The making of a Savvy trader? Is it possible?

ADVERTISEMENTS for courses that claim to be able to turn you into a proficient or even savvy trader have mushroomed over the last few years.

The courses, which typically cost a few thousand dollars, will teach you trading techniques, which may be executed on a variety of assets - stocks, options, currencies, commodity futures. But beyond techniques, the courses will also teach you the psychology of trading, which some coaches argue is more important than pure techniques.

Trading, after all, is a discipline, and not a get-rich-quick route, even if some ads may seem to give that impression.

First, what is the difference between trading and investing? Retail investors are often encouraged to take a long-term view of their investments and warned not to speculate or time markets. Yet, the buy-and-hold route has often been an extremely painful exercise, as the recent bear market shows.

Yeo Keong Hee, master trainer and forex strategist at Adam Khoo Learning Technologies (AKLT), says that there are over-generalisations in the way the terms are commonly defined. Investing, for instance, is often seen as an activity that involves longer-term positions and more deliberate analysis.

'I believe . . . these (over-generalisations) are not helpful to one who wants to consistently profit from the market . . . In fact, long-term investing can very often be risky, especially when investments are based on misguided analysis such as public opinion.'

Short term trading, he says, can produce good returns 'if the trader is trained to consistently engage the market with systematic trading techniques and risk control'. An AKLT brochure claims that Mr Yeo, who teaches forex techniques, is able to consistently make US$15,000 to US$20,000 in monthly profits from forex trades.

So what are the characteristics that make a good trader? Or, how can you maximise your chances of success?

The first element is to have a plan for your trade and stick to that plan. But alongside that is what Keane Lee of T3B Holdings calls the 'right mindset'.

'To achieve consistency, one must be willing to stick by the rules within the trading plan, especially cutting losses when the market turns against one's trades. Over time, one manages the downside by taking small losses in some trades and allowing most winners to ride the trend as long as the market decides. In other words, keep in mind that taking care of the downside is our job; and the upside is the market's job.'

Mr Lee has designed a proprietary trading system to track the price movements of stocks and derivatives. The system generates buy and sell signals.

This brings us to the issue of risk control, a discipline that often falls by the wayside when emotions run high. Sticking to a trading plan is itself a form of risk control.

Adam Sprague, director of OptionsXpress says: 'Traders use strategies that limit their risks, while taking advantage of price volatility. A successful trader needs a good trading plan to identify and limit the risks with each trade. The key benefit of the plan is that it helps to take any emotion out of trading. Even before entering a trade, the trader must know what their exit points are for both the profit and loss.'

He adds: 'Problems for traders often arise when they have a plan, but they start to bend their own rules, such as adjusting the profit and stop levels.'

OptionsXpress offers a self-directed trading platform and free online education on products including stocks, options and futures.

AKLT's Mr Yeo believes that consistency depends on how trading techniques are implemented with systematic risk control. These together should help to rein emotions that can be wealth destructive.

'In my classes, I focus a lot on risk control and overcoming the psychological weaknesses that invariably sabotage a trader's success. There are too many courses and books that focus excessively on trading techniques, while glossing over or even ignoring the importance of trading psychology and systematic risk control . . . This is the reason why most traders lose money despite learning a wide variety of good trading systems.'

A trader, he says, should pick a technique or a few techniques that suit his personality. He must also 'respect and minimise the impact of market risk'. This includes setting limits to trades. The third is to master the 'emotional attributes' of trading.

Be willing, for instance, to take small losses. 'The unwillingness to take losses is rooted in the desire to make money, which of course is the motivation behind trading in the first place. Ironically, such an unwillingness will lead to greater losses eventually.'

Traders, he says, must make an effort to resist the impulse towards instant gratification 'in order to be among the minority of traders who emerge profitable against the odds'.

Yet another must is the discipline of money management. Says Mr Lee: 'A trader must set aside trading capital that he or she is emotionally detached from - not money that you are too afraid to lose as it will have a negative effect on trading psychology. Next comes money management, which includes position sizing and appropriate diversification. With this, a few losses would have little impact on the total capital.'

If you are mulling a trading coach, most centres offer free introductory or orientation seminar. Make sure you ascertain all the fees, as some may cost well over $5,000 when you include books and other material. Check, too, whether there are avenues for follow-up, such as a mentoring scheme or refresher courses. The latter may actually be free at some centres.

Do your research too on the track record of the trainers themselves, as well as the students. T3B's Mr Lee says: 'Track record is definitely important. But most significant is the students' track records as it is crucial that the coach's techniques should be easily replicated by the students. Furthermore, if the coach is highly successful, his or her personal portfolio should be sizeable - in the millions of Singapore dollars.'

Mr Yeo says that a trainer should be a successful trader as well, rather than just an analyst.

'If a trader is able to profit from the market consistently, we know that he not only knows about how markets work, but also that he is able to put his knowledge into practice . . . Of course, it is possible to get good training from a competent market analyst who doesn't trade. But such training is likely limited to the intellectual dimensions of trading.

'Only a successful trader can impart the nuances of trading psychology, which are crucial.'