I’ve noticed that after one or two solid winning trades, I lose all enthusiasm for trading. I get sleepy and restless at the same time. I just want to take a nap, or go outside and do something. Anything but keep sitting in front of those screens! I usually force myself to stick around at least until 2PM EST, but I can’t seem to find any more trades to take. But, I know the trades are out there, because I can always find another trade to take when I’m red for the day. Funny how that works!

Maybe a lot of traders don’t have this problem, because it seems like a lot of traders out there can’t stand to be away from the markets. I enjoy trading, but I don’t have any real drive to do it beyond needing to pay my bills. I definitely don’t have any sort of gambling addiction.

So, the last two days I’ve been trying a way to attack this problem… I offer myself small rewards to continue trading. In particular, the last two days I said to myself: Just find one more winning trade, and then you can quit and go see a movie.

Making this deal with myself has worked wonders so far. What do I get? Having a goal perks me up and helps me focus. After the trade, I get to quit early. Then, I get to go see a movie (or have a massage, or buy a book, or whatever I chose). And, any winning trade I find will make more money than I’ll be spending, so I come out ahead financially.

This is kind-of a cousin to the suggestion I made long ago: go spend half the money you’d lose on yourself, instead of trading through a bad day. At least then you’re enjoying the money instead of throwing it away.

Most traders focus on cutting off strings of losses. But, if you apply proper risk management techniques, then strings of losses won’t take you out of the game. A much bigger problem, which many traders overlook, is that missing out on winners can hurt you far worse than losses. Your overall positive expectancy is based on your winners outpacing your losers, but for this to work out, you actually need to have the winners. And, you can’t have winners if you aren’t trading.

Based on that old saying “you can’t hit the ball if you don’t swing the bat,” I call this article “Keep Swinging!”

Important Caveats!

Many traders are not ready to take this advice, yet. The best thing for their accounts really is to walk away, for one or both of these two reasons:

• … because they let the losses affect their judgement. My article on how to recover from a loss points out that recovery is an aspect of your mindset, rather than your account balance. If you are not mentally recovering from your losses, walk away (and try to get better at recovering quickly).
• … because they do not have a system that works for them, and that they believe in. I don’t mean you need a mechanical system; even a completely discretionary system is fine. But, you have to know, either from testing, or your track record, or whatever, that it works and has a positive expectancy. If you are testing the waters and trying things out, please only make tiny bets if you trade at all.

So, if either of these two issues applies to you, by all means walk away from losses and regroup. But, it’s once you’ve addressed these two issues that your profits and confidence can really soar.

Excuses, Excuses…

In the past, when I had a string of losses, I would often quit for the day, or even take a couple days off. I would tell myself things like:

1. I must be off today… I better get away and get re-centered
2. The market’s mood is changing… I better stay away until it starts acting better
3. I am just unlucky today… better to save my capital and come back strong tomorrow

But those are just excuses, when you get down to it. I’d make those excuses because, when I was losing, I wanted to walk away. It’s hard on the ego to lose. But, I’ve come to realize that walking away is the last thing I should do.

Why not Walk Away?

I am going to assume here that one of your main goals as a trader is to be consistently profitable. That’s not to say you should be focused on making up your losses, or on the amount of money you have made, when trading. But, since we all know we’re trading in order to make money, it’s good to analyze how best to actually do that!

If you recall, in my article about how to be consistently profitable, I point out that there are two main factors affecting profitability. They are:

• the profit factor of your trading performance
• the number of trades you take

The profit factor is explained in the linked article, and is a somewhat fixed aspect of your trading system. The number of trades you take is up to you, though! The article shows that the more trades you find and take, the better the chances that you will be profitable that day (or week, or month… whatever your time frame is).

So, a trader that has a “three strikes and you take the rest of the day off” rule is actually crippling their chances of being profitable. By stopping in the red, they’ve dropped their chance of profitability that day to 0%, by default. But, even worse, the time off also means less trades will be taken that week. This lowers the chances that they will be profitable that week, and so on.

Another way to look at it: If you have a 60% win rate, then you can expect four out of ten trades to be losers. But, you don’t know which four they will be, and you shouldn’t care. If those four happen to be the first four of the day, then why would you stop, rather than go on to have your expected six wins? It’s not rational. Recall the caveats from earlier. We are assuming here that your losses don’t affect your judgement or performance. If so, then the outcome of the next trade has nothing to do with the previous trades. Your chances are still governed by your statistical win rate.

Of course, due to the nature of probability, there is always a chance you might keep trading and go on to have 10 losses. But, that’s what good risk management and money management are for. And, the fastest way to get back into the green is to keep trading.

