What You Need to Trade for a Living
Stockscores.com Perspectives for the week ending October 4, 2009
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In this week's issue:
Do you want to trade the markets for a living? Many aspire to do so because of the freedom it offers and the potential to make a lot of money. There is also a perception that it is easy to do, a quick way to riches. This is where perceptions differ dramatically from reality. To make a living as a trader is simple but not easy.
It is very easy to become a trader; it is certainly much more difficult to become a doctor, teacher or painter. All you need is some capital and, with the opening of a brokerage account, you are ready to trade. But trading and trading profitably are two different things. You might get lucky when you start and be convinced that trading is easy, but I doubt that "lucky" traders will be around for much more than a few months. To be a trader for the long term is extremely challenging.
So, what does it take to succeed? Here is a list of some things to think about:
1. Determination - after 20 years of trading, I still find it challenging. The market changes every day; what works one day will be a complete failure the next. You have to really love trading so you can have the desire to overcome the steady stream of obstacles that the market will send your way.
2. Knowledge - there is a lot to know but what you need to know about trading is probably not what you think. I don't think in depth knowledge of Finance is necessary to be successful. Trading is more about human psychology than it is about business, but having a broad range of experience will be useful. Mostly, you have to have an open mind and be a progressive thinker.
3. Discipline - since managing risk is so important to being a successful trader, having the discipline to follow your trading plan is essential. If you approach the market with a gambler mentality you will eventually lose.
4. Experience - I can teach anyone my trading rules in a couple of days but there is still a period of learning that all most go through in order to internalize the rules and make them their own. I have seen traders go through the learning process in less than 2 months but for most the process will take at least six months. Consider your first year of trading as part of your education. Don't expect to make profits and don't depend on the market for income while you are learning.
5. Equipment - I like to tell people that a sophisticated computer set up will not make you a successful trader. However, once you know how to trade, having some computer technology can make you more effective and more profitable. Once you are a proficient trader, expect to spend $5k to $10k on computer hardware and monitors. Do you need all of this to make money? No, I have traded from my laptop on the beach in Hawaii! However, I am more effective and efficient at home where I have a lot more resources to work with.
6. Data - the market has become very competitive, to the point where some trading strategies require data to be accurate to the fraction of a second. I don't trade with that much emphasis on time but I do use some powerful software and real time data feeds to identify trading opportunities. Software like TradeStation, which I use in addition to the software that my broker provides to me, is helpful for testing strategies and finding opportunities. That costs $300 - $500 a month but is only necessary if you are planning to be an active trader.
7. Brokerage - of course, you will need a broker to make your trades through. The brokerage business is very competitive and so there is no longer a huge difference in the prices that brokerages charge for trading. However, what does make the difference is what you get in addition to the order fulfillment. When researching brokerages, consider their service offering beyond price. I use Disnat (www.disnat.com) and they were just awarded the number one rating in Canada by JD Power and Associates.
8. Time - trading takes time, an active trader should expect to monitor the market from the time the market opens until it closes and then do some more work after that. I find trading a lot of fun so I don't really think of it as work. However, your time trading should be focused time without distractions. A phone call or having to run an errand when you should be trading can cost you a lot of money. You can give yourself some extra freedom with technology, I often keep an eye on the markets from my car with a laptop and cellular internet connection.
9. Patience - the market controls us, it does not care what we want or need. You can not overpower the market with hard work or desire. Instead, you have to take what the market gives. There are times when the market is not in a very giving mood and then there are times when the market is very generous. To be successful, you have to realize that having patience for the right conditions is necessary.
10. Capital - trading requires capital. I am often asked about how much is necessary to start and I always answer the same thing; "a little less than you are willing to lose." No matter how smart you are, no matter how hard working and determined you are, I guarantee that you will lose money when you begin. So, the person with $5 million in their brokerage account should start with the same amount as the person with $5 thousand. When you begin, you are just working to learn and your losses are part of your education. What is most important is capital preservation, which is why discipline and patience are so important. If you run out of capital, you are out of business. Never take risks that could put you under.
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Understanding where the overall market is going to go is key to determining what strategy to apply but right now this market is at a difficult point to call. I like to use the S&P 500 as the index that I analyze to determine where stocks are likely to go. Right now, it is hitting resistance at the long term downward trend line and pulled back from that resistance last week. It is on the border of a technical breakdown but I don't think it is a clear call yet.
This is a market with upward momentum that has a good chance of reversing. So, what do you do in this environment? I think you have to play defense, sitting mostly in cash but taking advantage of what will likely be an increase in price volatility by short term trading.
Since the major indexes closed above their open on Friday, basically coming back from morning weakness, I think there is a decent chance that the market bounces higher over the next few days. After that bounce, I think there is a good chance that we will see a continuation of the weakness that we saw this past week. However, a savvy swing trader can play it both ways, buying the bounce and then shorting the next wave of selling pressure.
So, for the very short term, trade a strategy like the Pull Back Play which buys short term weakness that has taken the stock back to the upward trend line. But you can also monitor a short selling strategy called Reversal of Fortunes which looks to short stocks that have broken their long term upward trend lines. GDG and PFL are good examples of what I look for with this strategy.
For this week, I ran the Pull Back Play strategy on the TSX market. I think that the commodity based stocks will do better in the near term as these stocks tend to attract scared money, and there is a bit of October fear picking up in the hearts of investors right now. Here are a couple of short term swing trading ideas to consider:
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1. T.GCE
T.GCE has been pulling back for about 8 days and has come back to the long term upward trend line. The stock was weak on the open Friday but came back to close up and near the high of the day. Support at $3.50.
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2. T.LIF.UN
T.LIF.UN is trading in an upward sloping channel that has quite a bit of variance between the top and bottom of the channel. It is now bouncing off the bottom of the channel where it should make a move back up to the upper limit. Support at $35.25.
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References
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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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