By Mike Parnos, Educator, Trader and Hedge Fund Manager*
Posted: May 9, 2008
Buy low; sell high. Sell high; buy low. Sounds easy, doesn't it? Well, there's a little more to it than that. Buy what? Sell when? Who's high? What's low?
A few years ago, thousands of people left high-paying jobs in the hope of making a living by trading in the stock market. Little did they know…and that "little" is why they're now working their way back up the corporate ladder one cheeseburger at a time.
Can you make a living in the stock market? Of course you can, but you have to treat it like a business. Before you can properly invest -- whether you're trading options, stocks, baseball cards or Barbie dolls -- you need to invest in yourself. You need to prepare yourself mentally, physically and financially. It takes commitment!
What Do You Need to Succeed?
- Education: Each endeavor takes its own form of expertise. Trading is no different. Every time the market fluctuates, it is reported. Everything is discussed, from aggressive trading strategies to conservative trading strategies to technical analysis to fundamental analysis. But, it takes more than just reading the information. You have to learn how to implement it.
- Information: You need to have access to the Internet for a variety of reasons. You need a computer with sufficient speed (600 MHz) and 128 RAM. You can get by with a dialup modem, but a cable or ADSL connection is preferable. Everything will happen faster.
The Internet is your primary source of information. Without this crucial information, you're flying blind. It's not healthy.
a.) You should have streaming stock and option quotes available. Many Internet sites offer 15-minute delayed quotes, but that's not good enough. The markets move much too fast.
b.) Often, the streaming, real-time quote services also include daily and real-time intraday charting. If not, a number of free Internet sites will give you 15-minute delayed daily and intraday charts. They are interactive charts that can, upon request, show you different time frames, chart sizes, various indicators, moving averages, volumes, and so forth. For a small monthly fee, you can upgrade to real-time charts.
Many quote and charting services are available -- some for less than $100 per month. For the most sophisticated traders, NASDAQ Level II quotes and tick-by-tick charting can help with entering and exiting trades.
- Brokerage Account: You will need to have an online margin brokerage account. Accounts where you have to talk to a human to place your order will invariably cost you money. Why? Because, by the time you dial the phone, get connected to a broker (or customer service representative), explain what you want to do, get a quote, have him or her repeat it back to you and place the order, the underlying could have moved a point in either direction. In that extra minute or two, the information you just received on the phone may now be obsolete and useless.
Ideally, an on-line account will have software that will show you the bid and ask prices of an option on all exchanges on which the option trades. As you know, the prices for an option can vary from one exchange to another. Seeing the different exchanges enables you, with a simple mouse-click, to send your order directly to the exchange offering the best price -- instantly. If you send your limit order at the bid or ask, it will likely be filled in a matter of seconds. No phones, no fouls.
When you open your account, if you want to trade options, you'll need to get approval to trade them. The levels of approval go from novice to professional. The more experience you have, the higher approval level you'll get. The brokerages do this to cover themselves. If you lose the family jewels trading options, you won't be able to sue the brokerage firm to get them back.
If you're relatively new to options, you'll probably get approval to sell covered calls and the straight purchase of puts and calls. If you have more experience, you'll be able to trade spreads. The highest approval level will allow you to sell uncovered options. - Money: If you're planning to treat trading, whether it's stocks or options, as a business, your money and your positions represent your inventory. As the saying goes, "It takes money to make money." It wouldn't be a cliché if it weren't true.
How much money is necessary to start your business? It depends on what strategies you want to use. Do your strategies involve stock purchases? If so, you'll need enough to subsidize the purchase (or half the purchase on margin) of the stocks. If you're simply going to buy calls and puts, you need enough to cover the purchases of the puts and calls.
For spread trades or trading naked (uncovered) options, the brokerage will likely require an account minimum. When spread and uncovered option trading, if you're going to do it properly, you'll need to have cash or other marginable securities (stocks, mutual funds, bonds, CDs, and so forth) in your account to enable you to make the trades and adjustments in your positions. Different brokerages have different policies for determining what securities they accept as marginable.
- Time: You've got it. Now, you just have to prioritize it. If trading is your business, you'll have to do research on what to buy, when to buy it and what the right price is. That takes time.
- Emotion: You can't afford it. It has no place in the business of trading. Cry at sad movies, not over spilled milk or lost money. If you properly follow your trading rules, a loss is just a cost of doing business. Nothing more.
Keep emotion, along with your ego, on a short leash. You'll have good streaks and bad, but, if you use common sense, and know every aspect of your business, you can do just fine. - Desire: You have to want it badly enough. It's amazing, if you want something badly enough, the number of sacrifices you're willing to make to achieve it. You'll be surprised how far desire will take you.
Knowledge Is Power
If you want to trade for a living, you'll spend the time (and possibly money) to learn the strategies. You'll find the strategies most comfortable for you and learn them inside and out. You'll know what to do when the strategy works and when it goes against you.
You'll know the adjustments you can make and when to make them. You'll know how to research and recognize opportunities and what strategies to use to take advantage of them.
The Secret of Survival
It comes down to survival. If you want to continue to trade and stay in business, you must concentrate on making good trades. You have to protect your inventory. How? Self-discipline. It's a rare commodity, indeed. You can't buy it at Office Depot. Either you have it, or you don't. It's like your money. Either you'll have it, or you won't.
*Reprinted (and modified) with permission from Mike Parnos, educator, trader and hedge fund manager, of www.mike-parnos.com
