Trading For A Living - Part 2

In part 1 of this article I started to look at the financial implications of giving up the day job to instead start trading full time for a living. There are more than just monetary considerations as we will see later, but for now, there are some more costs to ponder.

More Costs!

Let’s move on to equipment. Presumably you already have a PC and internet connection by virtue of the fact you are reading this on the internet. But are these both up to the job of trading full time? Again the specifications for both hardware and ISP will depend largely on your trading style, but if you’re relying on a 100Mhz Pentium II and a dial up service, you’re setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too – expect the unexpected.

Many traders make the mistake of saying “This will do me whilst I start out, and I’ll get something better when I make some real money”. This is quite simply false economy, you are unlikely to ever make real money with a substandard setup (and this applies equally to substandard software and data feeds). This is a cut-throat business and 95% fail, you must give yourself every advantage you can. You wouldn’t enter the Indy 500 in a go-kart with the intention of buying a better car when you’ve won a few races, and the same thing applies here.

Earnings

When you’ve added this all together, you have a pretty good picture of how much money you need to generate from your trading in order to live. Does your past performance suggest you will be able to meet this target? It’s tempting to say “When I go full time I’ll make much more”, but how do you know this is the case? Perhaps you can take a couple of weeks holiday and try it out – if you don’t make enough in that two weeks then you’re not ready. A few weeks really isn’t enough time to know if you’re going to succeed though. An ideal next step then is to cut your day job hours to part time and trade maybe two or three days a week. This way you know you have some money coming in, you get to trade for real, and if it all goes horribly wrong you are probably better placed to get back into full time employment than someone who quit the working world completely.

The option of part time work is a luxury many of us don’t have however. So does it have to be all or nothing – trade or work? Why not keep the day job and trade outside your working hours as well. If you are trading and end of day strategy, then this is easily achieved by doing your research in the evening and placing the appropriate combinations of Stop and Limit orders with your broker. For day traders, certainly practising is easier if your intended market is not your home market, for example if you want to trade the US and you live in the UK where you can come home and paper trade in the evening.

There are other try before you buy options open to the day traders who want to practise trading their home market outside of normal hours though. eSignal allows you to download tick data for any symbol and play it back in real time or speeded up so you could trade the whole day in an hour. Other vendors have similar offerings, and if you have an IB account you can use AutoTrader to record tick data during the day for playback into a demo version of SierraCharts or QuoteTracker for free.

The bottom line here is that before you take the plunge, you need to have done everything in your power to prepare yourself for what lies ahead. It will still be harder than you ever thought, but it will be nigh on impossible with no preparation whatsoever.

Other Considerations

There are a few non-financial aspects to consider before going full time with your trading. If you have a family, how will the change impact them? Do you have the space to work uninterrupted during the day? It’s important that the family don’t assume that because you are at home you are automatically available to take the kids to school, or walk the dog. Make sure from the start that everybody knows the ground rules and that you can separate your working time from your free time effectively.

Consider also the social impact of leaving your full time employer. Again, if you have a partner or family are you going to drive each other nuts being in the same house all day? Relationships can be tested to the limit! Or if you live alone, are you going to drive yourself nuts being on your own all day? Trading full time can give you enormous amounts of free time, but if you have nothing to fill that time with you can quickly lose the plot – I’ve seen it happen and it’s not pretty.

Is It Worth It?

Nobody can tell you if trading for a living is for you, it’s something you have to find out for yourself. I’ve seen traders go through highs and lows to challenge those of any stock chart, but for most it has proved to be a good move. The long list of benefits are all there for the taking, as with any change of career or indeed any major life change, as long as you go into it with your eyes open, and above all prepare, then there is no reason why it cannot work for you.

About The Author

Geoff Turnbull is a full time day trader, and a contributor to http://www.stock-trading-world.com

The Realities Of Market Timing

Market timing systems are based on patterns of activity in the past. Every system that you are likely to hear about works well when it is applied to historical data. If it didn’t work historically, you would never hear about it. But patterns change, and the future is always the great unknown.

A system developed for the market patterns of the 1970s, which included a major bear market that lasted two years, would have saved investors from a big decline. But that wasn’t what you needed in the 1980s, which were characterized by a long bull market. And a system developed to be ideal in the 1980s would not have done well if it was back-tested in the 1970s. So far in the 1990s, any defensive strategy at all has been more likely to hurt investors than help them.