You don’t make money by not trading.

Some traders, rather than quitting for the day, start placing smaller bets. This also cripples their chances of profitability. Say you cut your bets in half. Now you need twice as many wins as you needed before to get back in the green. I am a firm believer in risking a percentage of equity, so I do think you should trade smaller when your account is in a drawdown. But, that’s an adjustment to make each month or so. Not after every trade! I’ll go back to those caveats: if your judgement is not impacted, and you have a solid system, there is no good reason to cut your risk because of a few losses.

My Excuses Were Bogus, Anyway

Let’s look at the excuses I mentioned earlier, one by one. These were just three examples from my trading… Perhaps you can think of more, from yours.

First: “I must be off today.” Seriously? If I get all introspective, I can tell if I am truly off or not. I remember, one day last month, I kept pulling the trigger maybe a half-second too late, on three trades in a row. It was seriously cutting into my profits. I was pretty sure the markets hadn’t sped up, so I realized that I must have had slow reflexes that day. Maybe I was distracted, or whatever… doesn’t matter. That’s the time to walk away. Most days, though, I am just fine, and the “I must be off” theory is just a bogus ego band-aid.

Second, “the market mood must be changing.” Really? If so, then why are my setups still setting up? I have not compiled statistics to prove this (and I doubt statistics would prove it, actually), but it seems like the first setup I skip always ends up being a big winner. Surely most traders have experienced this. And of course then you try the following setup, lose again, and feel just terrible. Losses suck, but missed gains followed by more losses really sucks. Moral of the story: take all your setups, when they appear.

Two weeks ago, on a Monday, my first three trades were all small losses. This did not feel good at all. I literally thought to myself “the markets aren’t acting right.” When I realized what I was saying, I got up, walked around a bit, and had a snack. When I felt normal again, I kept trading (I was extra careful to only consider “perfect” setups, to be sure). I made two more trades, for two wins, and ended the day at break-even. I’m sure you know the emotional difference between ending the day oh-for-three, and ending the day break-even. It’s a huge freakin’ difference.

At this point, you might be objecting: “but, sometimes the markets really aren’t conducive to my trading style.” My response is: whatever criteria you are talking about should be a precondition of your trading setups. In other words, if you are correct, then on those days you shouldn’t be able to find any trades to take. If you have loosely-defined setups which give false positives when the market mood shifts, then improve your setups and keep taking every good one you find. But, please wait until you have a lot of data to back you up! Remember that it’s a common misconception that you can judge what works quickly!

Third, “I am just unlucky today.” Yes, many times we feel like we are down on our luck. But, what does that really mean? I’m not sure I can say. It’s not like we literally have a luck jar that can be running low on luck juice. This is such a flimsy excuse for quitting! In my article on how to tell if you are a good trader, I pointed out:

“If a trader has a win rate of 40%, then there is a 7.8% chance that any string of five consecutive trades are all losses. Even at a 60% win rate, the chance is 1%. So, after hundreds of trades, I should actually be surprised if there are not a few strings of 5 or more losses! It’s to be expected, and not a reflection on my ability to trade in any way.”

Earlier this week, I scratched three attempts to scalp HD. Three times, in quick succession! It kept stalling, and I kept bailing. Then, it would retreat a few cents, and set right back up at the number I was watching. After the third scratch, I said “Enough! I am just not having any luck with HD” and I passed on the fourth setup. You can guess that the fourth one ran far enough to make a profit even after covering the commissions on the other three tries! That pissed me off, because it was clearly a mistake on my part to ignore a good setup because of previous failures. Once I got calm again, I went on to trade MNT and SLAB for wins, ending the day in the green.

It Goes for Winning Streaks, Too

I am personally still guilty of this mistake: If I have a string of winners during the day, I tend to take the rest of the day off. I am back to worrying that my “luck jar” will run out of “luck juice,” I guess. This is just as bad as stopping due to losses (though it doesn’t feel nearly as bad). More trades is always statistically better. Say I had 5 wins in a row, so I quit. The next day I have 10 losses. I think I would probably wish I had stuck around for a potential 5 more wins on my good day. So, this is something I’m working on.

As with strings of losses, the key here is to not let the strings of wins affect your judgement. If you start feeling like a trading god who can do no wrong, and get overenthusiastic, then by all means walk away (and work on improving in this area). I don’t get the god complex, but I have a kind of post-win lethargy. I lose all will to trade for a while. I think it’s just fear of losing my gains in disguise, and I’m working on just forgetting my previous trades, whether they are wins or losses.

