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.   

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.

As this is my last report for 2007, I thought it appropriate to review what has transpired in the share market over the past 12 months. In my opinion, this year has been difficult for those managing a portfolio of direct shares.

Shares that have performed well this year include BHP, RIO, CSL, WOW and LEI, and unless you held these select shares, it is unlikely you would have achieved a good return. These stocks have dominated the market; however, in more normal market conditions you tend to find the stocks that perform well are spread across various indices and sectors.

This year, while the top 20 achieved 32% better growth in comparison to last year, only a few stocks in this index actually contributed to the growth. For example, 11 of the companies in the top 20 are in the financial services sector, yet this sector only rose by 4.77%. The materials sector, on the other hand, only has two stocks in the top 20 including BHP and RIO, yet it achieved phenomenal growth of 48.01%. This was double the performance of the next best performing sector which was Healthcare at 24.64%.

The good news is that we are unlikely to see a repeat of this next year, therefore my recommendation to all investors and traders is to stick with your plan as it will work over the medium to long term.
    
So what can we expect in the market?

Last week I indicated that I needed to see the market rise this week to change my opinion from bearish to bullish. While the market has technically traded higher this week given that the All Ordinaries Index rose above the high of last week, it only did so for one day while for the remaining days it traded down to close lower. Given this, it is still not possible to confirm the short term direction of the market, although it is showing some bullish signs given that the market has not traded below last weeks low of 6543.2 points.

If the market is bullish it will trade up next week and in doing so confirm that it will potentially rise through until mid-January to between 7250 and 7500 points. If the market falls next week, it will confirm it is bearish and likely to fall until mid-January to around 6200 points. Right now is the time to sit back and be patient because when the market confirms it is bullish there will be some great buying opportunities.

One of the key criteria to astute investing is to consider when and how you will take your profits - in other words, you need to consider your exit strategy before you invest. Most investors never give this any consideration because when they invest they expect the asset to rise. And while the asset may rise, the value of the asset is not realised until you sell. Consequently, this is considered unrealised profits as the asset could fall in value. Therefore, you need to consider how and when you will exit if your investment turns sour or does not perform as expected.

Unfortunately, many investors mistakenly believe that if they have not sold a share that is falling in value then they are not losing. But let me demonstrate why the opposite is true.

If I buy a blue chip share that is rising in an uptrend, I know with high probability that the stock will rise a minimum of 20% in price over the next 12 months. Let’s assume I invest in five stocks throughout the year. Four of the stocks rise in value (all by 20%) and only one makes a loss (also by 20%). Now let’s convert this into dollar terms. If I invested $1,000 in every stock then I would have made $200 on each winning trade and lost $200 on the losing trade; therefore I would make $800 and lose $200, which would give me a net profit of $600 or a 12% return on my capital of $5,000.

Now let’s assume I decide to hold onto the stock that was falling in value, because I believe there is a chance it will turn around and start to rise. However, by the time it has decreased by 50% in value I realise that this is not going to happen. So what is the effect of this on my portfolio? On the losing trade, I lost 50% or $500, meaning the unrealised net profit changes to only $300 ($800- $500 =$300) or 6% profit on my $5000 capital. By allowing the losing trade to fall below 20% halved the return on my portfolio from 12% to 6%.

The longer a stock continues to fall the greater the effect on your overall profitability, which is why it is so important to ‘cut your losses short and let your profits run’. In essence, allowing your losses to run into bigger losses turns a good investment strategy into an average one.