Realistic Expectations (Part 4)
Posted by Mark on October 10, 2013 at 06:30 | Last modified: January 8, 2014 06:12Today I will conclude this blog series by talking about making a living through full-time trading.
I cannot accomplish this task by relying solely on trading income to cover monthly expenses. This is too much stress for anyone who is required to think clearly. Any trader will have periods of “feast” and of “famine.” If I require trading profits every month to pay the bills then at some point I am likely to fail. Treat trading as a business. Nobody starts a successful business without having savings to sustain them through the rough times until the business becomes profitable [again].
While I cannot rely on monthly income, I should aim to cover the expenses each and every month. I look to make $X per month. I don’t care what percent return that is or how it fares relative to the broad market. My goal is to avoid having to go back to work for someone else. If I cover my bills on a regular basis then I will be successful.
I would offer two footnotes to the above-stated points. First, while I do not care much about it, if my monthly requirements demand an unrealistic percent return then I need to be cognizant of that to lower risk of going bust. Second, for me a particular type of trading strategy is needed to trade for a living. Because the mortgage is due every month, my personality requires something that will make money most of the time. This means I need to place trades that give me a high probability of making my monthly requirement. More speculative trades tend to have a lower probability of profit, a higher reward-to-risk ratio, and are characteristic of less liquid markets. Speculative trades, as an experienced trader once described, can buy me “dinner and a movie” but are not something to trade with the goal of covering the mortgage. I need to understand the difference.
In summary, I need to implement critical thinking to help determine realistic expectations and then I need to develop a mind-set that keeps me focused on requisite monthly income generation rather than the commonly advertised percent return relative to a benchmark.
Prospective traders: you can do it!
Categories: Option Trading | Comments (0) | PermalinkRealistic Expectations (Part 3)
Posted by Mark on October 7, 2013 at 05:54 | Last modified: January 7, 2014 12:28As promised in my last post, today I will discuss some trading expectations that I do believe to be realistic.
I believe that profit potential is directly proportional to time frame. A trade that lasts minutes will make less than a trade that lasts days; both market movement and option decay occur in larger magnitude over a longer period of time. I believe position size should be smaller for less consistent trades and for trades with a smaller average-win-to-average-loss ratio. I believe shorter time frames are more inconsistent due to inherent volatility of the markets. Shorter time frames should therefore be traded in smaller size, which is also consistent with limited profit potential.
I believe the discussion of reasonable returns should end around 1% per month of my total net worth. At roughly 12% per year, this would knock the socks off historical stock market returns and make people like Warren Buffett or successful hedge fund managers very proud. I have seen many educational programs and newsletters that tout monthly returns of 5-10%. In my opinion, even claims as low as 2% per month should be closely scrutinized. Are losses taken into account? How long will it take to recover from a loss? If I leverage up with that strategy then will I lose everything after consecutive losses? If I limit position size to 1-2% of my total net worth then will I make enough money to offset the cost of the service?
I am a firm believer that chasing advertised returns can stifle my growth as a trader and/or may completely knock me out of the trading game sooner rather than later. Advertised returns are usually wildly exaggerated. I can use my critical thinking skills to figure out why on a case-by-case basis. The sooner I am able to discern reasonable expectations from misleading marketing, the sooner I will stop wasting time and money likely only to land me in the red.
Finally, I believe I can make a living trading. I’m not convinced that I can make millions of dollars doing this but I can pay the bills. The more money I wish to make as a percentage of my total net worth, the more likely I am to fail and suffer catastrophic loss.
I will conclude this blog series with my next post.
Categories: Option Trading | Comments (0) | PermalinkRealistic Expectations (Part 2)
Posted by Mark on October 4, 2013 at 06:42 | Last modified: January 3, 2014 09:05In an attempt to formulate a position on what I believe is reasonable to expect as a trader, I have begun by reviewing “trader wisdom” that was the focus of my last blog series.
Continuing on:
> It’s not that you can predict the future with it but you get comfortable with how [the market] reacts.