If your emotional security depends on understanding what’s happening with your investments at any given time, market timing will be tough. The performance and direction of market timing will often defy your best efforts to understand them. And they’ll defy common sense. Without timing, the movements of the market may seem possible to understand. Every day, innumerable explanations of every blip are published and broadcast on television, radio, in magazines and newspapers and on the Internet. Economic and market trends often persist, and thus they seem at least slightly rational. But all that changes when you begin timing your investments.

Unless you developed your timing models yourself and you understand them intimately, or unless you are the one crunching the numbers every day, you won’t know how those systems actually work. You’ll be asking yourself to buy and sell on faith. And the cause of your short-term results may remain a mystery, because timing performance depends on how your models interact with the patterns of the market. Your results from year to year, quarter to quarter and month to month may seem random.

Most of us are in the habit of thinking that whatever has just happened will continue happening. But with market timing, that just isn’t so. Performance in the immediate future will not be influenced a bit by that of the immediate past. That means you will never know what to expect next. To put yourself through a *timing simulator* on this point, imagine you know all the monthly returns of a particular strategy over a 20-year period in which the strategy was successful.

Many of those monthly returns, of course, will be positive, and a significant number will represent losses. Now imagine that you write each return on a card, put all the cards in a hat and start drawing the cards at random. And imagine that you start with a pile of poker chips. Whenever you draw a positive return, you receive more chips. But when your return is negative, you have to give up some of your chips to *the bank* in this game. If the first half-dozen cards you draw are all positive, you’ll feel pretty confident. And you’ll expect the good times to continue. But if you suddenly draw a card representing a loss, your euphoria could vanish quickly.

And if the very first card you draw is a significant loss and you have to give up some of your chips, you’ll probably start wondering how much you really want to play this game. And even though your brain knows that the drawing is all random, if you draw two negative cards in a row and see your pile of chips disappearing, you may start to feel as if you’re on *a negative roll* and you may start to believe that the next quarter will be like the last one. Yet the next card you draw won’t be predictable at all. It’s easy to see all this when you’re just playing a game with poker chips. But it’s harder in real life.

For example, in the fourth quarter of 2002, our Nasdaq portfolio strategy, with an objective to outperform the Nasdaq 100 Index, produced a return of 5.9 percent, very satisfactory for a portfolio invested in technology funds only. But that was followed by a loss of 7.8 percent in the first quarter of 2003. Most investors in this strategy, at least those we know of, stuck with it. But they experienced significant anxiety at the loss and the shock of a sharp reversal in what they had thought was a positive trend. The same phenomenon happened, with more dramatic numbers, in our more aggressive strategies.

Some investors entered those portfolios in the winter of 2002, and then were shocked to experience big first-quarter losses so quickly after they had invested. Some, believing the losses were more likely to continue than to reverse, bailed out. Had they been willing to endure a little longer, they would have experienced double-digit gains during the remainder of 2003 that would have restored and exceeded all of their losses. But of course there was no way to know that in advance.

Most timers won’t tell you this, but all market timing systems are *optimized* to fit the past. That means they are based on data that is carefully selected to *work* at getting in and out of the market at the right times. Think of it through this analogy. Imagine we were trying to put together an enhanced version of the Standard & Poor’s 500 Index, based on the past 30 years. Based on hindsight, we could probably significantly improve the performance of the index with only a few simple changes.

For instance, we could conveniently *remove* the worst-performing industry of stocks from the index along with any companies that went bankrupt in the past 30 years. That would remove a good chunk of the *garbage* that dragged down performance in the past. And to add a dose of positive return, we could triple the weightings in the new index of a few selected stocks; say Microsoft, Intel and Dell. We’d get a new *index* that in the past would have produced significantly better returns than the real S&P 500. We might believe we have discovered something valuable. But it doesn’t take a rocket scientist to figure out that this strategy has little chance of producing superior performance over the next 30 years.

This simple example makes it easy to see how you can tinker with past data to produce a *system* that looks good on paper. This practice, called *data-mining,* involves using the benefit of hindsight to study historical data and extract bits and pieces of information that conveniently fit into some philosophy or some notion of reality. Academic researchers would be quick to tell you that any conclusions you draw from data-mining are invalid and unreliable guides to the future. But every market timing system is based on some form of data-mining, or to use another term, some level of *optimization.* The only way you can devise a timing model is to figure out what would have worked in some past period, then apply your findings to other periods.

