positions, and ends up losing money.

How much should you have in your trading account when you start? Remember, we are talking about trading capital. It doesn't include your savings, long-term investments, retirement funds, house equity, or Christmas club. We only count the money that you want to spin in the markets, aiming to achieve a higher rate of return than you can get from Treasury bills.

Do not even dream of starting with less than $20,000. That is the barest minimum, but $50,000 provides a much safer flying altitude. It allows you to diversify and practice sensible money management. At the same time, I do not suggest starting with more than $100,000. Too much money in a trading account makes a beginner lose focus and leads to sloppy trading. Professionals can use a lot more, but beginners should stay below $100,000 while learning to trade. Learn to fly a single-engine plane before moving up to a twin-engine model. A successful trader needs to get into the habit of being careful with money.

Beginners sometimes ask me what to do if they have only $10,000 or $5,000. I urge them to study the markets and paper-trade, while getting a second job to accumulate capital. Start trading with a decentsized account. You're going into battle, your capital is your sword, and you need a weapon that's long enough to give you a chance in com bat with well-armed opponents.

Hardware and Software

Thinking about my first purchases of trading technology is pure nos-talgia. I walked into a drugstore in Florida and bought a pocket calculator. A year later I acquired a programmable calculator with a tiny engine that pulled magnetic memory cards through its slot. Then I bought my first computer. It had two floppy drives-one for the program, the other for the data diskette. I upgraded it from 48K to 64K RAM (that's kilobytes, not megabytes!), and it was a rocket. My first modem collected data at a brisk 300 baud, later upgraded to a sizzling 1,200. When hard drives became available, I bought myself a 10-MB unit (they also had a 20-MB model, but who needed such a monster?). There was only one good program for technical analysis, and it cost $1,900. Today, I can buy a hundred times more powerful software for a tenth of that price.

Does every trader need a computer? My friend Lou Taylor did all his research on scraps of paper. I used to offer him computers, but to no avail. Most traders, including myself, would be lost without a computer. It expands our reach and speeds up research. Just keep in mind that computers do not guarantee profits. Technology helps, but does not guarantee victory. A poor driver will crash the best car.

To become a computerized trader, you must choose a computer, trading software, and a source of data. Trading programs tend to be undemanding and run well on older, slower machines. A good pro gram for technical analysis must download the data, plot daily, weekly, and possibly intraday charts, and offer a multitude of indicators. A good program should allow you to add your own indicators to the sys tem and let you scan lists of securities according to your parameters. The list of programs for traders keeps growing, so that by the time you read this book any review will be out of date. My company keeps updating our brief software guide, which we send out as a public ser vice. To request a current copy, please contact us at the address that appears in the back of this book.

A striking development in recent years is the wealth of resources for traders available on the Internet. Today you can analyze markets without buying any software-just go to a website, key in your stocks or futures, select the indicators, and click your mouse. Some websites are free, while others are subscription-based. With all those websites, why buy technical analysis software? For the same reason that in a city like New York, with its good public transportation system, some of us own cars. Clients often ask me how to add some new indicator to their favorite website. When you travel by bus, you cannot ask the driver to take your favorite route.

Can you program your own indicator into a website and scan charts with it, posting green dots for buy signals and red dots for sell signals? When you find a website that can do it, you may no longer need software. Until that time, those of us who are serious about research will continue to buy technical analysis software. You can get a top-notch program for a few hundred dollars. A historical database with a year's worth of updates will cost a couple of hundred more. If you have a tiny account, however, use free websites. Always try to push your expenses down to the smallest possible percentage of your account.

Data

Signing up with a data service appears simple, but raises several questions that go to the heart of trading. How many markets should you follow? How far back should you go in your research? Do you need real-time data? Answering these questions takes you deep into the trad-ing enterprise and forces you to review your decision-making process.

How Many Markets Should You Follow? Beginners make the common mistake of trying to follow too many markets at once. Some look for software to scan thousands of stocks and quickly bog down. Serious beginners should pick no more than two or three dozen stocks and track them day in and day out. You need to get to know them, develop a feel for how they move. Do you know when your companies release their earnings? Do you know their highest and lowest prices for the past year? The more you know about a stock, the more confidence you have and the fewer surprises can jump out at you. Many professionals focus on just a few stocks, or even on a single one.

Which stocks should you track? Begin by choosing two or three currently hot industries. Technology, Internet, telecommunications, and biotechnology industries are in the forefront of the market at the time of this writing, but the list is likely to change. It always does. Pick half a dozen leading stocks in each of those industries and follow them daily. That's where you'll find the highest volumes, the steadiest trends, the crispest reversals. Several months later, after you get to know your stocks and make some money, you may be ready to add another industry group and pick its top six stocks. Remember, the depth of your research is much more important than its breadth. You can make more money from a handful of familiar stocks.

