Trading For A Living - Is It Easy? Hardly!

Trading for a living, what could be a more alluring profession? The Forbes list of the 500 wealthiest people in the world is littered with names of people who have amassed huge fortunes in the world of Wall Street. Warren Buffett, George Soros, Paul Tudor Jones, James Simons, Louis Bacon, and Eddie Lampert, just to name a few. In 2007, to make the list of 100 top earners on Wall Street, you needed an income of at least $75 million! The top earners made over $1 billion!

With that in mind, it is no wonder that new traders set out to make their fortunes in the financial markets. After all, they are bombarded with advertisements and infomercials describing the next great thing in the world of trading. Starting with accounts as small as just a few thousand dollars, these traders hope to hit it big, and they seek to find that holy grail of trading systems that will lead them to the promised land of Wall Street riches.

I was one of those traders almost 15 years ago. At that time, after subscribing to a couple stock newsletters, I was bombarded with other newsletter writers, telling me they new the way to financial fortune. One service got me interested in commodity trading by sending me some spread trading strategies. These proved to be outdated and ineffective, since markets change over time. I then learned a popular trend following system, had some initial success, and then was hooked on trading. Little did I know that trading is a lot more difficult than I realized.

What I didn't realize is that the competition in the financial markets is fierce. Wall Street is littered with MBA's and PHD's from the Ivy League schools. These people are groomed for Wall Street careers through summer internships at the big investment houses such as Goldman Sachs, Merrill Lynch, or even some big hedge funds. Some of these hedge funds not only hire traders, but top scientific minds from disciplines such as physics, chemistry and engineering.

In 1998 I had the opportunity to work for a hedge fund and commodity trading firm as an execution trader dealing with Asian and European markets. This firm was run by a trader who hired computer programmers that could test and research all of his ideas and then program them into automated trading models. The only orders I needed to execute were the more sizable orders so we could avoid the slippage caused by large stop orders. There were other traders and research staff that all had a hand in developing new models for the system. In spite of this, that firm eventually nearly failed and is now just a shell of itself.

Around that same time, I learned that a friend of mine from college worked for one of the biggest offshore commodity funds, and one of the most successful. He indicated that firm also had a significant number of research personnel conducting research on new trading models. Their system was also heavily automated, they had their own research platform for developing these new models.

Also in the late 1990's I was introduced to Jaffray Woodriff of Quantitative Investment Management in Charlottesville, Virginia. We had a mutual friend that was a fraternity brother of mine at William and Mary. The first time I spoke with Jaffray, I realized that he was far more intelligent than I. He was also a computer programmer and learned how to test and develop his own trading models on his own software. He clearly had a passion for the markets and I could just tell this guy was going to make it big. At that time, he had a small trading business, but ran into some initial problems. So, he took off for Wall Street to work at an investment bank. He had some good success on the trading desk there and a few years ago, decided to start up his current business with a partner. That hedge fund now manages over $3 billion!

Now that you know how stiff the competition is, you may think twice about trying your hand at trading for a living. Can it be done? Of course it can. However, the statistics suggest that traders who start out with less than $10,000 trading futures or in the Forex currency markets will fail 90% of the time. The main reason for this is the lack of capital, but it can also be attributed to not having a coherent plan for trading.

With this in mind, new traders should follow the following process before attempting to stake their claim in the financial markets:

1. Determine the absolute highest amount of money you are willing to lose in the markets, money that if lost, will not affect your standard of living.

2. Determine what you seek to achieve in this business. What are your short term goals and long term goals?

3. Determine your monthly bills and make sure those are covered by ANOTHER source of income besides trading.

4. Figure out what type of trading suits your personality best. Are you able to withstand significant losses while waiting for significant trends to develop? Do you need to be right more often than you are wrong? Do you want to take quick small profits or wait for big trades that occur over longer periods of time? Can you pay attention to the markets with no distraction throughout the day, or do you have a real day job that requires most of your attention? Are you more interested in technical analysis or fundamental analysis? Do you like mechanical trading systems or do you like to go with your gut? When you answer these questions you can figure out whether you should focus on longer term stock trading, daytrading, short term swing trading, options trading, etc.

5. Once you figure out the trading style that suits you best, then you must conduct a good bit of research on the markets to develop your trading strategies. I recommend backtesting strategies on historical data with a program such as TradeStation. If you are able to program your own software for developing trading models, that is even better. Do not fall into the trap of just looking at the bottom line results of the models that you test. You must see how they perform on a day-to-day and month-to-month basis so that you will have an idea of the losses you can expect when trading for real.