So Keep Swinging

I view ideas like cutting down risk or stopping trading after a string of losses kind of like training wheels on a bicycle. They keep you from hurting yourself when you are still learning, and uncoordinated. Once you know what you’re doing, and have the proper confidence, take the training wheels off! Leave those crutches behind.

Can you make a living as a daytrader? Come on… You don’t need me to answer that.

Every day, non-traders seek out information about trading for a living. They read article after article about successes and failures. They mull over the risks, and their impacts. They write me email asking questions. Some of those people will end up giving trading a try, and some won’t. Let me tell you something about the people who do try it: all that research is just them going through the motions.

The people who make the jump to trade for a living don’t need an article to tell them they can do it. They already know, deep down, that they can. To them, every horror story is an example of a mistake that they won’t make. Every success story just reinforces their conviction. They may be wrong, but they are driven to find out first hand.

They say they’re investigating, or weighing the risks and benefits. But, whether they know it or not, that’s not really what they’re doing. No, they’re building a case to convince themselves (or their spouses, or whoever) that quitting their job and trading is not a dumb thing to do. But this whole process is a waste of time, in my opinon. Because, it is a dumb thing to do, and there’s no way around it.

FACT: Trading is risky, and most people that try it will fail. They will start with money, and finish without money. From a safety and security standpoint, you couldn’t make a bigger mistake than quitting your job and trading for your rent money. But, be honest: you already knew that, long before you did your first “can I make a living daytrading” google search (the first of many such searches, if you are like me). And, if your probable failure were going to stop you, you wouldn’t be sitting here reading this article.

There are plenty of reasons why these potential traders might end up sticking with their jobs. Maybe their spouses can’t stomach the idea, and they value their marriage more than their dream. Maybe they shy away from the embarrassment of failure in the eyes of their friends. Maybe they just can’t find a way to raise the needed capital yet. But it’s not the risk, and it’s not the fear. If the risk, or the efficient market hypothesis, or whatever, were going to stop you, it already would have. If you have a trader inside you, just admit it: you know the risks, and you know that trading is still for you.

It’s the same story with any start-up business. For instance, anyone that does two minutes of investigation knows that you don’t want to open a restaurant, if you value your startup money. Most new restaurants fail, but I am glad people still take a chance and open new restaurants. I am glad people still go to hollywood to become actors. I am glad for musicians and artists that would rather struggle to express something beautiful than count widgets for dependable income. I am glad for dreams, and the chance to reach for them.

So, if you are a trader and you know it, don’t waste any more time pretending you are still deciding. You had decided before you started. The only question is if you are able to try it sensibly. Can you build up enough trading capital? Can you build up some savings so you can give yourself a chance to succeed? Can your family live with it, and do you care enough to let that stop you if they can’t? Learn everything you can about trading, and when you think you know everything, learn some more. Get health insurance. Etc., etc.

You don’t have to make the jump all at once. Look at Prospectus, who writes here. He’s getting started via a Zecco ($0 commissions) account, risking just a few dollars per trade. I think that’s a great idea. When you have a dream, take steps toward it until you are there. I worked essentially double my normal hours for a year, to build up my trading stake. If that weren’t possible, I would have looked for a second job. Do what you have to do!

I never would have written this post if it weren’t for a couple great posts by Phileo about his hard look at trading for a living part I and part II, and some commenters claiming that daytrading is a terrible idea. So, essentially, my response to them is: I think it’s the justification that’s hard, rather than the decision. And, we already know it’s a statistically bad idea. But, we believe in ourselves, and we follow our dreams. And, some of us do succeed. This past year as a stock trader has been wonderful for me, and that gives me all kinds of motivation to make sure my success continues. If it doesn’t, so be it! I will still have had years of trading bliss, and if you’ll forgive the pun, I wouldn’t trade that for anything. :-)

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

When I reported on my own trading journal that I had earned a profit of $3641 for the month of January 2007, TyroTrader had asked me whether that changes my current status as a laid off embedded Software Engineer. I have been trying to avoid addressing this question all this time, and trying to let my trading reveal the answer to me. But now, I think I need to directly answer this question.

