Trading For a Living

January 17, 2012 | Filed under: Day Trading,Equities,Stocks | Posted by: Admin

Trading for a living. It’s a rush! It’s exciting! It’s also a great way to lose your hard earned money! Is it possible to strike it rich trading for a living or is it just hocus pocus and a bunch of smoke and mirrors?

If you are like most people that wind up trying to make a job out of trading for a living, you saw an ad on the internet or TV about some joe who made it big trading for a living and you were intrigued.

Maybe you saw an ad for free trading on E-Trade or one of the other on-line brokers. Thats where I started. Paying bills on my banks website and I saw an ad to get free trades and learn about stock market investing online. Wow, when I went to E-Trades web site it was cool. I started getting online every day to research different stocks and started learning about technical trading and how day traders were trading for a living. What a pump! I started paper-trading. Watching CNN for a clue as to which way the market would go.

Pretty soon I had bought and read dozens of books about trading for a living and had taken a couple of fairly expensive courses. To this point I had not invested a dime in the market but had invested several thousand in training.

But now I felt that I was ready for the real thing so I opened a real account and funded it with $5000. I was pretty confident because my paper trading accounts had all made profits. I was counting the stacks of money I was getting ready to make.

In reality I lost on the first 5-6 trades that I made. Ouch! Time to step back, take a breather and analyze what went wrong.

A commonly quoted statistic in the financial circles states that as many as 90-95% who try to make it trading for a living fail. With such a high failure rate you might think that most of those trying to profit in this manner must be stupid or uneducated but when you look at the demographics of the group you would be dumbfounded to discover that these are successful, intelligent people. Many have successful businesses or careers in other industries, so why then the abysmal rates of success of people trying to make it big by trading for a living?

Components Of Successfully Trading For A Living

The problem in many cases is that we as traders read something that makes sense to us and we focus on that aspect and that aspect alone. When it comes to trading there are several aspects to being successful. Generally speaking there are three areas to master when trading in commodities or the stock market.

They are:

Psychology
Methodology
Money Management

Market Psychology

Investopedia defines market psychology as “the overall sentiment or feeling that the market is experiencing at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to the group’s overall investing mentality or sentiment.”

These emotions are present whenever you are risking real money in the market. If you are human you will feel one or more of these emotions when deciding to start or stop a particular trade. Those who are successful at trading for a living remove the emotion from trading by finding a system or methodology that allows them to make decisions on market indicators or fundamentals. It is one of the things that makes trading for a living so tough.

Methodology

There are several different ways that people approach making buying and selling systems. Some people prefer to look at company fundamentals such as PE Ratios and balance sheets while others look at technical indicators such as MACD, Stochastics or Bollinger Bands. Others use a combination of the two such as the newspaper Investors Business Daily. If you are trading for a living you must find a successful system that works.

Money Management

Money management is the theory of managing your losses, really. If you are in a winning trade you should let it run but do not get greedy. If the stock or commodity price advances by a certain percentage, it is time to end the trade or to at least sell some of the stock to preserve your gains. Conversely if a trade loses a small amount it may be better to get out quickly minimizing the loss. In this manner you can make several small losing trades and still be profitable because the winning trade made up for your losses.