Necessarily, every market timing model is based on optimization. The problem is that some systems, like the enhanced S&P 500 example, are over-optimized to the point that they toss out the *garbage of the past* in a way that is unlikely to be reliable in the future. For instance, we recently looked at a system that had a few *rules* for when to issue a buy signal, and then added a filter saying such a buy could be issued only during four specific months each year. That system looks wonderful on paper because it throws out the unproductive buys in the past from the other eight calendar months. There’s no ironclad rule for determining which systems are robust, or appropriately optimized, and which are over-optimized. But in general terms, look for simpler systems instead of more complex ones.

A simpler system is less likely than a very complex one to produce extraordinary hypothetical returns. But the simpler system is more likely to behave as you would expect.

To be a successful investor, you need a long-term perspective and the ability to ignore short-term movements as essentially *noise.* This may be relatively easy for buy-and-hold investors. But market timing will draw you into the process and require you to focus on the short term. You’ll not only have to track short-term movements, you’ll have to act on them. And then you’ll have to immediately ignore them. Sometimes that’s not easy, believe me. In real life, smart people often take a final *gut check* of their feelings before they make any major move. But when you’re following a mechanical strategy, you have to eliminate this common-sense step and simply take action. This can be tough to do.

You will have long periods when you will underperform the market or outperform it. You’ll need to widen your concept of normal, expected activity to include being in the market when it’s going down and out of the market when it’s going up. Sometimes you’ll earn less than money-market-fund rates. And if you use timing to take short positions, sometimes you will lose money when other people are making it. Can you accept that as part of the normal course of events in your investing life? If not, don’t invest in such a strategy.

Even a great timing system may give you bad results. This should be obvious, but market timing adds a layer of complication to investing, another opportunity to be right or wrong. Your timing model may make all the proper calls about the market, but if you apply that timing to a fund that does something other than the market, your results will be better or worse than what you might expect. This is a reason to use funds that correlate well you’re your system.

The bottom line for me is that timing is very challenging. I believe that for most investors, the best route to success is to have somebody else make the actual timing moves for you. You can have it done by a professional. Or you can have a colleague, friend or family member actually make the trades for you. That way your emotions won’t stop you from following the discipline. You’ll be able to go on vacation knowing your system will be followed. Most important, you’ll be one step removed from the emotional hurdles of getting in and out of the market.

About The Author

Robert van Delden has been managing the FundSpectrum Group since 1998, whose objective it is to help individual investors to increase their investment returns using low risk Market Timing strategies.. More details can be found on our membership web site: http://www.fundspectrum.com

Is Starting A Business For Me? What To Consider Before Starting A Business

Do you have the right temperament?

Starting a small business is one of the most serious decisions that a person can take in life. Positively, it often results in higher income levels than one could achieve as an employee together with the unique buzz of being your own boss but conversely it also can be stressful, will demand longer working hours and will probably reduce your ability to take long holidays.

Do you have a definite business idea?

The desire to be your own boss is not enough to succeed. Empirical evidence clearly shows that those who do best normally have previous work experience in their chosen business field or have conducted thorough research.

Research, Research, Research!

Before committing to setting up a new business carry out as much research as possible, perhaps contacting any representative and professional bodies for their input and advice. In addition, it is important to note local market conditions as, unless you have a unique selling point, it is very difficult to succeed where a local market is saturated with established competitors. In addition, it is always wise buy a few pertinent general business books as most will encapsulate the basics of creating a successful business - The formula being remarkably consistent from sector to sector.

Hope for the best but expect the worst!

By definition most entrepreneurs are positive but ironically such optimism can often be their worst enemy, so always leave a sufficient financial safety blanket.

Keep non-essential costs to a minimum.

Many new business people overspend on hardware, expensive computers, printing etc. If your business does not require people physically coming to a shop or office do not waste money on office rental or even employing a secretary. In many cases, a serviced or virtual office will create the right impression at a fraction of the cost of having your own office.

Get Expert Advice

Today many government bodies and banks offer free business start up advice. In general such advice may not be all encompassing and may have certain vested interests but by seeking such advice from a number of different suppliers you should end up with a fair understanding of how to develop your new business.

Consider a Franchise.

