If you can replace your income from trading while at a full time job, your confidence will not only increase but you will have built a sum of money to draw upon when you do finally go on to be a full time trader. This ‘safety’ margin is one of the smartest plans you can have as well as one of the main strategies for building wealth.

Fail Safe
What exactly is this ‘safety’ margin? It is simply a ‘fail safe’ plan in case things go wrong. For example, if you use leveraging to invest, you may avoid using all of the available funds that the lender provides. To be a full time trader, having a safety margin means having enough cash in the bank to sustain your lifestyle for at least 6 to 12 months. This will give you more options when something does go wrong.  

All too often I see traders who attempt to trade full time, without enough cash to support themselves, trading short term and taking higher risks. This only results in making trading decisions based on the need to derive an income rather than on good trading techniques. Consequently, they end up exiting trades when they should hold or entering trades in the hope of a quick profit.

One of the biggest misconceptions about becoming a full time trader is that you need to trade short term. If your capital only limits you to trading short term, I suggest you revert to my original proposed strategy of trading while working full time. Failure to do so will place you at high risk of losing your capital and ending up back at work.

Portfolio Set Up
The best way to set yourself up if you want to trade full time is to have a portfolio of good ‘medium to long term’ shares that will perform year in year out. If you then want to trade short term, I recommend you only use 10% of your total capital. This ensures you are protecting your capital by not subjecting the majority of it to high risk trades. Remember that the amount that is allocated to short term trading does not have to replace your income but rather supplement your total portfolio.

For example, if you have $100,000 in capital and you need to make $50,000 in income, your asset allocation could be $90,000 in a safe medium term share portfolio with the average trade length between seven and eighteen months. If you averaged a 25% return on this portfolio each year including dividends, then you would receive $22,500, which means you only need to make $27,500 out of your short term trading account. Therefore, the $10,000 capital in your short term trading account needs to generate on average just under $2,300 per month or slightly under 25% of your capital each month.

Now let’s assume you decide to use CFDs to trade short term, which allows you to leverage 10 times your capital. This means when you trade a share using CFDs, it only has to rise 2.5% in one month for you to make 25% on your capital. This is very achievable, and more importantly, very repeatable for someone who has acquired the knowledge and has the experience.

Part-Timer
People often want to trade the market because they are sick of working full time and want a change in their lifestyle. Of course getting up at 7.00am is not exactly wonderful especially when working for a company that does not pay well or appreciate your efforts. Thus, l suggest that as you transit to be a full time trader, move into part time work instead of giving up work entirely. This has huge benefits as your ‘psychology’ will slowly adjust to be less dependent on a steady income stream.

Working part time will also help you transit into the life of a trader, and many people find they actually crave work again after they leave. Being a full time trader can be lonely–you are ‘home alone’ while your friends are at work and this can lead to boredom. Some I know have taken up hobbies or charity work to keep them occupied, while others have gone back to work even though they were successful trading full time. Therefore, before the leap, it is important to consider the changes to your lifestyle as well.

Becoming a successful full time trader is definitely a journey and not something that happens overnight. Some people find that when they get there, it is the best thing that they have ever done and yet others find it is not for them. Whether you take up full time trading or not, the main thing is you enjoy and profit from the journey.   

I have mentioned in previous reports, back to June 07, that the market has been unfolding in very unusual ways and this is occurring again right now given that as of yesterday the market has closed lower for the last 9 consecutive days. If we review our market back to 1982, this has never occurred before except in mid-1990 when it closed lower than it opened over 10 consecutive days as the market fell into a 4 year low in January 1991.

Even events such as the Asia crisis, the tech wreck and Sep 11 did not cause the market to behave in its current manner. So what is forcing this market lower? I firmly believe it is the hedge funds short selling in the market in order to profit from the so-called ailing US economy. The unfortunate by product of this is that it costs average Australian’s dearly as their superannuation plummets.

Interestingly, while the Dow has already fallen below its August 2007 low, our market has not which indicates it is much stronger. What we know is that these periods do not last very long because the hedge funds will eventually buy back the shares to cover their positions and when this occurs the market will rebound strongly.           

So what can we expect in the market?

Last week I believed the short term low I have been expecting would occur soon; however, rather than find support and rise this week, the market has continued to fall to below 5850 points, with no signs of stopping. The depth of the market has fallen in price but the length in time it has fallen over is abnormal and unexpected. The longer and deeper this fall continues, the less likely it is that the 4 year low occurred in August 2007, and the more we can expect the All Ordinaries to fall to around 5200 points.

Either way, the current bearish conditions will not last much longer and we should see the market rise for a minimum of 2 to 4 weeks very soon. I still believe our market will be bullish over the next one to two years, however, given what has happened in the last few weeks we may need to wait a little longer for the bull-run to resume.

The extreme volatility that began in August of last year on the Australian market, as a result of the sub-prime mortgage meltdown, has continued. While this has created a lot of angst for investors, it is important to remember that the best time to buy good shares is following a market crash or a severe market pullback. For example, QBE more than halved following the September 11 attacks in 2001 but has since risen over 500%.  In the current market, I believe the banks will present a great opportunity to buy once the volatility settles. Five of the seven banks in the top 20 shares had negative returns in 2007 as follows: ANZ -2.66%, MQG -3.46%, NAB -6.46%, SGB -4.27% and SUN -16.86%. Only CBA and WBC delivered positive returns of 19.44% and 15.18% respectively. Given that RAMS is now out of the picture and the supply of money is tight around the world, I believe the banks are in a prime position to benefit. 

 So what can we expect in the market?  

