This is one of the most common questions I get from novice traders. They’re stuck at one of the first steps – deciding what market they want to specialize in.
If you’re stuck here as well, then there’s something I’d like you to think about which may make the decision easier…
You’re unlikely to get it right first time anyway.
No matter which market you choose, there’s a good chance it’ll change sometime in the future.
If you choose a market and it just happens to be the market that suits you, then that’s great. But don’t plan on it happening. The decision you make now is nothing more than a best guess as to the most suitable market – a best guess based on limited understand of the various choices available, and whether or not they will suit your personality and your lifestyle.
Of course, you should always research the markets to make the most informed choice possible. But the point is that you don’t know what you don’t know, and your belief as to the most suitable market will possibly change anyway, as you gain experience.
So don’t be paralyzed by indecision.
Don’t fear making the wrong decision.
And don’t be afraid to change markets in future.
Any experience you gain in one market will be transferable to other markets. And these days it’s easy to open new accounts.
Would you like an example?
I thought I was making the right decision in the year 2000, in selecting the stock market, trading from weekly charts. In a very short space of time I realized that I did not have the patience to wait weeks on end for trades to play out to their conclusion, so I had to adjust to daily charts.
In 2003 I changed to options (traded on ASX shares on a daily timeframe) in an effort to get more leverage. I suspect the decision was also influenced by a need for more excitement – a poor reason to trade, but nevertheless a major decision making factor for many traders.
In 2004 I changed to Contracts For Difference (CFDs), still trading ASX equity CFDs, but allowing ease of trading both long and short without the wider and unpredictable spreads that exist in the options market.
2005 saw a change to forex, with timeframe gradually dropping from daily charts down to 15 minute charts.
2006 saw an interest develop in equity index CFDs as well, with timeframes in both forex and indices dropping down to as low as the 1 min chart.
I’m comfortable where I am now, with forex and equity index CFDs, but foresee at some stage in the near future I’ll probably make a permanent change across to emini futures.
It took me a long time to find where I’m comfortable. And as I said I fully expect changes again in the future. I imagine one day I’ll possibly even reverse the timeframe trend and move back to longer timeframes, as I get nearer to retirement and try to minimize workload.
So, hopefully you’re now comfortable with the idea of just making a decision as best you can right now, and accepting that it’s ok for that decision to be incorrect. You can always change it later.
As success coach Mike Litman says, “You don’t have to get it right, just get it going!”
Ok, back to the question… which market should I trade? What are the options – no pun intended! Well, to really simplify the choices, you have essentially four markets to choose from:
- Stocks – whether directly through the stock market or via some form of derivative such as CFDs.
- Futures – whether commodities, bonds, stock index or FX futures.
- Forex – spot FX.
- Options – A derivative market based on an underlying instrument of stocks, futures or forex.
This article won’t go into each in detail. That’s perhaps a topic for future articles. In the meantime, a web search will bring up more information than you could read in a lifetime. The key thing we need at this stage is just a decision. The education will then follow, once you’ve chosen a market.
Here’s the way I’d approach it, if I was starting out again. Maybe this will work for you as well?
- In my opinion, the most important factor for a beginner in choosing their first market is to choose the one which you are most familiar with or feel most excited about.
It’s that simple.
If you have been to an introductory seminar on forex, and skimmed through a few forex books at your local bookstore, and are quite excited by the idea of trading forex, then that’s your starting point.
If you’ve never heard of forex, futures or options before, but are comfortable with the fact that stocks are simply just a part ownership of a company, especially of the larger companies which are household names, then the stock market is your ideal starting point.
If you’ve been following the Dow or S&P on the news each night for the last few years, and think it would be great to trade the whole market, then maybe you need to start with emini futures.
- Having chosen the market that you’re most familiar with or most excited about, select a timeframe which suits your current lifestyle. If you work during the market hours, then you can’t daytrade. Start off with a longer-term swing trading or position trading timeframe.
If you want to daytrade, and the market hours and your lifestyle allow that, excellent. Otherwise, do not try to force daytrading into your schedule. It just doesn’t work. It’s very time intensive and if it disrupts your family, work or personal life, then you’re placing the odds of success very much against you.
Make the timeframe fit your lifestyle. Don’t try to make your lifestyle fit the timeframe.
- Confirm through a broker the minimal capital requirements to operate in this market and timeframe. If you can’t afford this, then either set in place a plan to simply trade on a demo until you can save up further funds, or go back to step one or two and select an alternate market or timeframe.
WARNING: Undercapitalization is one of the biggest killers of trading careers. Please note that even if you meet the brokers minimum capital requirements, it will rarely be enough to trade safely. The market and timeframe must be such that the normal stops should not risk more than 1% of your account. Anything more than this in the early days, and the stress from financial loss could well lead to the end of your trading career. If you can’t afford this, just learn while you save more money, or consider an alternate market or timeframe which allows less capital.
- Now learn your market and practice on a demo platform. Consider the use of the Traders Checklist to Success to guide you through the learning process. But under no circumstances should you risk capital in the live markets, until you have educated yourself on the market, understand the risks, and have demonstrated success on the demo platform.
That’s it. Simple!
What market are you most familiar with, or most excited about?
What timeframe fits your lifestyle?
Can you afford it?
Well done. You’ve now chosen your market and you’re ready to start your education.