6. Do not start trading until you are absolutely confident in the strategies you have developed. One big mistake a lot of traders make is not sticking to their plan. As soon they experience a drawdown, they give up on their strategy and try and trade a new one. As soon as they start the new one, the old one starts working. This is one reason I recommend against the purchase of black box trading systems without any knowledge of how these systems select their trades.

7. After you start trading, maintain records on how your trading. Be sure to write down the reason for initiating your trade, and the reason you exit. If you deviate from your strategy, state why, and how that deviant trade performed. In this way you will be able to keep track of what works for you and what does not.

Ultimately, you must approach trading like you would any other business or profession. It requires research, education and knowledge to succeed in this business. Many people fail, so do not assume that because you have some smarts that you can be successful. Successful trading requires careful planning, common sense, intestinal fortitude, and a little luck!

Scott Cole
http://www.kungfutrader.com

Reuters - Weak Japanese exports and poor corporate earnings provided more evidence of the economic damage wrought by the global financial crisis, knocking Asian shares to four-year lows on Thursday.

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The Myth of Automated Day Trading Systems

There is a widespread rumor in the financial community that successful day trading can be manually programmed and automated to produce vast profits for minimal work and input on the part of traders, providing a regular and consistent income by simply setting up a system, clicking a button to turn it on, and walking away.

This is NOT true.

I myself am just one of the many victims of this 'automated trading system' myth. In 1996, I strongly believed that a trading system like this was possible, and I wasted four years of my life trying to automate and computerize trading.

I programmed dozen of strategies, I used TradeStation, MetaStock, and OmniTrader, and I read countless books and articles on systems trading. I researched automated trading solutions and talked endlessly with other traders, always trying to find the edge I was missing. I stayed on this path for four years, only to realize in the end that I was chasing the nonexistent Holy Grail of trading.

Simply put, finding success with automated day trading systems is impossible.

Think about it for a second:

If day trading could be automated, why would Meryll Lynch, Goldman Sachs, and other large financial companies spend millions of dollars every year in salaries for traders? If anyone should have a handle on systems trading, it should be the big-shots in the industry.

If day trading could be automated, we would soon have computers trading against computers, and trading would cease to exist since there would be only ONE price. This is equivalent to chess: if you have computers playing computers, then there is never an actual winner.

Stock prices rise and fall based on human emotions and human perceptions. It's not economic reports that move the market - it's the reactions of traders TO a report that move the market.
Again, it took me four years to come to this conclusion. It took me four years to realize that there's only one thing that can give you an edge in the market: experience.

Now, don't get me wrong. You need rules. You need a strategy. You need discipline. Automated trading systems can provide you with all of these things, or at least simulate these things. But there's another key ingredient to success that automated trading systems will never be able to account for, and that's experience.

Experience is essential in everything you do, whether you're a toddler trying to walk, a child learning to read and write, a college student studying a foreign language, a professional starting a new job, or an athlete mastering another skill.

When it comes to trading, you need a trading strategy, you need rules on when to enter and exit a trade, and you need to establish how much money you are willing to risk. But once you've got the plan, you need to execute it. And only experience will help you there.

It's like approaching a traffic light that just turned yellow - sometimes you brake at the light and sometimes you decide to go for it. But how do you make that decision? Obviously you don't make the same decision EVERY time you encounter a yellow light. Why? Because no situation is exactly the same as the ones before. You rely on your experience of former situations to lead you to the right decision in the current situation.

The same is true in trading - no trade is exactly like the trades before or after. When it comes to trading success, you need two essential components: a plan AND experience.

It's not a problem to establish a plan, but the only way to gain experience is by actually trading, even if it's just on paper. I like the saying, "Practice makes a master," and it works really well here because it applies in trading, too.

So don't make my mistake. Instead of spending years trying to pinpoint the Holy Grail of automated trading which doesn't exist, sit down and focus on gaining the experience you need to find TRUE success. Invest in trading education. Study your trading charts. Practice trading. Learn through trial and error. In the long run, gaining the confidence and experience you need to be successful will be far more rewarding than a fruitless search for automated trading systems.

Markus Heitkoetter is a 19 year veteran of the markets and the CEO of Rockwell Trading. For more free information and tips and trick how to make consistent profits with online trading, visit his website http://www.rockwelltrading.com

Reuters - Asian stocks slumped to their lowest since December 2004 on Wednesday as poor U.S. corporate results and falling commodity prices fanned worries of a protracted global economic slowdown.

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