There are 3 issues that I want to address which will help to answer this question. The first is the pragmatic aspects of the vocation of Trading for a Living, which this article (courtesy of Dr. Brett Steenbarger) discusses very succinctly. The decision to pursue the vocation of Trading for a Living cannot, and must not be taken lightly. As mentioned in that article, this decision has far ranging implications, for my family, and my future job prospects. We have all been taught not to care about what others think of us. However, it’s hard not to NOT care about what my parents and my loved ones think of my decision to Trade for a Living. In my opinion, we actually need to care about their opinions, because this is one of those things that can put your personal affairs in disorder, and distract you from performing well during the trading session. So the first thing I had to do is sit down and have a very frank and honest talk with my wife and find out what she thinks about what I want to do. Basically, she’s neutral about it, but wants re-assurance that I will be able to perform well enough to feed the kids. Yeah, I guess that’s a valid point. I’ve also had frank discussions with my parents regarding my intentions . My mom in particular seems to think that Daytrading is no different from gambling (Of course, she means no disrespect to all the professional Gamblers out there !). I disagreed on this point, but decided not to enter into any heated debates with her on this. I probed further in our discussions, and she basically said that she is ok with it if I can prove that I can earn consistent profits each month, every month. Sure, I knew that already, it’s pretty much implied.

So will I be able to deliver consistent profits? I’ve done something for the month of January, but that says absolutely nothing about the next 12, 24, 36 months. Writing about this right now actually brings up a whole slew of thoughts about fear, doubt and uncertainty. If I blow up again, and lose another $1K or $2K, where will the money for diapers come from? With no safety net now (via a cube farm paycheque) , will I really, truly be able to do this?

But when I don’t think about it, when I am in my chair, at my desk, in front of my LCD screens, stalking a stock for the next win, or bailing on a loser before it hits my stop, when I feel like the home team, I sincerely believe that I can perform. And that is where it begins, where it must begin - the 6th Habit of the Highly Effective Trader, which is the capacity to trust in my own ability to perform. I think that is the key. The fears, fear of failure, fear of not being able to make enough money to support my wife and our two children, is very real, and will always be there. And, I’ve already given it the respect it deserves, so it’s not necessary to give it any more time of day inside my head - left unchecked that will also cause my personal affairs to go into disorder, and prevent me from performing well during the trading session.

Instead, I fill my mind with searching for the next potential option trade, scanning for the next swing trade idea, plotting about how I can make less trading mistakes (aaargh, that alone will save me thousands of hard earned $$$$ !), finding out what is the next snarky remark TapeWorm has to say, filling my head with learning from the trading blogosphere, and even reading Dr. Van Tharp’s Book on “Trading Your Way to Financial Freedom”. These are some of the things that keep me challenged, keep me passionate, help to make progress on my self-development, and just motivate me in general. And when I’m motivated, I’m not fearful. And when the market has this much to offer me (and more), there’s no room for fear to take any hold.

However, there is still the chance that I have matured enough to follow my trading plan religiously, but will still experience a drawdown, or a series of demoralizing losses. What would I do then? In all honesty, I don’t even want to visit that road. Prevention is the best medicine, so I want to plan things so that even when my regular trading is striking out, I’ll have other income to get me thru the lean times. TyroTrader had the right idea in his post about his plan for achieving different streams of income. I also plan to diversify my income stream by starting to daytrading the US market, and eventually re-visit the Futures market. But beyond that, I will also be investigating into diversifying into other streams of income beyond the scope of trading, like real estate for instance. During my discussions with my parents, they threw out the idea of becoming a registered investment advisor. It’s an amusing suggestion, but one that I cannot dismiss at all, because of how other doors of opportunity may open up should I decide to pursue that option. In the worst case scenario, it would just mean that I have to brush up my resume and go back to a cube farm engineering day job.

One of the obstacles present in the vocation of Trading for a Living is the inherent risk of the job itself. While there is no risk of physical harm on the job, the vocation of Trading for a Living has a very blunt and obvious degree of financial risk, ie. the risk of ruin. I got a glimpse and a little taste of what that meant when I was trading futures. I said I would stop, but I still couldn’t get it out of my system for another day. Going down that dark and slippery path off the cliff is not a pretty picture, and fortunately, I’ve taken the obvious step of forcing myself to stop until I could figure out how to control myself better. I have learned from that experience, though. What I’ve learned is that I have to give this notion of “Risk of Ruin” the respect that it deserves. What that means is that I can’t take an “all-in”, gung-ho, laissez-faire, brash and impetuous approach to my trading. On the contrary, it must be a methodical, calculated, careful, and even boring approach to trading. The glamour and mystique of getting rich from daytrading is a myth. Sure, you may make two or three very profitable trades occasionally, but certainly not +17R every single trading day (unless you’re PinoyTrader, LOL!). Most days, trading, if executed successfully, is actually monotonous and boring (sorry Richard, but it just is!). But everything else about it is very enjoyable for me - the thrill of the hunt, the research, the learning, the freedom to take a nap right after lunch, or take a day off whenever I feel like it, that all has unique value in my mind. And that is what makes it worth accepting the risk.

