AT THE CLOSE
Transitioning To Trading For A Living
Every month I interview dozens of potential new traders, and the question of transitioning from the safety of a paycheck to successful trading comes up often. In my opinion, there’s no need to leave job security behind. Let’s discuss a few scenarios.
The Business Of Trading
One of the first things to take into consideration is to realize that trading is, indeed, a business, and must be treated as such. With this in mind, let’s cover some business basics. One of the primary reasons for not succeeding in any business is lack of capital. I’m speaking of capital to properly run the business, not living expenses, which we’ll get to later. Many books and seminars and TV ads attempt to convince the public that money can be made with their products with only a $25,000 retail brokerage account. This is extremely difficult. Can you and should you invest your own money with a retail account? Sure you should! Do your homework and trust yourself, not a stockbroker, to make investing decisions for you. But investing is not trading for a living.
For our assumptions here, let’s assume an average stock price of around $50 per share. Merely buying 1,000 shares of a single stock would tie up all your capital and margin. If your intention is to simply make $100,000 per year, this would require some extraordinary vision and a lot of overall risk. For the most part, the strategies that our traders use require about $1 million or more to work properly. Bear in mind that I’m talking about “use of capital,” not “abuse of capital,” and certainly not engaging in excessive risk.
Getting Started
Now that we’re thinking about starting a trading business, let’s think about how. Let’s assume you’re working a “normal” job, with a bit of flexibility, as most of us are. Time zones can actually play a part, as you will soon see. Most of my traders engage in what we call the “opening-only” strategy that I have discussed in the past. This is one of our most lucrative single strategies and has been working well for decades.
In this strategy, our traders place orders to buy or sell short a number of shares at predetermined prices prior to the opening print on Nyse stocks. We go through a premarket calculation to determine limit prices that we would like enter this trade — if the stock gaps up or down from the previous day’s closing price. For example, I place 2,000 shares to buy and 2,000 shares to sell short in about 50 stocks each day. I don’t want to be filled if the stock opens at a fair price based on market conditions; I only want to be filled on gap prices.
I try to get about a 10–15% fill rate, giving me stock, either long or short, on five to eight stocks on average. The big edge is that I know that if I am filled, the Nyse specialist is also filled at my price, in my same direction, long or short. Over the decades, even with all the changes on the Nyse, this is still a true assumption. I take profits with an automated program, or cover losses when they happen, and am usually finished with this strategy within five or 10 minutes, rarely any longer than that.
We have many traders who engage in this strategy and nothing else when transitioning to a full-time trading career. This allows for half-prep time and half-trading time. Many make a good six-figure income doing this and this alone. It’s a great way to keep your job while augmenting income and/or preparing for the move to full-time trading. This requires the use of capital that I described, but not the abuse.
Another strategy that only takes a half hour or so takes place at the end of the trading day. This strategy revolves around the market on close (Moc) imbalances that are published by the Nyse starting at 20 minutes prior to the closing bell. All-day-long various funds and groups place orders to buy or sell great number of shares at the very last price of the day, the Moc price. We filter for larger imbalances, either buy or sell, and immediately place orders that go along with the imbalance. We can then either take profits or increase share size for the next few minutes based on market conditions.
As professional traders, we have the opportunity to submit Moc orders to close or offset the imbalance during that last 20 minutes. This is another strategy that can be done in a short time frame.
Now to time zones. I have always traded in the Pacific time zone, where the market opens at 6:30 am and closes at 1:30 pm. Many of our local traders, while transitioning, will come in at 6 am, trade the opening, and go to their jobs at 8 or 9 am. They then return for the last half hour of the day during lunch. Of course, your time zone may be different, but if you have some flexibility in your job, you too can transition this way.
Making The Transition
I never advise anyone to quit a job to start any business venture, and trading is no exception. Traders need to keep a cool head and not worry about making mortgage payments or feeding their families, especially during the first crucial months. I suggest to those who find themselves retired or out of work but want to become traders to have enough money to cover expenses for a year while getting started.
So take things one step at a time, keep a level head, and start your trading career one move at a time. After you achieve a comfort level, you can easily segue into a full day of trading with techniques that work for you.
Don Bright is a professional trader with Bright Trading, an equity trading corporation.
He may be reached at donbright@brighttrading.com.
Related Reading
Bright, Don [2008]. “The Business Of Trading,” Technical Analysis of Stocks & Commodities, Volume 26: August.