The risks of establishing your own business are considerably reduced by buying a well known and established franchise. In many cases, the franchisor can often help with finance, computer software and business methodology. The downside is that if you really are aiming for the heavens then becoming a franchisee is unlikely to result in untold riches!

About The Author

Austen Osborne

www.startingmybusiness.biz is dedicated to helping small businesses that are starting up or are looking to grow. They offer everything from company formation to accountancy, via business books and virtual offices.

Call now on 0845 1300 060 to get started.

Overbought/Oversold

Has your broker ever told you that a stock is “overbought” or “oversold”? He probably went on the explain that the stock you own (I hope you didn’t) had gone down so far that it now was oversold and due for a rally. He might also have encouraged you to buy an equal amount to “dollar cost average” your position so that when (“if”- he didn’t say that, I did)) it did go back up you could “get out even”. He might even say you “could make a fortune”.

Waiting to get out even is the great trap that is preached by all the big Maul Street brokerage houses. What is even worse is most brokers and financial planners believe it. What happened to all those beautiful company reports sent to you telling how wonderful this stock was before you bought it. Maybe you better read those back to him. Brokerage companies do not want you to sell.

When any stock is going either up or down for any extended period of time it does seem logical that it can become overbought or oversold, but let’s examine what that means to your ownership.

The reason a stock started up is because the underlying profit projection is going to produce substantial profits that will make the stock more valuable. At some point it is going to reach a true valuation and should stop advancing. What usually happens is it goes beyond true valuation to what could be called overbought (over valued) and then starts down. You may be encouraged to buy when a particular stock becomes “hot” and everyone is buying it. When all the sheep are buying you want to be a seller or you will also be sheared.

Suppose all this was in anticipation of future profits that did not materialize? Then the rise would turn over and head down. This would be more likely for a smaller company than one of the giants, but giants have been toppled. If any fraud was involved the company might even go bankrupt.

Think back to WorldCom that went to the moon and was finally flushed down the sewer. Did it EVER while it was tanking become oversold for a rally? Not hardly because there was no value. Unless you truly understand how to trade overbought and oversold situations the best thing to do is keep your hands in your pockets.

Beauty is in the eye of the beholder. Overbought and oversold is in the mind of the buyer/seller.

About The Author

Copyright 2004 All rights reserved.

Albert W. Thomas Former 17 year exchange member, floor trader and brokerage company owner. F*R*E*E investment letter www.mutualfundmagic.com. Author of best seller "IF IT DOESN'T GO UP, DON'T BUY IT!"

al@mutualfundmagic.com

Super Rules, OK?

Do you rule your superannuation or does it rule you?

It’s easy to fall for some myths about your super unless you do some clear thinking about who is in charge. Virtually all Australian employees now have a superannuation account, many have several, even more than they know about. We all hope to use this money to fund our retirement, but unless you look after your super then you are in danger of losing some of your money along the way.

Myth number 1.

Someone else can look after my super. Only partly right. It is possible go through your working life letting your super run on autopilot, but you may be in for an unpleasant surprise if you don’t keep an eye on your super. Make sure your employer is paying the correct amount, and that if your employer goes broke your super is still available.

If you change jobs you need to decide if you wish to ‘roll over’ the money into another fund. This is especially important if you change jobs frequently. You can find that you have relatively small amounts scattered over several funds, and in each you will be paying a management fee before you earn any distribution or interest. In the long term inflation will eat away at the value of your principle, even though the dollar amount stays the same. Many super companies provide a free service to consolidate small accounts for you. Use them.

Myth number 2.

It’s not my money until I retire. Dead wrong. It’s your money, just like the rest of the money in your pay packet. Super funds are providing a service of managing your money until you can legally access it when you retire. You have control of it. After July 2005 you will have even more say about your money. If you are not happy with the service you should tell the service provider. If they can’t fix your problem, then you can sack them and put your money elsewhere.

Myth number 3.

I don’t need to worry about it until I am at least fifty-something. Not really. Australians are enjoying longer lives and better health. You will need more money if you want to have more options in retirement. You will probably need to top up your super to achieve financial independence in your golden years. The sooner you start the better.

The Australian Government is generously giving away our money to help lower and middle income earners top up their super. It’s called the superannuation co-contribution scheme. If you, or your spouse, are eligible you should make sure you get your share.

