Sunday, 8 November 2009

Trading is My Business – It Can be Yours too!

OK, you have read my ROAD MAP from yesterday’s post. What now?
I am going to use K’s statistics for the purposes of making my point.  I will make a couple of statements that are very important to understand.
If you trade a very liquid market such as the ES, DOW EURO 50 or the main FX pairs, then you can slowly increase your size and earn as much as any person needs.
It is much easier to read the order flow that will move the market for the next 10 or so minutes than to try and see where the market will go longer term. Why? Because 1 very big order can change everything. That’s why I Day Trade. I only have to be right for 10 minutes 6 or 7 times a day.
So your first task on the road to becoming a full time trader, paying your bills from what you earn trading, is to get a methodology and train to use it.
OK, you found a mentor and in 6 months you are consistently profitable trading 3 ES or 3 DOW EURO 50 futures and work between 4 and 8 hours a day. Now what?
Now we look at the math. What is the basis of every business? The business plan.
After about 6 months of paper trading 3 contracts, K’s stats look something  like this in the last week:
Number of contracts traded per trade:     3
Number of trades a day:                        6
Percentage of trades profitable:             71
Ratio of Won $ to Lost $:                      7.5:1
Largest Loss:                            $312.50/ 300 euro
Largest number of losses in a row:          3
From these numbers we worked out how much capital the business needed:
Notional Margin:  $800 or Euro /contract = $2400 or euro per trade
Provision for draw down or expected losing string:     $300 or euro /contract = $900 or euro
Double the expected draw down: $1800 or Euro
Monthly data, IT and platform costs:  $200
Total Minimum Capital Required = 2400 + 1800 + 200 = $4,400 or euro
You need $5,000 to become a trader if you have met all my criteria. This is money you must have mentally written off before you start trading. Very important. You must not have the fear of loss as it will very likely become a self fulfilling prophecy. So wipe that amount off your net worth before you begin.  I call this your cost of doing business.
The business gets under way. With each $5,000 earned K can add another 3 contracts.

How much can you earn?
When you move from paper trading to real trading expect to only make about 20% of what you made paper trading. Once you get to 100% trading real money, you are ready to start increasing your size.
If things go according to plan, the following is possible:

Looks pretty optimistic doesn’t it. Perhaps, but to make it happen you need to do your part and the market needs to move to allow the profits. With the financial mess in the world, I think we can count on enough volatility.
But let’s say the earning curve is a little longer. Maybe once you are trading over 10 contracts your mind starts playing games with you. Just slow down the growth level. Stay at the number of contracts that leaves you in the “I don’t care about the losing trade” comfort zone. The result will be that your account will grow more slowly, but grow it will IF you stick to the trading plan.

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