The last issue I wanted to address is the nobility of this vocation. In every other vocation, even in professional sports, you are being compensated for providing some sort of product or service that someone else deems of value. As an embedded Software Engineer, I would design the software that went into devices which the consumer or companies bought. A basketball fan pays money to see a pro NBA player perform. However, in Trading for a Living, you are not being compensated for providing any service . There is no value being created. And perhaps someone can correct me if I’m wrong, but right now, I don’t see how buying stock XYZ at price A and selling it at price A+1 contributes to society. However, I do have an intrinsic desire (especially the INFP within me), to be a contributing member of society. For me, this helps to bring a sense of balance to the work, family, and friends buckets that I juggle in my life, and also provides an outlet to prevent me from always thinking about stocks too much. So if I am to pursue Trading for a Living, I have to start being more active in pursuing new and existing volunteering opportunities.

Writing this article has been exhausting mentally, because I’ve had to think quite long and hard about what I’m getting myself into. If you are considering the vocation of Trading for a Living , hopefully this has given you an idea of what you’re getting yourself into since it is clearly not for everyone. I’m glad I did it, because now I feel a little bit relieved to have gotten that load off my chest. Now I can get down to business - Yes, I am Phileo, day/swing/options Trader !!!

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Ok, so you’re currently in your cube farm, and you think you’ve read all these books on trading, and you’ve read all those blogs about trading for a living, and now you want to know whether it is for you, the whole you, and the real you. Well, I have been pondering the same question.

I was once asked at the exit interview with a company I used to work for, about why I am quitting my job. This prompted me to start learning about how to evaluate a job. Through a variety of books, and introspection, what I eventually came up with were factors that I found to be important in evaluating a company. Over time and through discussions with a close friend of mine, I expanded that idea into a quantitative formula for evaluating a job offer, or even a company.

First, the factors I use to evaluate a company are as follows:
1) Passion/Challenge (variety, interest, and technical difficulty of the job duties, tasks and responsibilities itself)
2) Growth Opportunities (potential for promotion, moving to a different position, training, taking courses, expansion of the position/responsibilities, etc.)
3) Job security (threat of downsizing/right-sizing and/or layoffs, hostile takeovers, major re-org, etc.)
4) Compensation and benefit package
5) Work Environment (relationship and rapport with peers, direct reports, supervisors, managers, hours worked, corporate culture, etc.)

My process was as follows:
First, rank the factors according to importance by assigning a percentage weight to each of the above factors, such that the total cumulative weight of the 5 factors MUST equal to 100. You can even assign equal (or zero) weights to the various factors, but the total cumulative weight MUST equal 100. This is the most meaningful but hardest step because you really need to spend some time think about what is important to you. Note that the assignment of these weights will change over time as your values change and the company changes. For example, as a worker in the high tech industry, it is very common for me to stay more than 8hrs a day, or work more than 40hrs per week. In one of the companies that I used to work at over 5 years ago, I would spend an average of about 50-60hrs per week (10hr days + saturdays) at work in order to meet the deadline, deliver results, make an impact on my peers and my boss, and establish influence within the company. But nowadays, now that I have a family, I value a company where I do not have to work 60hrs per week, since this gives me more free time to do other things.

For example, here is how I prioritized the factors according to the following weights over the past 3 years:

Factor                          Weight

.                        2006     2005    2004
Passion/Challenge     27%      29%     26%
Growth                14%      13%      9%
Job security           9%       9%     12%
Compensation          26%      26%     30%
Work Environment      24%      23%     23%
==============================================
100%     100%    100%

Next, evaluate your current company against these same factors by scoring them from 0-100 for each factor (0=bitter disappointment, 100=giddy nirvana). This time, the cumulative scores do not have to add up to 100.
For example, here is how I scored my (former) employer:

Factor                        Score

Passion/Challenge            70
(High initial interest which declined over time)

Growth                       60
(taking courses ok, but there was no real opportunity for advancement)

Job security                 40
(Very little threat to my job security - until I was laid off !)

Compensation                 85
(they paid me well)

Work Environment             75
(good rapport with my co-workers and boss, good corp. culture)

Then the next step after that is normalize the results by computing the weighted average as follows:

Weight1*Score1
+ Weight2*Score2
+ Weight3*Score3
+ Weight4*Score4
+ Weight5*Score5
==================
= Normalized Total

In my example:
27%*70 + 14%*60 + 9%*40 + 26%*85 + 24%*75 = 71

So, my employer ranks somewhere between a B- and a C+. Just your average, vanilla flavoured employer.
Note that although this is an objective and quantitative formula for evaluating a company/job offer, there is no conflict with the truth that accepting job offers or deciding to leave a job is as much about gut emotion than rational thought. All I am trying to do here is to quantify my gut emotions with a rational formula - the values we place on the 5 factors remain totally subjective, and will vary from person to person.

