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Million Dollar Trading
If your going to be spending your time and your money, you might as well be getting paid for your investment. Hello, my name is Eric Bigham, I am a finance professional.
Over the years I have spent a considerable amount of time commuting, on trains, planes and automobiles. I have worked in the professions of Chartered Accountancy, Banking, Management Consulting and for over five years I managed money for private investors, an activity I fell into purely by chance. It operated like a mini hedge fund where I took a percentage of the gains above a "de-minimis" agreed level.
With my type of work, the travel can be demanding at times, particularly when you spend a lot of time living out of your suitcase as a consultant. For me commuting on the train was the worst, especially the 5am from Brussels to London.
Of course most people sleep, but I would spend part of my commuting time working of course, some of it on leisure activities like reading, but the only time I never resented the time spent on trains, was when I managed to use it to make money.
For a time I had a particular long commute, between London Waterloo and Reading. That commute afforded me the luxury of being able to trade the markets. This not only killed the time, it positively made it enjoyable and profitable to boot. I would often arrive at work, in the knowledge that I had already earned more than I was about to be paid for my full working day ahead. This was a nice feeling! It gave me a sort of glow, at least on the inside. Not to be confused with gloating mind, the sense of satisfaction of was most agreeable.
Of course I'm not talking millions here, but often it could reach amounts of up-to £ 900 or so.
At one point I lived In Brussels and worked in London for a bank, following this role I joined a large management consulting practice and again spent a lot of time commuting.
Making money online, trading the markets, is not easy, but the act of trading is simple to do. Many trading apps are built to let you trade, but these are not trading systems ,they are order management systems. There is a HUGE DIFFERENCE and if you do not understand the distinction you will likely lose more than your fair share in your online trading career.
Most CFD systems for example are essentially mathematically rigged to remove arbitrage out any profit you are likely to generate from trading, just like like a casino roulette game is mathematically designed to ensure the player will always lose in the long run, it is a mathematical certainty.
Sure you are highly likely to generate plenty of winning trades, but average those winning and losing trades over the long run and it is likely the average trader will accumulate more losing trades than winning ones.
You should understand the difference between games of skill and games of chance. The regulator does. This is why games like poker, which are essentially skill based, favour the trained player. On the other hand, games like roulette, are chance based games. Replace the word chance with the word probability and it makes things a lot clearer.
The probabilities of winning a hand of poker can be calculated with reasonable certainty. Some hands offer a higher probability than others, so a trained professional player, will know when it's time to hold'em, and when it's time to fold'em.
This is why Gaming Regulators are very concerned about chance based models. Because these cause users to become losers. The regulations concerning the marketing of chance based games, such as the national lottery or bingo is heavily based around the reality that players who believe or are led to believe, that they have a fair chance of winning, are essentially being misled. Chance based games are in fact purely gambling. Statistically gamblers are likely to lose more than they win over time. Which is why chance based games should be marketed as entertainment games and not try to give the misleading impression that there are realistic chances to make profits. You pay to play and be entertained, not earn a profit.
Trading the markets is not generally entered into as a game, if you treat trading as a game, be prepared to pay to play. If it is profit you seek however then it is your responsibility to make sure you play the game of skill not the game of chance! If you do you will be able to trade profitably, no matter what level you wish to scale this activity up to.
I used highly sophisticated models to pick and manage stocks. I know that they are highly sophisticated because as a qualified Chartered Accountant and having worked with many analysts I have spent my fair share of time working with excel models. It is fair to say I know modelling inside and out, it comes with the territory.
It is not the sort of nonsense many trading sites write about. There is an army of technical analysts that do little more than follow lines on a graph and think they can read something into it, some probably can, many I would wager cannot. Again the reader is referred to the Intelligent Investor if she or he is in any doubt about the difference. I am not a technical trader or tea leaf reader, same thing really. I used Trusted Financial Strategy, trusted not because some author says so, Ben Graham aside, but because I tested the methods using real money, mine and my clients. The practice and art of trading over time will give you the skills to build trust in your methods. Start small, learn from your mistakes, and correct your models as you go along.
So without further ado here are my top 10 tips to become a Successful Online Trader. Remember to register and login to leave comments, and make purchases.
Far too many people talk to much and trade too little. Don't over-trade, but make sure you don't miss out by taking no action at all. My trading models are calibrated to select stocks based on risk to reward. Sometimes the market might indicate that no trades are worth the risk. This is fine for a while, yet Ben Graham teaches us in the Intelligent investor that markets may have several cycles before your models indicate that you can safely step back in. In these cases you're never going to trade, you will likely miss out.
So you must re-calibrate your model to let you trade, just know that your taking on more risk. As a trader you must trade and manage risk, if you don't there is no point to it. Active trading is not the same as long term investing, and they both require different strategies. For decades Wall Street made little distinction between value investors and traders. But you should. As a trader be prepared to take and manage risk. This is why I advocate starting small, and building up your confidence gradually. Trading is a skill more than an art. Don't jump into day trading on margin or you'll likely be wiped out before you can say sucker punched.
