Hey it’s Bill at Investing Systems.
I’ve been in the investing and trading business over 20-years now and I’ve seen everything. I’ve learned a lot over that time following the markets literally every day.
If you are just getting started investing or trading, I’m going to share some important points to help you as a beginner trader.
These key points are something every new trader will eventually figure out – though it might take years.
I’m going to speed up your learning curve dramatically.
Here’s the Gist of this Article:
Invest in Stocks
Speculate in Options
Day Trade Futures
Trading vs Investing
No one really talks about this when discussing the markets. And it’s one of the most important distinctions to consider.
Every conversation about the market or any stock should first differentiate between whether one is talking about trading or investing.
I’ll let you in on a little secret. You’re better off “investing in stocks” than trying to trade them. I know that’s not the most popular take or probably what you wanted to hear, but here’s why I say that.
Very few active stock traders beat the returns of the market over a long timeframe. And I’m talking about all those “active money-managers” and portfolio managers you see all day on CNBC or other financial channels telling you which stocks they think you should buy. I’m also talking the endless supply of articles about individual stocks and all the analysis that surrounds discussing individual stocks.
An entire industry is built around the idea of getting you to actively buy and sell stocks, when the best approach is actually “index investing” for the long-term.
But here’s the good news:
If you want to be a “day trader” that’s fine. Trade Futures.
Futures is a much better instrument to day trade than stocks. For a ton of reasons. I’ll discuss why down below, but first lets talk about why trying to be a “stock picker” isn’t usually as good as long-term index investing.
I asked Perplexity this question:
“What percentage of active portfolio managers in the stock market beat the index each year?”
Here are the results:
Based on the search results provided, the percentage of active portfolio managers that beat the stock market index each year is quite low. Here are the key points:
1) Over a 10-year period from 2013 to 2023, only 10% of mutual funds saw more than half of their stock picks beat the index. This means that 90% of funds picked more losing stocks than winners over that timeframe.
2) When looking at individual stock positions held by large-cap funds between 2013-2023, only 44% beat the index over the period they were held. For small-cap managers, it was slightly better at 46%
3) Over the past decade, only 15% of active funds in the IA North America sector (which tracks US stocks) outperformed the S&P 500 index
4) The average US fund returned 200.5% over the past 10 years, while the S&P 500 returned 327.8%, meaning most active funds significantly underperformed the index4
5) Before costs and fees, active managers on average beat their benchmarks by only 5 basis points (0.05%). After costs and fees, they underperform the benchmarks by 5 basis points
While the exact percentage isn’t specified for each individual year, the overall trend shows that a large majority of active managers fail to beat the market index consistently. The data suggests that in any given year, likely less than 50% of active managers outperform the index, with the percentage being even lower over longer time periods. It’s important to note that past performance doesn’t guarantee future results, and there are always some active managers who do outperform in a given year. However, identifying those managers in advance and maintaining outperformance over time has proven extremely difficult.
Let me repeat myself here:
You’re better off “investing in stocks” using index funds like SPY, QQQ and DIA (the S&P, Nasdaq and Dow Jones) than you are trying to actively day trade stocks. If the Wall Street professionals can’t beat the indexes, it’s going to be very hard for a beginner trader to do it.
I know that’s a hard lesson to accept because everyone wants to be a trader these days.
But like I said – the good news is that trading Futures is perfect for the beginner wanting to get in on the action. Trading Futures is the way to go. Even if you are brand-new and a complete beginner to trading.
Stocks – Options – Futures
While I’m on that topic I have to mention Options too. Many new traders gravitate to options because it doesn’t take nearly as much money to trade options as it does to trade stocks, but in my opinion Futures trading is still better than options for a new trader.
Trading options can be fairly complicated. Sure there are simple strategies, but once you start going down the options trading rabbit-hole you discover that it can get complex pretty quick. If you are a beginner trader or just getting started and you want to trade, do some searches on options trading and you’ll quickly realize there’s a LOT to learn. Even basic options trading requires a lot of learning and study and you probably want to start off by signing up for some services to learn options trading.
