Trading as a Career or Trading for a Living

Here goes the story of Rahul, a 19 year old, college freshman. He is extremely passionate about the stock market and tries to read every relevant book that he can get his hands on. And so Rahul gets some money from his Dad and opens a trading account.

To begin with, he had seen several times ads in the newspaper, CNBC etc. about Gurus who give training for stock market trading. He signs up for such a seminar.

His instructor starts with the general talk about where trading can take a man, and about trading instruments and time frames like swing, intraday etc. He quotes about the risky nature of daytrading and how futures trading is akin to war. And so the Guru’s emphasis on why so many get blown out of the market in their first trading year itself. Rahul asks for a excuse, looks straight in his eyes and asks, “Is there a quantitave study ever being done that suggests 90% of people fade out?”; and then,” Do you mean that the chances of success of a person who wants to be a trader is 10%?”; and still,” What are the chances of an average, positive thinking, well educated, totally driven person to succeed as a trader?”

Rahul leaves the seminar unsatisfied by the answers and conducts himself some study.

1. Most people enter the market with information from the snake-oil vendor society.
2. Most of then are happy to get their hands on some analysis software or in-fashion downloadable e-book; i.e. they bother about excess information rather that knowledge.
3. Still those who escape the above two get stuck in technical analysis/fundamental analysis hubblaboo rather than bothering to understand the functioning of the market.
4. Then there are the worst type who think that life’s all about luck and one needs luck and gambling instincts to succeed in stock market trading.

And so his study concludes that the 10% who succeed are perhaps those who have at least an average I.Q., well educated, positive thinking, highly motivated and do not come in the above categories.

Rarely do any of us grow up learning how to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way. In the trading environment, you will have to make up your own rules and then have the discipline to abide by them.

The problem is, price movement is fluid, always in motion, quite unlike the highly structured events that most of us are accustomed to. In the market environment, the decisions that confront you are as endless as the price movements you intend to take advantage of. You don't just have to decide to participate, you also have to decide when to enter, how long to stay in, and under what conditions to get out.

There is no beginning, middle, or end - only what you create in your own mind.

-- Jesse Livermore

What was the last thing you traded? Look at its 1 year, 6 month, 1 month, and 3-5 day charts. Can you see all the opportunities where you could have made a profit? Should have gone long there, shorted here . . .. You're assessing "opportunity" based on price activity subsequent to the point at which you believe the opportunity existed, which means that you're working backward to identify that point of opportunity.

While trading, these are the very opportunities a trader is aiming to spot. This and the desire to make trades will often drive the inexperienced trader to "see" opportunity where there is none, simply because the trader can easily envision the price pattern moving in any given direction. If his predisposition or any of his analysis makes him inclined to forecast a certain direction, he can quickly envision the movement of price in the direction that will yield profits. By envisioning such price pattern formations, it's often the case that the trader will mentally emulate what he has previously viewed on historical charts, and perhaps even had a desire to experience. And this psychology is made even more complex when the trader begins to find "evidence" in current price activity that supports his forecast/vision and ignores any information that contradicts it, thereby providing a false justification to make the trade.

This type of thinking will cause a trader to make trades when no real opportunity exists. The fundamental problem is that the reason for action is based on a forecast/vision, and not on what has happened and what is happening right now. Given the fact that forecasts and visions are not realities and that historical and current activities are, decisions that are based on the proper interpretation of what has happened and is happening will be correct far more often. It's critical to avoid mentally creating opportunities and to know when to stay out of a trade.

Looking at the charts again, try to identify forward-looking opportunities, where you consider only each price point and the price patterns before it. You'll find that it's now far more difficult to spot the winners, but those are the opportunities that you need to identify and then appropriately act on in order to be a successful trader.

Any experienced and successful trader will agree that it's very important not to trade until there's a true opportunity.

-- Innerworth

To keep experiencing the novelty and freshness of the market, and to keep from being trapped by your preconceptions, it's important to keep distinguishing between the tape and your interpretations of the tape. View as neutral both the events and your inclination to impose your interpretations on them. You enter the market without expectations, surrendering to it rather than struggling with it for personal gain. Ultimately, you are able to fine-tune your responses.

-- Ari Kiev

Consider everything that appears on the tape as an evidence of support and lifting power, or pressure and selling power. Continually compare the strength of these forces. Use all the judgment and reasoning power at your command. Endeavor to improve your judgment by constant study and practice. Strive to lift your judgment from commonplace to good; from good to better; from better to excellent.

-- Richard Wyckoff

Until the lens of experience focuses information, it does almost no good. No matter how much the marketing machines of the Information Age would have us think otherwise, information by itself isn't power: knowledge is. And turning information into knowledge requires more time, experience, and effort than an afternoon spent starting at a screen full of facts.

Information is passive. To make it knowledge, you need to assimilate it. Put it in context. Understand it. Knowledge streamlines and focuses our relationship with information. Knowledge helps us avoid information we don't want or need and leaves us with the stuff we can use.

In an age in which endless amounts of bits and bytes are always available, it's a daunting task to spot the worthwhile stuff. It's easy for the Net to overwhelm us or lull us into the misconception that simply having access to something is as good as knowing it.

-- Michael Penwarden

Consider that you are going on a trip one fall morning and need to formulate an idea about the weather conditions prior to packing your luggage. If you expect the temperature to be 60 degrees, plus or minus 10 degrees (say in Arizona), then you would take no snow clothes and no portable electric fan. Now what if you were going to Chicago, where you are told that the weather, while being 60 degrees, will nevertheless vary by about 30 degrees? You would have to pack winter and summer clothes. Here the expectation of the temperature carries little importance concerning the choice of clothing; it is the variance that matters. Your decision to pack is markedly different now that you are told that the variability would be around 30 degrees. Now let us push the point further; what if you were going to a planet where the expectation is also going to be around 60 degrees, but plus or minus 500 degrees? What would you pack?

We can see that my activity in the market depends far less on where I think the market is going so much as it does on the degree of error I allow around such a confidence level.

--Naseem Taleb