You need a stock picking system, or what I call a trading plan. A plan will list the stocks you are intending to trade before you ever log into your brokerage account. Your brokers sell side research and tips are NOT A PLAN. Remember if the advice is FREE you'll get what you paid for it.
Brokers are paid to generate trade volumes, it is how they make money. Your responsibility is to yourself. Generate winning trades by doing some analysis before hand. Build your own stock picking system. It can be simple and crude, but it will be a start. It might not be much good at first, but it is a system and can be tweaked over time to help you select better stocks over time. The stock picking system you come up with should have some sound logic built into it. That logic will not always work in your favour but by starting small and tweaking the system it will improve. You should plan to allocate a certain amount of capital to each stock based on your assessment of the risk you are taking. Put less money into stocks deemed to carry a higher level of risk. Volatile stocks are more risky by nature and are easy to spot based on their trading movements. Don't rely on your charts for this, use the given Bet, which is a statistical measure of the risk in a stock relative to the market.
Remember, just randomly selecting which stock to buy is deadly and will cost you big time. Or if your system involves listening to what the TV pundits advise, again you can expect to lose your shirt or even more! Learn how to pick using Risk Return analysis then place your bets confident in the logic you have put into your selection. Place your trades and compare the outcome to the plan. Watch live positions like you would your first born baby. Then sell out the positions when your system signals to do so. Congratulations your trading like a pro.
OK you can select stocks, you have read the financial and analysed the trends, You've even learned how to allocate capital like Warren Buffet, but once you have added you stocks to your portfolio, they will move, Don't be forced into panic selling, if the TV Pundit warns you to sell, ignore and go with your plan and sell on the Signal. You should have come up with a way to signal the decision you should be taking at any point in time, based on the market and your exposure to it. Ideally you will have embedded your algorithms into some systematic formulae that makes good sense. You don't want to sell too soon, the moment you buy stocks you have lost money due to the transaction costs.
And don't fool yourself, if your getting commission free trades, your paying in the spread, brokers don't work for Gratis, nada or FREE. Banks trades at a fraction you do also so your against it from the get go. Again we are reminded of Buffets Margin of Safety advice. Try to build in a margin of safety by buying low. Ideally at less than intrinsic value, but this is easier said than done, and is less applicable to traders than value investors, but the principle is sound and can be applied using momentum indicators, the only real value to them so make good use of them to enter trades when the market indicates your buying a bargain. Picking bargains is difficult and there is some skill and an art to finding them. I use the wisdom of Two Great Investors to differentiate the stars from the dogs. See the net tip to learn more.
If you pick your stocks wisely, and that means like a value investor, you can probably trade in and out of the positions frequently to take advantage of "Mr Market" as warren Buffet would say, confident that when the market dips you have real buying opportunities and when it is over valued you can justify selling to release some capital.
Day traders pick when the market rises in the hope of riding the trend, but they take little notice of the intrinsic value in the company they are buying. Smart investors do the opposite. If you have arrived at an estimate of value to be £10 per share lets say, and the market price is £8, you're looking at a £2 margin of safety. Some companies have more cash in their bank accounts less debt, than the value attributed to their shares in the secondary market. These companies are selling at under value. If the market closed tomorrow, these companies would large cash piles.
Why might the market under value some companies. Well there are many reasons, but fear is a good one. This is why you should attempt to have a n estimate of value before you buy. Warren buffet says that he looks at a stock as if he was buying the whole company. Even if there was no stock market, if he would be happy to own that company, then he'll buy the sock, if it is selling below his estimation of value.
Remember valuation is an art, and estimate and not a thing that is true just a mathematical equation that derives a number based on estimates of future earnings and cash flows. As no body and not even Warren Buffet can predict t the future, valuations should be viewed for what they are , best guesses. But you can opt for an educated guess as opposed to a daft one. To learn more about stock valuation you could do worse than listen to the advice on the subject of Valuation Guru Professor Aswath Damodarany. His free online classes are well worth your time, as he teaches people who are going into the valuation profession. He is the first to confess that valuation is not a science.
I use a simplified valuation method which is more of a rule of thumb to initially gauge the intrinsic value of any asset. I teach at my talks and it helps to eliminate the large volume of poor bets, before you get down to some serious analysis. Allocate capital based on Rationality. Analyse Riskiness of a stock and compare Risk to Returns, the data is free and requires a little modelling but it will save you thousands in costly miss-allocation of your precious capital.
I think I am the inventor of the dynamic stop loss as I never read about it, yet using a dynamic stop loss when you trade invariably makes a lot of sense. From what I can gather, it appears that many traders are comfortable in setting absolute or get me out limits. An absolute stop loss might refer to a fixed amount, for example if the trader loses $1,000 she might decide to exit her trade, or a fixed percentage, if he is down 5% of the position he will trigger his stop loss.