Yes, I can be comfortable on most days with how the market reacts: until a day rolls around when I am not. At some point the market will make a three, four, or greater standard-deviation move that can potentially knock my socks off. This is what I must prepare for each and every day even though I will only see it on rare occasion.
> I sit here in front of the screens all the time watching the 5-minute bars on all the futures and I’ve
> gotten very comfortable with my trades because I kinda know… I get decent entry points because I
> know how the market is moving around when I’m getting my trades on and I know when to just…
> hold off… doing my adjustment for 5, 10, or 15 minutes to see—you know, typically it’ll reverse here
> so I’ll wait and see and maybe get a better price.
This is too general to be meaningful. To me, the underlying tone suggests this happens regularly, which is not realistic. The subjective terms “comfortable,” “decent,” and “better” are all true if I am on a profitable streak and false if trading has hit the skids for my account.
> On this trade, I think it’s important to really understand how [the market] works so you can see
> the graph and see how these candles affect the trade.
This sounds good and I can see a large audience nodding heads but it becomes meaningless nonsense when I try to analyze it.
> You’ll see patterns among the stocks.”
I find it unrealistic to expect any patterns to be evident in live trading at the hard right edge of a price chart.
I’ll go more into realistic expectations in my next post.
Categories: Option Trading | Comments (1) | PermalinkRealistic Expectations (Part 1)
Posted by Mark on October 1, 2013 at 07:07 | Last modified: January 3, 2014 08:48What do I know? You must be the judge. I am now in my sixth year of trading for a living. Over that time, I am profitable net living expenses. In recent posts, I have dismissed much as the Holy Grail in sheep’s clothing and because of this, I feel it important to clarify my position on what I do believe is realistically possible to accomplish as a trader.
Let’s begin by reviewing the “trader’s wisdom” that was the subject of my last blog series:
> I think one of the most important things X teaches is trading the same market over and over and over again.
I do believe it is possible to trade one and only one market for a living.
> You get to the point where you don’t need any indicators.
I do believe I can trade for a living without indicators.
> You really understand how the market breathes.
I disagree. The time to be most cautious is when I think I understand how the market works because inevitably it will change direction and catch me with my pants down. If I ever start to believe this then I have become too arrogant.
> You get really comfortable [and really start to think] “okay, I know what I’m doing today.”
Do I know or was I just lucky? I’ll choose the latter and thank goodness each and every day that I’m still in the game.
I will finish the review in my next post.
Categories: Option Trading | Comments (2) | PermalinkWords to Live By? (Part 5)
Posted by Mark on September 20, 2013 at 09:49 | Last modified: January 24, 2014 08:42In this series, I am breaking down a snippet of supposed “trader wisdom.”
In picking up where I left off in part 4, the trader continues:
“I sit here in front of the screens all the time watching the 5-minute bars on all the futures…”
He’s got multiple screens going, 5-minute charts, futures… like WOW! He certainly sounds to know what he’s talking about. The newer I am to trading and/or the less experienced I am with taking losses, the more apt I will be to believe him.
Heck, he might even be this trading G-d who I randomly found via Google search:
There are his multiple screens to watch all those intraday futures charts so he must be making millions of dollars.
“…and I’ve gotten very comfortable now with my trades because I kinda know… I get decent entry points…”
The Holy Grail has a very slippery slope and can be described in many ways. One piece of trader wisdom I do believe is that the Holy Grail does not exist. Logic therefore dictates that anything describing the Holy Grail does not exist either. Making millions of dollars easily and quickly through trading: Holy Grail and nonexistent. What about getting “decent entry points?” If the entry point is decent because it is followed by a successful trade then yes, this could be the Holy Grail. By claiming decent entry points the trader implies that on average his trades are profitable. Consistent, positive returns are what any trader seeks in order to be successful, after all.
I will continue to scrutinize said “trader wisdom” in the next post.
Categories: optionScam.com, Wisdom | Comments (1) | Permalink