Jason,
I think this post really captures the converstation we have all the time about trading full time vs as a supplement to a full time job. I think it really depends on the person. But I do agree with not putting all of my money into trading. That is why I invest in real estate and also have a nice cushion in my savings.
Standing Aside in Slow Markets
I haven't traded this week. I placed two trades last week and closed them out quickly, one for a modest winner; the other for a modest loser. So this will possibly make two weeks where, basically, I haven't swung the bat and haven't made any money trading.
I'm fine with that. And therein lies a lesson.
When I began trading late in 1977, I made a conscious decision: I would pursue the markets, but not for my primary livelihood. My market activity would always be to supplement my income, not constitute my income.
Because of that decision, I've always had savings separate from my trading capital, and I've had investments separate from my trading capital.
And that gives me an important option: the option to stop trading.
My trading is mostly in the S&P 500 Index. Over the last twenty trading sessions, the median daily high-low range in SPY has been 1%. That is down 50% since June. Daily trading volume is down by a comparable percentage.
Here are the daily closing prices for SPY over the last 20 sessions: 111.11, 111.14, 111.14, 110.02, 109.41, 111.00, 110.80, 111.27, 109.44, 109.55, 111.25, 111.36, 110.81, 111.11, 110.93, 109.82, 109.81, 110.71, 111.05, 111.78. That's a little bit more than a 2 point range.
If I'm sitting at the poker table and keep drawing poor hands--a couple of low cards, unsuited--will I be placing big bets? No. I'll muck hand after hand. Eventually I'll draw cards worth playing.
If I'm a good baseball hitter and a pitcher is pitching around me, will I start swinging hard at pitches outside the strike zone? No, I'll stand there and wait for my pitch. Eventually I'll get balls worth swinging at, whether it's during this at-bat or a later one.
And eventually I'll get market moves worth trading for my style of trading.
But one key to longevity in markets is being able to stand aside when markets aren't giving you good pitches. It's the capital I don't have at risk in markets that allows me to keep my trading capital out of unnecessary risk.
To have a passion for trading--but not a need to trade: that's a great place to be if you're going to last in the markets.
This is the one area I have gotten better at and learned over the years. I am more than willing to sit on the sidelines as I am this month. There was a time where I felt I had to "do something" this month. I found that I most assuredly can do something, but is it prudent? I still from time to time do something just for the sake of it, but thank fully the is not the norm anymore.
ReplyDeleteI bought the trading coach book a while back and will get to it soon now that school is out. Also, since I plan on getting back in to managing my account on a full time basis, I like the idea of a friendly competition. Hopefully whoever loses so to speak, still ends up profitable. It will be up to each of us to not try and make a move just for the sake of competition. For instance, this month I would have been sitting out regardless of any competition.
A useful metric might be tough as if I'm doing 6-month covered calls and you're trading month-to-month, how do you measure on a monthly basis? What if you are targeting a certain dollar amount per month and I'm targeting a monthly return of 1%? We'll figure something out. I think on a yearly basis, posting your year-end 1099 from your broker is an easy task.
Remember a few months ago I was mentioning a possible project but then I got sidetracked. I was going to open a separate account with maybe $3,000, then give each of us $1,000 to play with. Something small, but the goal would be to make it grow as quickly as possible. So nothing in line with long-term growth or capital preservation, etc. This way there could be some friendly competition at a small risk, but you would be compelled to follow so by default you are learning other people's strategies and probably watching some ticker symbols you wouldn't otherwise watch.
Well I was thinking that we would use a mark to market method to measure monthly returns, but ultimitally the true measure would be at the end of the year. But even so if at the end of the year not all positions are closed we would still need to do a mark to market to get the annual return on the overall portfolio.
ReplyDeleteI will have to share the spreadsheet that I am building. But I am sure we can figure something out. We can talk about it more on Friday when we meet up.