So You Want to Be a Share Trader. Part 1

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.

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