Let me explain why I disagree with this approach. Firstly as a trader you are very likely to eave a lot of money on the table. You will invariably sell too soon or too late. The same price of a volatile stock moves more than a steady climber or a low income stock. So it makes no sense to exit a volatile stock just because it's down 3% when in fact the next day it might equally well be up 5%. Stop trading loss signals should reflect the stock Beta. The stock Beta is a measure of the volatility of the stock compared to the volatility of the market.
High Beta Stocks offer more scope for gains and also losses of course, so timing and technicals will come into play more when you trade high Beta stocks. If we decide to set the stop loss as a percentage of the Beta the stop loss trigger will be signalled at different levels for two different stocks.
Build target stop loss signals around the price movement, This results in better signals, it will keep you in stocks that rebound and make you money and it will get you out of the inevitable dogs. To make any money trading you must take risk and buy volatile stocks but you must have the wherewithal to hold them and get out when it is profitable to do so.
Pick and Trade a basket of stocks, do not place all of your eggs in one basket, I use capital allocation to pick a basket of 12 stocks, this is the mathematically proven number to give maximum diversification of you portfolio. Picking all the stocks in the index is tantamount to playing the index, and is not profitable due to the cost per trade, you'd be better off gambling on the index, but this is exactly that, a gamble. Stock pickers do not gamble, rather they place bets, strategically using mathematical logic.
Statistics is your friend, learn about confidence intervals and put this knowledge to good use when deciding on the size of you portfolio Allocate more capital to the stocks that offer you the highest return for any level of risk and looked at t it another way take the smallest risk for any level of return, so most of you money will be on your top bet, but life is never like a plan, things will go wrong and your stock spread will act as a kind of cushion or buffer against losses, because some of the smaller amounts of capital placed on longer shot picks will turn out good and offset losses on your main pick.
If you are handy with Microsoft Excel you can take the trading data and analyse it in a giant PIVOT table or some similar analysis, to measure your trading wins and trading losses. I did this and was surprised how many wins I had. I was also surprised at how few trades contain or are responsible for the major losses you are going to have. A single bad trade can wipe out a whole years profits if your not careful. Which is why adhering to those Dynamic Stop Losses is critical for any short term trader.
I always keep the whole portfolio pick, this way I can gauge the returns based on my pick logic at the time.
The markets move in cycles, this is due to forces in the economy being at odds with each other. Markets are created when individuals, governments, banks and companies, swap money for goods and services. Money is made up of cash and to a much greater extent debt. The creation of debt in particular creates cycles. This is because when you spend money on credit such as the purchase of a house, you eventually must repay the debt and this is the reverse of spending. I would recommend the video and research put out by Ray Dalio on the Economy to get a better understanding of this.
Long-term and short term debt cycles drive the central bank to react to inflation by setting interest rates and quantitative easing policy. You should now enough to gauge where you are in the economic and business cycle at the time of your trades, and base your stock picking around this. As welcome into a period where the fed or other central bankers are prone to raising interest rates, this is likely, certainly mathematically speaking , have a downward pressure on house prices, Property companies will be squeezed as their borrowing costs rise precisely when their product sales drop, many will gout out of businesses, and or restructure, this is not the time to be long property, so know this and make judgemental calls when deciding where to lace your cash.
Readers of the Intelligent Investor or followers of Warren Buffet, will know that he is always promoting chapter 8 of that book, the chapter on Mr Market.
The Stock market dose not in general represent the true value of a company, it tends to represent the price people are willing to pay to play or own a share, this price moves daily based on market announcements. Markets tend to over react both on the up and down side, You should have an idea what you believe the intrinsic value of a stock is, and buy when the market goes below this as it is offering you a bargain and sell when it goes above this as it is over priced and not a bargain, successful traders trade bargains, it is possible to buy and sell the same bargain over and over. I have a mining stock that I new was a bargain and I traded it 106 times profiting on 87 trades. Simple sell it and buy it back when it is cheap enough to justify it. This type of trade is a swing bout the intrinsic mean, and must be done in the context of the market cycle, typically in the upward trend of the cycle.
If you are not paying tax on your trading profits, well you have none. Profitable traders complete the asset section of the tax return and will typically exceed the capital gains tax allowances and pay tax on trading profits like any other business. To pay tax is to be profitable, I'm not saying paying tax is enjoyable, but it is a validation of your profitability. Keep detailed trading accounts based on your trading log or trading book and draw up you trading P&L Profit and loss account and balance-sheet at the year end and add this to you overall self assessment tax t=return. Your trading losses, which are inevitable can be offset against trading gains and trading profit calculated, deduct the tax free allowance then submit this amount to tax, the revenue will look at your submission and return you if you inadvertently over pay them.
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