Fact number 1.Our superannuation is our money. To look after your super you need to learn about your rights and options. It’s a long term task. You need to get information and advice. Don’t rush, but start soon.

About The Author

Darby Higgs is a Melbourne-based web writer. Read about how he retired at http://www.vinodiversity.com

Protecting the Tax Advantage of Your Deferred Compensation

The American Jobs Creation Act of 2004 imposed strict new rules on non-qualified deferred compensation plans. Beginning in 2005, deferred compensation programs that are not in compliance with the new rules may be taxed as wages, slapped with a 20% excise tax, plus charged an interest penalty.

Given the potentially huge tax consequences for non-compliance with the rules, you should consult with your organization’s benefit specialist and your tax professionals to figure how your compensation might be affected by these new rules.

Deferred compensation plans are often used to provide for the deferral of salary, incentive compensation (i.e., commissions or bonuses), or supplemental compensation for top executives, independent corporate directors, and individual board members. The new rules apply to nonqualified deferred compensation plans at taxable and tax-exempt organizations.

An option for independent corporate directors and individual board members who receive 1099 income for their services may consider is to freeze their nonqualified plan and adopt a qualified plan such as the “one person defined benefit plan”, called the Solo-DB Plan. Qualified retirement plans are exempt from the requirements of the American Jobs Creation Act.

The Solo-DB plan allows the highest deductible contributions possible in a qualified retirement plan. For example in 2005 one can contribute up to $170,000 of compensation into a tax-deferred Solo-DB plan.

Defined benefits plans have been around for a long time. But, recent pension legislation has raised the contribution and deductibility limits as well as simplified plan fund requirements. Thus, defined benefit plans like Solo-DB have become much more attractive to upper-income individuals with self-employment income. The Solo-DB plan will allow you to aggressively fund your retirement while cutting your taxes significantly.

Individuals who qualify for the Solo-DB plan include sole proprietors, independent contractors, and small business owners age 45 or older who can contribute more than $41,000 annually to the plan for at least three years.

For more about Solo DB plans visit Lamaute Capital at: http://www.InvestSafe.com.

About The Author

Daniel Lamaute, CEO of Lamaute Capital, Inc. (www.InvestSafe.com) specializes in setting up retirement plans. You may visit http://www.investsafe.com to access a free calculator that will help you estimate what your maximum contribution might be under different plans.

What My Horse Had For Breakfast

Let’s see, he had some oats, fresh alfalfa and his vitamins. I know from the mixture that is great food and he will win the seventh race this afternoon. He can’t lose because of his diet and a great jockey will be riding him.

Kinda reminds me of what my broker (horse trainer) told me to do when I was selecting a mutual fund to buy. He said to check out what was in the fund (the mixture of stocks, like my horse’s breakfast) and to see if there was a good fund manager (the jockey). I did what he said and carefully read the annual report and the prospectus too. Sounds great so I bought it.

What I can’t understand is I did all the things the horse trainer said I should and "Rocket", my horse’s name, still came in 6th in an 8-horse race. All I wanted him to do is come in first and I can’t say I’m crazy about that mutual fund either.

That fund has a 5-star rating, is managed by one of the great names on Wall Street and has 60 of the best known company stocks I can think of and yet it is going down. I am doing everything that conventional wisdom says I should, but I continue to lose. Is there and answer?

I am not so sure about the horse, but I know the conventional wisdom of Wall Street is mostly smoke and mirrors. I read the Annual Report, but I forgot that "annual" means that much of the information is over a year old. How much help can that be? And I forgot that the prospectus was not written to enlighten me, but for the bean counters in Washington. It is supposed to make available to me all the financial information I need to make a decision to buy. All of this research is nonsense, as it will not tell me the one most important thing I need to know - will the price increase so I can make a profit? Unfortunately, my broker is not going to be much help here either as he has been trained by the Wall Street method which has nothing to do with making money or protecting my capital.

Anyone can look up all kinds of information, but when it comes down to it ask this question: Will knowing all that stuff make me any money? I always figure that if I can find it out it isn’t worth knowing any more because that information is already reflected in the price of the stock or mutual fund. So why bother?

Wall Street brokerage companies want you to do all that "research" because if what you buy doesn’t go up they can say you knew everything about it before you bought it. It wasn’t their fault you did not understand it.

I think I’ll sell that horse. And quit listening to my broker.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know.