So, to evaluate a job offer or an employer, repeat steps described above for the company making you the job offer and compare the two scores.
Normally, I do this for the job offer that I would receive within the same vocation. But in this case, I want to compare my previous job with a totally different vocation - trading for a Living. So, I will go through this exercise as follows:

1) Passion/Challenge - I am absolutely and overwhelmingly passionate about Trading for a Living. And of course, I find trading to be challenging => 90
2) Growth Opportunities - Trading for a Living offers me a tremendous chance to improve myself as a person - in that sense I do have the opportunity to expand my responsibilities/capacities => 85
3) Job security - regardless of pay or inherent risk, the vocation of Trading for a Living will always be there so long as there is equity in my trading account. No threat of being laid off here => 90
4) Compensation / benefits - This one is the toughest to evaluate objectively. Granted, the potential for great income exists. And granted, I believe I can achieve the goal of consistent income given enough time and practice. But at the present moment, while my consistency is improving, it’s still not at a point where I generate trading income that is comparable with my previous job. ( That says nothing about the future, only what is the present reality of or my situation). Also, Trading for a Living, like all businesses, is not a source of a steady income.
=> 55
5) Work Environment - Trading for a Living is very much a solitary job. There aren’t many scenarios involving trading itself which require working as a team, or collaborating with others. (Working on a stock picking newsletter, or designing and implementing an Automated Trading System is a different story). While I can understand how Trading for a Living can get lonely sometimes, I have not experienced that feeling myself. It is good to have interaction with other traders, even though much of the interaction is through a bunch of 1’s and 0’s travelling down an inert piece of wire. Also, having a life outside of trading helps a lot. What is the “corporate culture” of Trading for a Living? Choice, freedom, and freedom of choice. The most important part is the freedom to get what YOU want out of the cultural aspect to trading. It is up to you to make it as social or as solitary as you want it to be. => 70

So, normalizing, we get:
27%*90 + 14%*85 + 9%*90 + 26%*55 + 24%*70 = 75.4

The first surprise is that the vocation of Trading for a Living ranked SIGNIFICANTLY higher than my previous job (that I was laid off from recently). It is a surprise because I used to think that a high-paying job that pays for the bills ‘n the toys was automatically a satisfying job. Not true, according to this system.
The second surprise (which really should not have been surprising to me at all) was that this is objectively confirming what my emotional side has been saying all along - that Trading for a Living would be a better “job offer” than what my previous employer offered, at least according to this system. That’s not to say that I don’t enjoy Engineering - I studied 5 long years to get my BASc in Engineering Physics, and still do enjoy practicing (5-10% of) what I learned in University. However, I think it’s time to recognize that I enjoy the vocation of Trading for a Living just as much, if not even more.

So what happens now?
Well, there are other issues not addressed by this system which I will need to consider. I will talk about that in Part II (since I have to take a break and gather my thoughts for answering this question).

In the meantime, try this system out yourself, to see how your present job compares with the vocation of Trading for a Living (or any other job, for that matter).

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Let’s say that you are engaged in a snowball fight (It doesn’t matter how, why, or where you are engaged in the snowball fight). You are protected behind a wall of snow that you have previously built. It is in your best interest to make this wall as big as possible so that it will offer you even more protection from the snowballs. For each snowball that you throw, there are two types of snowballs being thrown back at you: white snowballs, and black snowballs. The white snowballs will stick to your wall and make it bigger (which is a good thing). On the other hand, the black snowballs will punch a hole in your wall that is equivalent to their size (which of course, is a bad thing). The size of each white snowball can and will vary. The frequency of these snowballs hitting your wall, however, will depend on how often you are throwing snowballs at the opposing side. Furthermore, for each snowball that you throw at the other side, you will get back a certain number of white snowballs or black snowballs (but never both). Your success in this snowball fight is measured by the size of the wall. How will you win this snowball fight?

Before I answer that question, consider that the size of the wall of snow matters quite a bit. For example, if the size of the wall is less than 10x bigger than one of the black snowballs, then you would have to be a cracker jack snowball fighter, because all it takes is a few black snowballs to obliterate your wall of snow. Not only that, but for each black snowball that punches a hole in your wall, you actually need a white snowball that is BIGGER in size than that black snowball in order to repair and restore your wall (it takes more time AND effort to repair something than it is to take it apart).