The choice is easier for futures contracts trading-there are only about three dozen futures, in six or seven groups. Beginners should stay away from the most volatile markets. Take grains, for instance. You should analyze corn, wheat, and soybeans, but trade only corn because it tends to be the slowest and quietest of the group. Learn to ride a bicycle with training wheels before starting to race. When it comes to tropicals, analyze all, but trade only sugar-a big, liquid, and reasonably volatile market, leaving aside coffee and cocoa, which can move as fast as the S&P. Needless to say, a beginner has no business with stock index futures, whose nickname on the floor is "rockets." You may graduate to them in a couple of years, but at this stage, if you have an opinion on the stock market, trade SPDRs or QQQs, exchange-traded market indexes.

How Far Back Should You Go in Your Research? A daily chart on a computer screen will comfortably show five or six months of history. You'll see less with candlesticks (see p. 72), which take up more space. Daily charts alone aren't enough, and you need weekly charts with at least two years worth of history. Learning history prepares you for the future, and it could be helpful to glance at a 10-year chart and see whether that market is high or low in the long-term scheme of things.

Charts spanning 20 or more years are especially useful for futures traders. Futures, unlike stocks, have natural floors and ceilings. Those levels are not rigid, but before you buy or sell, try to find out whether you're closer to the floor or the ceiling.

The floor price of futures is their cost of production. When a market falls below that level, producers start quitting, supply falls, and prices rise. If there is a glut of sugar and its price on the world markets falls below what it costs to grow the stuff, major producers are going to start shutting down their operations. There are exceptions, such as when a desperately poor country sells commodities on the world markets to earn hard currency, while paying domestic workers with devalued local money. The price can dip below the cost of production, but it cannot stay there for long.

The ceiling for most commodities is the cost of substitution. One trading commodity can replace another if the price is right. For example, with a rise in the price of corn, a major animal feed, it may be cheaper to feed animals wheat. As more farmers switch and reduce corn pur chases, they take away the fuel that raised corn prices. A market in the grip of hysteria may briefly rise above its ceiling, but cannot stay there for long. Its return to the normal range provides profit opportunities for savvy traders. Learning from history can help you keep calm when others are losing their heads.

Futures contracts expire every few months, making long-term charts difficult to analyze. When it comes to dailies, we look at the currently active month, but what about the weeklies? Here we have to use continuous contracts, mathematical devices that splice several contract months. It pays to download two data series-the currently active contract, going back about six months, and the continuous contract going back at least two years. Analyze weekly charts using continuous data, and switch to the front month to study daily charts.

Do You Need Real-Time Data? Real-time data flows to your screen tick by tick, as prices change in the markets. A live screen is one of the most captivating sights on Earth, right up there with nude co-ed volleyball or a chain collision on an expressway. Watching your stock dance in front of your face can help you find the best spots for buying and selling-or make you forget reality and swim in adrenaline.

Will live data improve your trading? The answer is "yes" for a few, "maybe" for some, and "no" for most. Having a live screen on your desk, says a trader friend, is like sitting in front of a one-armed bandit. You invariably end up feeding it quarters.

Trading with live charts looks deceptively easy, while in fact it is one of the fastest games on the planet. Buy at 10:05 A . M ., watch the price rise a few ticks, and take a couple of hundred dollars off the table by 10:15. Repeat several times a day, and go home at 4 with thousands of dollars and no open positions. Sleep like a baby and return in the morning. Trouble is, you need perfect reflexes to do that. If you pause to think, delay taking a profit, or quibble accepting a loss, you're dead.

Most successful day-traders are men in their early 20s. I've met very few successful day-traders over 30. There are exceptions, of course-a friend in her 70s is a fantastic day-trader, but she is an exception who confirms the rule. This game requires lightning-fast reflexes, as well as a certain thoughtless capacity to jump, that few of us preserve past the age of 30.

Beginners do not need live data because they have to put all their attention into learning to trade with daily and weekly charts. Once you start pulling money out of the markets, it might be a good idea to apply your new skills to intraday charts. When longer-term charts give you a buy or a sell signal, use live data not to day-trade but to dance into or out of positions.

Once you decide to use live data, make sure it's real and not delayed. Most exchanges charge monthly fees for real-time data, while the Internet is full of websites offering free data, delayed by 20 minutes. That delay does not interfere with the entertainment value, but trading with it is suicidal. If you need real-time data, be sure to get the best.