In my last report for 2007 I indicated that I needed to see the market rise during the week following 14 December to change my opinion that it would be bullish through to the end of January. However, as we know the market has continued to trade down over the last 4 weeks breaking below 6200 points, which was the top end of the target for the fall that I predicted in my report on 30 November.  I believe we will see a short-term low in the very near future and once this is confirmed the market will be bullish. There is a high probability that the low in August of last year was also the 4 year low, which if correct means our market will be bullish for the next 1 to 2 years, although this will only be confirmed once the all time high is broken.  Dale GillhamChief Analyst Wealth Withins

News Flash: ‘Boom share market rise entices many to the share market in the hope of finding riches.’ A new share ownership study by the ASX claims 55% of adult Australians include shares as an asset class in their portfolio, an increase of 175% over the last 10 years. Those that have direct share ownership account for 23%, whilst the remaining 32% have a combination of direct and indirect (managed shares) or just indirect share holdings.

The bull market that has unfolded since March 2003 has seen the average individual make good returns, so much so that many are looking to leave work and trade the share market full time……….

Sound familiar! I have heard it all before; just prior to the tech wreck, the Asia crisis, the 1987 crash and the list goes on. There is a saying that ‘we learn from our mistakes’, but if this is true, why then do people continually make the same mistakes believing it will be different this time?

Only a week ago I received an all-too-familiar phone call that. It was a gentleman who had been investing in the share market for the past year and had made some money. He told me he was going to take six months long service leave and trade options full time in an effort to become a full time trader, so he wouldn’t have to go back to work.

Other than reading a couple of books, he had no education in the share market and had simply made money in a very bullish market. So what do you think his chances will be of becoming a successful trader if he takes his long service leave now and does nothing more to educate himself? Statistically, anyone trading options has less than a 5% chance of being successful long term but that aside, even if he were to trade shares, what do you think his chances would be? At a best guess, I would say less than 50%; in fact if I was to be truly honest I believe it would be less than 30%.

If you want to become a full time trader you need to follow the ‘Be, Do, Have’ principle. You need to BE a full time trader, DO what a full time trader does and then you will HAVE what a full time trader has.

So how can you Become a full time trader?

It takes at least two years for anyone to become a full time trader, if not longer. Knowledge is everything in the context of trading. The streets are littered with ‘would be traders’ and in a bull market many are profitable mainly through sheer luck rather than good knowledge. Strong bull markets tend to hide mistakes in judgment and lack of knowledge, which is why I say that unless you have been trading successfully for more than two years, you cannot consider yourself a trader.

To be a full time trader, you need to combine a high level of knowledge with experience; without this, your probability of success over the longer term is very low. When you leave work to trade full time, you no longer have the security of a regular income; therefore your attention is often directed to making profits from every trade to pay the bills.

This need for survival often results in the trader trying to trade more to make up for any trading losses or failure to meet their expected financial needs. A spiral of increased pressure begins, resulting in the trader taking higher risks to get back on top. Unfortunately, due to their lack of knowledge and experience, many end up back at work.

Being a full time trader does not mean you work every day. It simply means that your trading is paying for your lifestyle. (This is a very important distinction and one I suggest you ponder if your goal is to trade full time.) If your goal is to replace your income of $100,000 per year, it does not mean you have to make around $2,000 per week from trading. It just means your total trading profits over one year need to equate to $100,000. Looking at it like this rather than the micro view of generating $2,000 per week will make a dramatic difference to your psychology and how you trade the market.

Another very important point I want to make is that you should only subject yourself to the amount of risk you need to achieve your goal(s). For example, if you have $500,000 to invest and you need an income of $50,000 a year, you only need a return of 10%. Just by buying the top blue chip shares for the medium to longer term will more than deliver this income for you. If you only have $100,000 to invest and you still require $50,000 in income a year, you will need to generate a 50% return on your capital. Therefore, you will need to trade shares that assist you in producing this return or use leveraging in your trading plan. 

If your goal is to Become a full time trader, I highly recommend you prove to yourself that you can not only trade but make the sort of income you want from trading while still working.

In the next article I will share with you key strategies that will enable you to transition to becoming a full time trader, if that is your goal.

One of the key criteria to astute investing is to consider how and when you will take your profits – in other words you need to develop an exit strategy before you invest in the share market. This is crucial to your success simply because while an asset may rise in value, it is not realised until you sell. And because there is a possibility that an asset can fall in value you need to consider how and when you will exit if your investment turns sour or does not perform as expected.

Another key criterion to astute investing is to consider your rationale for investing in a particular asset in the fist place. If you do not understand the consequences of your investment strategy, you are taking higher risks and there is a high probability that you could lose. For example, many investors got caught up in the hype of the tech boom in the late 1990’s, investing large sums of money in the hope of making a fortune.

Media hype and speculation fuelled the misconception in the marketplace that ‘blue chip’ shares were out dated and that technology stocks or ‘dot com’ stocks were the growth stocks of the future. This misleading information permeated the market causing mass greed resulting in share prices skyrocketing to many times their true value. Many investors even forgot to consider the basic economic fundamentals of successful companies, ignoring the fact that many of the ‘dot com’ companies had no assets and were yet to make a profit. As a consequence, a lot of investors lost money and time in creating a wise investment portfolio.

Astute investing, however, has always been and will always be about risk management – which means every time you invest there will be a certain level of risk for the reward you are chasing. The astute investor always invests in assets that deliver the lowest possible risk for an acceptable return and not as many did in the tech boom investing for maximum reward and taking on excessive risk. Despite popular belief, real wealth does not come quickly; rather it comes from the continuous pursuit of accumulating good assets that provide capital gain and income.

Unless you understand the consequences of your investment decisions, it is better to invest your money in an average investment, like a bank term deposit. While your return may be lower, you are eliminating the risk associated with these higher risk investments.