The other thing to consider is that the general, average size of the your white snowballs actually depends on the size of your wall of snow (among other things). If you have a big wall of snow, then the probability of you getting bigger white snowballs has increased. However, if your wall of snow is small, then chances are, you are not going to see very many big white snowballs. Not only does that makes it harder to recover from a black snowball hitting your wall, but your wall of snow will grow at a much slower rate.

The key to winning this snowball fight then, is to know what is under your control in this snowball fight. You cannot control the size of the white snowballs. You cannot control whether a white snowball hits your wall, or a black one hits your wall. But, you can control the size of the black snowball. And that is the key - make the size of the black snowball about 1/3 the average size of a white snowball, such that one snowball can repair the damage done by almost 3 black snowballs. And, you can always make educated and calculated guesses of the average size of the white snowballs that hit your wall based on past observations of these white snowballs. Follow this (seemingly) simple rule, and you will win the fight.

If any of this sounds familiar to you, then that means you’ve probably read Van Tharp’s famous book “Trade Your Way to Financial Freedom.” In this very comprehensive book, he uses the snowball fight metaphor (where white snowballs represent trading profit, black snowballs represent loss, and the wall of snow represents trading account size) as a way to help the reader understand position sizing, expectancy, and other keys to trading success. This metaphor is much better than the marble analogy that I described in my previous post on keys to effective trading. I’ve modified and extended Tharp’s snowball metaphor as described above so that it really helps to remind me of the critical importance of position sizing and controlling losses. The new insight that I gained from this analogy was how position sizing and controlling risk are actually dependent on each other. When using fixed dollar amounts for entering a position, and separately calculating the stop loss point, that dependency is hidden and will not be clear. But once you incorporate the amount at risk into calculating the size of your position, then it becomes pretty clear. Van Tharp does a pretty thorough job of explaining how to incorporate the amount at risk into calculating position size. If you don’t plan to read Van Tharp’s book, then at least take the time to check out one of the articles that TraderMike wrote regarding position size.

There is one important corollary that needs to be pointed out. My modified analogy above also serves to highlight the problems of being undercapitalized (which Prospectus also discussed here) - the smaller your account size, the slower and harder it is to grow your capital. This is because the size of your wins are relatively smaller. A 3R win on a 30k account (with R=1% of account size) means a 30R win on a 3K account size (with the same R=1%) - and how often will you experience a 30R win from a single trade? Right, so one subtle (yet important) corollary of this snowball fight analogy is that one of the requirements for entering the business of Trading for A Living is having sufficient account capital.

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

Check out Steve Pavlina’s post about fields with low barriers to entry, where 99% fail. Seems very applicable to trading. A quote:

Imagine starting as a white belt in kung fu with no previous martial arts experience. You go to your instructor and say, “I want to compete in sparring tournaments at the black belt level.” Your instructor will probably laugh at you. If you were to spar a halfway decent black belt, you’d take a beating every single time. If you spar 100 matches, you’ll lose 100 matches. This is where the dabblers conclude that it’s impossible for them to succeed in kung fu. Those who are committed, however, know that they have a long road of skill-building ahead of them. Becoming a black belt is a choice, albeit certainly not an easy one.

What’s unfair about easy-entry fields like blogging, acting, or music is that white belts and black belts are thrown into the same pool. White belts are forced to compete against black belts who’ve been honing their skills for years. It’s totally unfair. But that unfairness is what provides the challenge and makes it fun.

There are lots of other interesting posts on his blog, if you aren’t familiar with it.

I thought I’d take a moment and talk about why I give thanks every day that I’m a a stock trader.

My Typical “Work” Week

On average, I trade about 4 days a week. When I trade, I actively watch the markets for about 4.5 hours, and set alerts to pull me back in if something comes up later. You can see from my video on my nightly trade prep that I spend maybe a half-hour each night on preparations. So, that adds up to 20 hours of dedicated work I put into trading per week. At my old job, it wasn’t unusual to do 20 hours of overtime most weeks, on top of the normal 40 hours. And, since a lot of my “work” hours are basically just waiting for opportunities to arise, I have a lot of freedom to multitask. Because of this flexibility, and the fact that I work at home, I can:

• Shop when there’s no traffic to fight
• Sleep in when I’m tired
• Go for a walk, or go swimming when the weather’s nice
• Cook healthy meals while I “work”
• Do laundry while I “work”
• Wash dishes while I “work”
• Vacuum while I “work”
• Exercise while I “work”
• tons more, but you get the idea…

Those entries about house chores may sound unremarkable, but think about it. It means that when I’m done for the day, I’m really done. It means my free time is really free. When I was working 60 hours a week, I let my apartment, and my health, go to hell. I didn’t want to spend the last half hour I had to myself cleaning up or cooking.

