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Strategies & Market Trends : Trading For A Living -- Ignore unavailable to you. Want to Upgrade?

To: Darren who wrote (618)	6/28/1998 5:45:00 PM
From: H-Man	Respond to of 1729

Newt for prez. ;-)

To: Darren who wrote (618)	7/3/1998 2:07:00 PM
From: Robert Graham	Read Replies (3) \| Respond to of 1729

With all due respect to Darren, I find it difficult to accept the statement that one can make a six figure income as being "pretty easy if you have at least some aptitude for trading". I have run across individuals here at SI that did demonstrate "some aptitude for trading" that washed out in the end. All they managed to do was stay in the game longer than many people have before coming to the understanding that trading the market is not working for them. This thinking of using $50,000 for a six figure income is IMO a bit unrealistic from my talks with other traders and what I see as common sense. Think about it for a moment. When you are trading full-time, preservation of capital becomes essential. This comes out of good money management practices designed to keep the trader in the game. IMO there is no money management practice that was created with this in mind that allows the trader to commit a good portion or all of their capital at once, and even leverage it through margin in the course of day trading, like I see other traders doing. I find that some of the very experienced and proven traders suggest only risking 10% of your capital at any one time. In this way the trader can suffer through the inevitable draw downs that come from mistakes and even their trading system and still be in the game and still pay those bills for themselves and their family. Does this not sound like an intelligent and risk aware approach to trading? Lets see...$50 per share stock with lest say $10,000 gives you a whole 200 shares to trade to a six figure income. I do not think so. Perhaps the $50 stock is too pricey fo this trader. So lets talk about a $20 or under stock which would limit the trader from a good portion of the liquid and active stocks out there, particularly in the latter stages of a bull market. This would allow for the purchase of 500 shares. Maybe we need to risk more money up front on the trade. Lets take the very high portion of $20,000 and purchase 1000 shares. Now at least for a point change in the stock, the trader can gross $1000 in profits. Now all you need over the course of a year is to accumulate 100 points of "profit". Sounds easy? Remember, you need to consistently make at least this profit in any market that is presented to you. A few hits in a row can take a fair percentage of those 100 points away from you. Also you need to pay your bills and living expenses which can amount to the $50,000 itself per year. And a good draw down, which inevitably can happen, will take a good part of the $50,000 away from you. So then where would you be? Now the $50,000 has become $100,000 and more. Lets allow for a 20% draw down in your trading capital, which IMO is not allowing for much of a buffer. So now we are talking about at least $125,000, and this is trading just one stock at a time. What is a trader's success rate? I imagine this depends on the type of trading they do and their own skill level. Lets assume the trader is past their costly learning curve. I think a success rate of 60% would be considered very good in any form of trading. I personally do not believe the traders who claim a 80% or 90% success rate what what are obvious reasons to a seasoned trader. Success rates will vary through the year and as the market changes. I never underestimate a novice trader's ability to deceive themselves. So the trader would need to go out after about a 160 point profit to come up with 100 point gross profit just to meet a $100,000 per year income. If each trade has the capability of a 3 point profit, then this would mean at least 50 trades would have to be made per year, or approximately one per week. Sounds doable, but actually doing this is another thing entirely. We are not even allowing for losses here where there can be up to 3 or more trades in a row that generate a loss. What about the mistakes a trader makes that goes beyond the losses generated by their "system"? Part of a trader's losses can be due to the trader's emotional state of mind which at times the market can play on and whipsaw even an experienced trader. And we are talking about at least $125,000 here and preferably $300,000 using a conservative money management approach. Now what happens if the car breaks down and need replacing? What happens if a storm causes damage to the house that is not entirely covered by insurance? So on and so forth. This is a part of life we have little control over that has its financial consequences. In addition to the lack of sound money management practices, I find that many traders who are relatively new to the markets simply have no concept of risk, little alone having the ability to realistically evaluate the realistic profit objective of a particular trade. Before I make each trade, I attempt to numerically evaluate the risk to reward ratio of that trade. In my case, I look to see how far away from solid support the current price is of the stock. Some traders take this as the distance between the price and its 20 day MA for example. I compare this not to my price target, but what I can reasonably expect as the minimum move up by the stock, which is usually to the next solid resistance. I then ask myself some questions. What are my chances of making my price target? What is the likelihood of me being able to exit this stock at break even or a very small loss if the trade were to go against me? It helps if support has just been validated before I enter my trade. Is there any news coming up like the company's earning's report that can create volatility in the stock that can unpredictably move against me? These are just a few questions I ask myself. A well-defined, tested, and proven system can take care of some of these questions but cannot replace the requirement for the trader to understand the risk involved in the trading of stock with the system they are using, and knowing when the risk for personal or market reasons have become to great to continue trading the system. After how many losses should the system be considered not to work with the current market? Do you wait and try again? Or is the system in need of change due to the changing market conditions? It would be nice to be out of the market before a major correction hits which can provide the system you are using with a price change that it may not be able to handle before a large loss appears. If you found yourself in this situation, then what do you do? Wait for a bounce before selling just to find yourself following the market down that has no apparent bottom? Or sell immediately at market and tolerate a very bad and costly fill? Even some of the best traders can freeze during a severe intraday market correction. Or do you attempt to follow your system as the market drops through the floor and "see what happens", this assuming you have the substantial courage to keep with your system during a crisis like this. I guess life as a trader is not that easy or success is not that predictable of an outcome, is it? Comments welcome. Bob Graham

To: Darren who wrote (618)	7/19/1998 7:14:00 PM
From: Mad Bomber	Read Replies (1) \| Respond to of 1729

[Gross Income] When you say: Both questions / responses were to achieve a 6 figure income. Six figure gross income on $50,000 is pretty easy. if you have at least some aptitude for trading...don't forget about the gov't though. They want their cut quarterly... Is your Gross income estimate here net of all trading costs (i.e. commissions, reasearch, hardware, etc.). Also, I assume you mean 50K margin account, so, 100k approx. buying power?? MB