Starting a Trading Business
Stockscores.com Perspectives for the week ending November 30, 2008
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In this week's issue:
For most, the stock market is a place to invest their money and save for retirement. But for some, the stock market presents a career opportunity. It is a chance to own a business that requires no employees, no place to store inventory, can be open the hours you choose and has the potential to be the highest paid occupation in the world. Last year, the top traders made well over a billion dollars.
Each.
Realistically, most of you will never manage the amount of capital necessary to enjoy those sorts of paychecks, but anyone with the desire can make a business out of trading. But let me be frank; doing so is simple, but not easy.
The reality is that most people who try to make a living trading the stock market fail. There are some very good reasons for this, but for those that are able to make it work, the poor success rate works in their favor. If 90% of aspiring traders lose money, that leaves a lot of profit for the 10% that can make it work.
Let me give you a guideline to help you get started creating your trading business. There are a few important areas that you must have:
Knowledge
As I said above, trading is simple, but it is not easy. If you want to trade for a living, you have to get an education on how to do it. There are a multitude of good books written about the markets and trading and there are many companies that offer education on how to trade.
Everyone should invest some of their capital in education first. Failing to do so will leave you exposed to the professional traders who are quite happy to put their hand in your pocket and take your money. Trading is a cruel game, it tends to give the test first and the lesson afterward. The more effort you put in to learning how to trade before you risk money, the better your chances will be.
With that said, I do not think that people should spend a lot of money on education. I met a lady at the Las Vegas Traders' Expo last week who told me that she and her husband had spent over $30,000 on education and were still losing money in the market. As I talked to her, I realized why; she had no idea of how to really protect her capital and make money.
There is a tendency for people to take a course, lose money in the market, and decide that they need to take another course. With each bit of training, they get more sophisticated in how they lose their money.
There are two things to keep in mind when looking for an education on how to trade. First, emotional control trumps all trading strategies and technical indicators. Nothing is more important, even the most sophisticated trading strategy will fail if the human component can not follow the rules.
Second, most education companies are marketing companies first, they are skilled at getting people to buy their educational products. From what I have seen, there is not a lot of real traders teaching those courses and so they lack the appreciation for how hard it is to manage emotions through the trading process.
I teach people how to trade and provide mentoring to help them overcome the emotions. You can buy my course for $2995. Canadian investors can get my course for free from the brokerage DisnatDirect if they choose to do their trading with them. For information, Click Here
Capital
How much capital do you need to make a living trading? That is a hard question to answer because there are so many variables. Market conditions and trading skill are the two biggest factors but generally, I think a talented trader can make a few hundred dollars a day with $10,000 capital with a broker that provides leverage of 3 to 1 when day trading.
So, how much is your time worth? Most traders starting out will not make any profits in the first few months as they learn so be ready to suffer through that learning period.
I also think it is extremely important to not have to make money trading. If you depend on the market to pay your bills while you are learning you will almost certainly fail. Emotion is what makes trading hard and the pressure of having to make a living off of the market will make it a lot harder to succeed. So, either have savings to live off of or find a way to make money outside of market hours. When I was learning how to trade, I DJ'd school dances. Glamorous? Not really. But it worked.
Equipment
There is a misconception that trading requires very powerful computers. Not true. The average computers that are available today have way more than enough power. There are some things outside the norm that will make your trading business easier to run.
First, try to get multiple monitors. The more real estate you have in front of you, the more you can watch for opportunities. Having multiple monitors attached to one computer is very simple so long as you have a computer that can host multiple video cards. Each monitor needs a video card, so if you want three monitors, you need to be able to put in three video cards. There are video cards that will run multiple monitors, the leader in that category is a company called Matrox (www.matrox.com)
Bigger monitors are not necessarily better. Resolution is what is important. A 50 inch LCD TV has the same resolution as the 12 inch laptop that I am typing this newsletter on. The monitors in my office run at a resolution of 1600 by 1200 each. That means I can put more charts in front of me because there are more dots on the screen.
Computers should have a lot of RAM, especially if you are running Vista as it is a memory pig. 2 Gigs should be good, more is better.
Finally, you should have a high speed Internet connection and it is not a bad idea to have some sort of backup if that should go down.
Support
As I have said a few times, trading is simple but not easy. Having the support of an experienced trader can make a huge difference between success and failure. Find a mentor who can review your trades with you and help you understand what you are doing right and wrong.
Those who take our StockSchool, whether by buying it or by opening an account with DisnatDirect, get mentoring from me as part of the package.
Brokerage
The brokerage is your connection to the stock exchange, they facilitate your trades. You deposit cash which gives you buying power to buy or short stocks. There are many different types of brokerages, most professional traders use a Direct Access brokerage.
Direct Access allows you to bypass market makers and send your trade order directly to the market. This has a price and efficiency advantages that can make a big difference in your overall profitability.
You send your orders using a trading platform through the brokerage system, which routes your order to the stock exchange. Once your order is filled, it is processed by the clearing house.
I have traded with all kinds of brokerages over the years and have never found that the process is 100% problem free. The Internet can go down, the stock exchange can have problems or the trading platform can fail. Some brokerages are more reliable than others, a company called Surviscor tests the Canadian brokerages for service quality. For traders, the most recent rankings were as follows:
1. DisnatDirect
2. E Trade
3. TD Waterhouse
4. Questrade
5. Trade Freedom
Finally, treat trading as a business. Prepare a trading plan and constantly adapt to market conditions so you can maximize your profits. Trading is very competitive, to do well you have to outperform other traders. Preparation and a well thought out plan are important for success.
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Position Traders have had few opportunities to choose from over the past few months, the market has been too volatile and unpredictable to play beyond a short time frame. I think this is still a risk market to take a longer term trade position in, but I am seeing some signs that stability is returning and now may be a good time to start to consider buying in, although with a good deal of caution.
In many ways, trading the stock market is more about trading human emotion than it is about the actual companies that we consider. September, October and November have been a time of fear among investors, even outright panic. But that emotion seems to be dissipating and we may soon see a round of bargain hunting which will likely be followed by a lengthy period of complacency.
One thing that I look at is the pace that the tops are falling compared to the bottoms. If you draw a line across the tops of the charts, you get a feel for how the buyers are feeling. Since the summer, that line has been steepening, indicating that buyers have gone away to hide.
The bottoms have also been falling steeply, a sign of seller panic. But, the bottoms have not been falling at as steep a pace in the last few weeks. In some sectors, we have even formed a rising bottom. This tells me that the sellers are tired and done what they will do. With some buyer interest, these markets may enjoy a little comeback rally.
This strategy is pretty aggressive, I would guess that it has about a 50% chance of working. However, the upside if it does work justifies the risk, provided you have the discipline to sell if support is broken.
Here are two ETFs that look better than most:
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1. T.XMA
The last low on November 20th was higher than the low set at the end of October. This makes me think that this sector is basing and as momentum turns, we may get a little comeback rally. Ideally, I would like to see the sector pull back over the next week and investors consider this ETF on weakness, perhaps some where around $10. Support at $8.50.
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2. XLE
Crude Oil has bounced off of its lows over the past week but Energy stocks have not been at new lows since October 10th. They have been basing in sideways trading over the six weeks. Consider this ETF on a pull back toward $40 - $45 with support at $39.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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