We la-hooooove our GURU’s, don’t we?
In all walks of life — fitness, romance, money, religion — we seek experts in their field to guide us onto the right path for success and/or happiness — and trading is no different.
In fact — when it comes to trading we might love our Guru’s more than anywhere else.
Whether self touted or legitimately gifted, we flock to Trading Guru’s looking for help on how to navigate the tricky waters of online trading.
If you’ve spent anytime around the online trading industry, you know that Trading Guru’s can run the gamut from advice to education to cheerleading to stock picks.
These guys can be cheap (free) or expensive (some over $1,000.00 a month). And for this monthly fee they promise to fill your trading account with that ever valuable commodity — cash!
With so many different Trading Guru’s out there and more than a fair amount of snake oil, I thought I’d put together an article describing 3 of the most important things you should be considering when seeking out your trading Guru. Which are…
1. Style of Trading
The first thing you’ll want to note is what method or style of trading does your prospective Trading Guru practice. Scalping? Day trading? Swing trading? Position trading? Investing? These are very different and separate trading disciplines, each requiring their own, unique skill set.
As trading is a highly psychological endeavor, aligning your personality to your style of trading is job one. For instance, if you have the attention span of teenage flea playing X-Box then it would be next to nearly impossible for you ro follow a position trading guru who holds trades from weeks to months.
It just wouldn’t feel comfortable.
Who cares if the guru in question has a killer track record? It needs to feel right for you or you’re not going to be able to follow it.
2. Track Record
Yes, these can be fabricated. Yes, some Trading Guru’s do fabricate them. But if all you have to go on are the actual trades this Trading Guru has made then I would have to say that any track record is better than no track record. And once you’ve looked at a few you will be able to separate the honest from the scam artists.
When it comes time to view the track record you want to look at two things — Winning % and Average win compared to average loss. Why both of these things?
Because a Trading Guru can have a 90% win rate, but if all those winning trades are 2% and his losing trades are -40% then you will have a loosing method on your hands.
Another important statistic is frequency of trades. This falls under style of trading for the most part, but if the Guru makes 10 calls a day and you only have enough money to trade 2-3 of those calls, you will not be able to mirror his or her performance.
Finally, how long have they been in business. If they have a track record of 15 trades, this is obviously not as good as someone with a track record of thousand’s of trades who’s been in business for years.
“It takes money to make money.” “You have to pay for education.” “Either you pay me or you pay the market.” “Less than one round trade per day.” These are just a few of the pitches you can hear coming from those ever persistent Trading Guru’s regarding the cost of their services.
These services — trading education, tips, strategies, stock picks delivered via Tweet, Text Message, Email — range anywhere from free to over $100.00 a month and anywhere in-between. What you, a potential customer, should be thinking is: with my capital base, can this subscription pay for itself AND still make me money? If not, will it provide me with an education that I can use to make myself money after I cancel the service? If not, what am I doing here?
Let’s say, for example, that you have an equity account of $5,000.00. Your guru charges $100.00 a month and offers 5 trades per week (20 trades per month). You have a discount brokerage that charges $7 per trade for a total of $14.00 for each round turn.
If you’re going to take each trade you would have a monthly cost of $380.00 just to trade these picks. $100.00 for service and $280.00 in commissions. That’s a 7.6% hurdle right out of the gate.
That’s fine if you believe think your Trading Guru can deliver more than 7.6% a month — but remember, that’s just to break even. And that’s on total equity. Of course, if your account is bigger the percentage cost gets smaller which might make the Guru worthwhile.
So there you have it. The three most important factors to consider when choosing a Trading Guru. 1. Trading style. 2. Track record. 3. Cost. And don’t forget, above all, the market should be treated with respect at all times. It’s not the lotto and it takes time, effort and commitment to learn. But who knows, with the right online trading Guru, you just might shave years off the learning curve.