I’m not going to get into a detailed discussion about the pros and cons of trading stocks vs. trading options, but here’s my personal opinion on all this given my 2 Decades of experience.
Invest in stocks
Speculate in options
Day Trade Futures
So you want to be a trader? You are just beginning to explore trading and you want some tips to put you on the fast-track?
See above… That’s my opinion on the best way to approach the various instruments. But keep in mind that no matter what you decide to trade, you’ll still need to learn technical analysis and reading charts. Chart patterns and indicators and all the stuff that goes with T/A is important to learn when you are just starting out as a beginner trader.
Investing in the indexes is easy. Learning to actively trade takes work – and lots of learning. Study charts, learn the basics of technical analysis – learn Candlestick patterns and put the time and effort into it. Read as much as you can and over time you can be a successful short-term or day trader.
Analyzing charts is the same no matter what you are trading. I almost forgot to mention “stay away from Forex”. Very far away (as a beginner).
Learn To Trade Futures. Futures Trading is Perfect for Beginners that want to Learn to Day Trade.
All about Trading Futures
If you want to be a day trader… If you are just starting out as a new trader – Consider trading Futures.
I firmly believe everyone should invest in stocks and quite frankly learn as much as possible about the markets and technical analysis (reading charts). But eventually most experienced professionals gravitate to trading Futures. So why not start there?
There are so many benefits to trading Futures over stocks (or speculating in options) that it honestly makes sense to me for a complete beginner or novice trader to consider starting off with Futures.
Here are just a few Benefits of Trading Futures:
You are focused on just one instrument. As opposed to sifting through hundreds of stocks constantly to decide which ones to trade and which ones are setting up.
Futures traders are typically day traders – which means you aren’t holding anything overnight. Your trading account balance isn’t at risk from one day to the next.
Futures trading requires very little up-front capital. Start off trading the Micro Contracts with very little risk and scale-up as you learn.
Futures trading is way more tax efficient than trading stocks short-term and you don’t have to itemize every single trade. (consult a tax professional for any type of trading).
Futures trading is perfect for beginners. Basically you are using the same charting methods as you would for trading stocks – just condensed on a smaller timeframe.
Futures trading will fast-track your understanding of charts and technical analysis. All the standard chart patterns and technical analysis stuff you see on stock charts is the same on intraday Futures charts.
There are a lot of “systems” for Futures trading that can help you develop a sound strategy. A good Trading System will add structure to your trading.
Here’s what I would say to a beginner Futures Trader:
There are basically only 2 symbols you will want to start off trading, MES and MNQ. Those are the “Micro” Contracts for the S&P 500 and Nasdaq Futures.
You want to watch those instruments trade on a real-time Futures platform (such as Think or Swim or TradingView or NinjaTrader) and become intimately familiar with their intraday behavior during regular market hours. (called the “cash session” which runs 9:30-4:00 Eastern).
You will need to learn the same technical analysis – chart reading – candlestick patterns etc. just as you would if you were going to trade stocks. But you are starting off with the best instruments for day trading right at the beginning.
I need to reiterate the fact that I am not knocking stocks here at all. Everyone needs to invest in stocks for the long-term in order to keep up with inflation. Stocks are for investing and index funds are the best way to invest in stocks.
I know you want to “be a trader” and that’s fine. Learn about trading Futures and learn about investing in stocks. If you really want to spend a lot of time, learn about speculating in options. Heck, you might want to do all three.
Just remember – as I mentioned earlier. Trading and investing are two completely separate things.
I’ve just scratched the surface here, but I hope it gets you thinking. I’ll be posting a lot more articles and diving into way more details about a lot of things I just mentioned. But I just wanted to give you some quick thoughts if you are a beginner to trading.
I’ve noticed there are a lot of searches and Reddit posts asking “How to get started day trading” and I wanted to share my thoughts on this subject in the hopes I can help point someone in the right direction.
Day trading Futures is completely viable for new traders and I think that’s a good place to start.
Thank you for reading this and let me know if I can help you out in any way.