7 Tips for Stock Trading You Can Do in Your Underwear | Behavior …

Last week, I wrote about the documented evidence that trading activity results in lower returns to investors. This is equally true for those people we think of as professional investors and for people day trading in their parents’ basements.

As far as I’m aware, there’s no peer-reviewed, academic study that shows any evidence that active trading will result in better returns. Despite that evidence, there are still plenty of people who claim to outperform a low-cost, buy-and-hold investment strategy. They insist that settling for the return of the market, say in the form of a simple index fund, is settling for mediocrity.

In fact, last week, the hosts of the Internet talk show tastytrade insisted during our live conversation that the key to success is for people to be even more active. They argued that the reason so many people have poor investment results is precisely because they don’t trade enough. They went on to tell me of countless people they know who do much better than the market by trading actively.

I have to admit, there’s something appealing about the idea of trading. Despite all the evidence, and my own experience saying it won’t work, it’s something that appeals to our hunter instincts. I can sit down at my computer and with just a few clicks, I can bring home the bacon. While I worry that people who have just started to trade recently might be guilty of confusing a rising market with their own genius, there’s nothing in the research that says that consistent outperformance is impossible. It’s just highly improbable.

So if you like going toe to toe with improbability while putting your hard-earned money on the line, there might be only one way to find out. Try it.

To improve your odds, and provide a baseline for measuring your results, I’ve put together a set of rules based on my own experience, conversations with countless people who have tried to be traders and some of the best books written by successful traders. You may know some other best practices, but these will get you started with your experiment.

Be prepared to lose money … at least for a while. I had a co-worker with a seat on the Chicago Board Options Exchange. He traded for a living, and he shared with me that during the first few years it was really hard to go to work. Trading was costing him money because he didn’t know what he was doing. By just staying home, he would save a lot of money. It’s the same for wannabe day traders. It will cost you money as you get up to speed, but you can think of this as paying your dues. Of course, the hope is that with each mistake, you’ll get better, but only time will tell.

Have a system. Traders always talk about their systems. The goal they all share is to remove emotion from trading decisions, and they all require the discipline to follow through every time. The tricky part is that you have no idea if you have a good system until you’ve been able to stick with it through all market conditions. So while it will be important to adapt your trading system as you learn, you also need to stick with it when things get tough. Balancing the need to adapt with the need to stick with it is a challenge you’ll face.

Don’t confuse practice trading with real trading. Before you start trading, you may hear the suggestion to practice your strategy by pretending to trade in real time and recording how it works. This will give you an idea of how well your strategy performs without risking real money. In addition, you can use tools to easily back-test a trading strategy and see how it would have done over long periods in the past. But remember: You will feel different when you stop testing and put real money on the line. Be careful to ease into any trading strategy no matter what the testing tells you.

Watch out for the Superhero Syndrome. Don’t be the person who makes a few good trades and then assumes it’s time to open a hedge fund. Remember that one trade will not make all your financial dreams come true. In fact, you’re going to need decades of successful trading before you will know if this is all worth it.

Track your results. Testing your trading skills means you’ll also need to grade the results. After all, you can’t know if you’ve found the perfect strategy if you haven’t tracked what you’ve done compared with what you could have done with almost no effort at all. Make sure you record all your trades. Winners and losers. Don’t be like the typical gambler who tells buddies only about the winners while conveniently forgetting about all the losses. Then, compare the results with a low-cost alternative, like an index fund. You’ll have hard numbers, and you can weigh if trading works for you.

Share your plans with your spouse. I’m making the assumption that the reason you want to become a day trader is ultimately to have a better life. If that’s the case, it would make sense to talk with your spouse or partner about your plans. You need that person on board with the risk you want to take and what might be required to make it happen. If you’re hiding your trading from loved ones, it might be a sign that something is off.

Contain the damage. I understand the temptation to commit yourself 100 percent to trading. However, I suggest giving yourself some wiggle room and setting up a separate trading account to start. Add a predetermined amount (after you’ve shared your plans with your spouse), then keep the rest of your money in your well-designed investment plan.

I have no doubt that you’ve found the perfect strategy, but for the sake of your mental health (and perhaps your marriage) test this perfect strategy first. Stick with the set amount and move any profits into other accounts to protect yourself. Think of it as the equivalent of going to the casino with only $100 in your wallet and no debit card. Pick an amount you can live with losing, just in case.

I wish you the best of luck as you head down this path, but you probably don’t need it. After all, you have technology, a system and the discipline to make it all work. And if you want, you can even do it in your underwear.

This article originally appeared at the New York Times on May 5, 2014.

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7 Tips for Stock Trading You Can Do in Your Underwear | Behavior …