And, I used to commute about a half hour each way to work. That was an additional 5 or 6 hours a week of driving on top of my work hours (when there were no wrecks blocking lanes). It’s money I don’t have to spend on gas, and wear and tear I’m not putting on my car. Fantastic!

Plus, the time I spent actively paying attention to trading is very mentally engaging. It’s a constant challenge, and putting your money on the line is never a dull experience. I get to constantly learn new trading ideas, as I go head-to-head with the best and brightest traders in the world (and, thankfully, the dumbest, as well).

The Free Time

So, I just sit around staring at the television when I’m not trading, right? Well, I certainly could, but one of the reasons I couldn’t stand working 60 hours a week at my old job was that I have too many hobbies that I couldn’t pursue. I recognize what a gift it is to have this time available, and I try to use it to its fullest. Some things I’ve had time to do are:

• Write this website, and other blogs. I like to write, and share what I’ve learned with others.
• Put a real focus on finding my own inner peace and stability. I don’t mind saying that getting divorced and getting near 30 years old were really messing with my head. I’ve had time to read a bit of philosophy and practice meditation, and just generally take the time to really think about stuff
• Contribute code and ideas to StockTickr. Check it out, if you haven’t!
• Play Guitars. I still can’t play like I could in college, though. How sad…
• Start learning to play piano.
• Start learning french, and reading about auxiliary constructed languages like Ido and Novial
• Keep up to date on computer science and math topics I enjoy, primarily in the areas of programming language theory, and abstract algebra
• and much much more

Worst Case Scenario

This is my favorite part! Sometimes people I know ask what happens if I wipe out my account. With the kind of risk management I employ, that’d be a statistically difficult thing to do. But, lets ask a more relevant question: Currently I barely cover my living expenses, and sometimes I don’t cover them. After last week’s bad losses, it looks like October will be one of those doesn’t cover expenses months. So, what if I can’t improve on that, and slowly eat away my account? I would call that the worst case scenario. Let’s look at it:

I’ve been at this for 7 months now. Outside my trading account, I have about a year’s worth of living expenses sitting in risk-free savings. So, in the worst case imaginable, I will seek full time employment in the computer science realm, after a year and seven months of the paradise I’ve just described. Wow! Since I actually enjoy computer science work, that’s not a bad deal at all. After another year, it might even be a nice change of pace! And that’s the worst case scenario! How amazing is that?!

My parents told me a story last year, of a couple they know. These people worked hard up until retirement age. The saved tons of money. They bought a dream house to retire in, and rented it to someone else to bring in more cash while they continued to work. Then, right before the time came to retire and enjoy the wealth and amenities they had amassed, the husband became ill. He didn’t die, but he can’t really enjoy things like he probably imagined he could. For instance, he lives on a golf course but can no longer play golf. I bet he regrets every game he passed up because he wanted to work through the weekend.

So, I say, in the worst case imaginable, I will have had almost two years of retirement at 29, in the prime of my life. That’s an age where I can really enjoy it. But, don’t count me out, just because I’ve thought through the failure case! I think I am on track to “make it” in this game…

Isn’t There Anything You Don’t Like??

Um… nope.

Oh, Come On…

Ok, there is one thing annoying me about this lifestyle. Working by myself, from my home… well, I don’t immediately see how I’m going to meet the girl of my dreams this way. And, I would really like to meet her. Any female readers out there want to fix this problem for me? :-)

I’m trying to figure this part out. I have a general aversion to on-line dating services. Doesn’t seem very natural, plus when I did break down and sign up with eHarmony they actually refused me service! ouch! I had no idea they would do that. Someone suggested later it’s because I’m not religious. I wish they had told me that up front, before I wasted time filling out their personality profile.

I could use my free time to do some sort of social activities, maybe… take some classes, or something? I dunno. The kinds of hobbies I like are generally solitary ones. I read. I program computers. etc…

So, If The Stock Trading Life Appeals To You…

Then, do it! Map out your own worst-case scenario, and see if it doesn’t sound at least a little fantastic. Going into trading is a little daunting, just like starting any other business. But, it is also extremely rewarding. Just don’t imagine getting rich in two years (even though there’s always a chance). Instead, imagine how rich your life will be, immediately!

It’s also one of the easiest businesses to get into and out of. To get into it, open a big trading account, and establish things like health insurance for yourself. To get out, simply transfer your trading balance back into savings or whatever, and move on. Compare that to getting in and out of, say, the restaurant business. Or real-estate. Ick! A trader’s life for me!