 HOLIDAY
SCHEDULE
Trading
for a Living and Keeping the Profits |
HOLIDAY
SCHEDULE
CSI will be closed for voice communication on Thursday, July 4th for the
U.S. Independence Day holiday. Data from open markets will be available
at the normal posting times, and the CSI host computer will be accessible
as usual.
Trading
for a Living and Keeping the Profits
I was introduced to the futures markets by a master trader. He was a coworker
and friend, who had a unique set of skills that brought him success. Patience
was his forte, and the reason he realized what most investors fail to achieve.
Thirty-five years ago he and I worked together on the top of a mountain
in Pennsylvania. It was the height of the cold war. As contractors of GE,
we wrote computer code to process azimuth and spherical information on
electromagnetic, optical and seismic signals. Our objective was to triangulate
the likely point of a nuclear attack against the U.S.
In addition to our regular work on that classified military project, my
friend patiently waited for opportunities in the futures markets. One day
he took a small long position in sugar. His reasoning was that the price
of World Sugar Futures was "impossibly low," at less than one and one-half
(1.5) cents per pound. He felt he couldn't go wrong because the price was
significantly below the cost of production. Along came the Cuban Missile
Crisis and the Bay of Pigs invasion, resulting in a surge in the price
of sugar by nearly 1000% to over 13.5 cents per pound! My friend used pyramiding
to skillfully parlay a couple of sugar contracts that were margined for
perhaps $800 into over a million dollars. This spectacular success in the
world sugar market involved a rare moment in history, but similar opportunities
can and do surface from other commodities over time. Patience paid off
for my friend in this trade and many others. He continues to invest using
the same strategy, and consistently does quite well.
Like a lion on the prowl, this trader waited for a suitable opportunity
to present itself. Then he acted decisively. When the position exploded
into a remarkable windfall, he kept his wits about him to play out the
scene and reap a fantastic bounty. It takes patient watching and waiting
to know when a market suggests the right opportunity. It takes honesty
and good relationships to continue the journey begun with that first successful
trade - to trade for a living. Today we humbly offer some basic insights
into how one might hold on to the gains that may fall your way, allowing
you to not only earn profits, but to also, perhaps, earn a living through
your investments.
Know Thyself
The accumulation of wealth requires honestly knowing who you are and knowing
that rewards come only when you are not fooling yourself or others. When
setting out to make a living off the markets, you must ask yourself if
you have what it takes to be an exceptionally successful trader. Measure
your prospects carefully, because the bigger the package of benefits you
seek, the bigger the risks required to achieve it. Honesty and patience
are more than virtues. They are prerequisites.
Making Money
With Money
Most people make a living by selling their services. They earn a wage for
performing a task for which others are willing to pay. Trading is a different,
more difficult way to make a living. Based on the idea of making money
with money, it is the art of capitalizing on price fluctuations.
I have had the experience of trading for a living, albeit somewhat vicariously.
I sold my services as a registered Commodity Trading Advisor (CTA), staking
my reputation and future employment on my market successes. For the bulk
of the trades I have booked, the at-risk capital and profits were not my
own. My first client was a New York executive who hired me to trade his
commodity account while he was out of the country. Profits rolled in and
soon I was asked to move my family to Florida so I could work exclusively
for him near his winter residence. My original client unexpectedly passed
away, whereupon I bought the computers and transformed CSI into a data-vending
firm. Although I successfully managed several accounts in the ensuing years,
data vending and software design eventually replaced the advisory business
entirely. This line of work rests more easily on my shoulders.
Making money with money may appear to be easy when the stakes are low and
the rewards are moderate, but the difficulty factor increases exponentially
with investment dollars. At lower levels, the emotional attachment to positions
is relatively minor, and decision-making is easy to control. Add a couple
of zeros on to both the investment risks and the reward, and things materially
change for the worse.
Setting
Goals
Trading for a living involves assuming the perils of an uncooperative market.
Losses are likely to occur even under the best of circumstances. You must
know in advance how much account value attrition you can afford before
you will exit from the market. In order to attain a viable risk-reward
ratio, it is crucial that you know in advance what will be the expected
value or outcome of your trading experience. The Trading System Performance
Evaluator, a product within CSI's Unfair AdvantageŽ system, can show
you the probability of returning a profit with your investment capital.
This is important because even a highly profitable system can turn into
a loser if your goal is statistically unreachable. Balancing investment
funds with a reachable level of achievement is a mandatory requirement.
As you move forward in your trading success (or failures), your goals will
change. In a series of successful experiences, your goal should increase,
provided the ratio of your goal to investment capital does not increase.
Just as statistical confidence is derived from a large sample, frequent
profitable experiences will add to your confidence in trading.
When long-term goals are realized, spend some time becoming accustomed
to your newly found wealth by taking a vacation from trading. Relax. Pay
taxes on your gains and set a new future goal. In the event of a large
loss, it is time to change your focus and scale back your investments.
On Relationships
If you are in any way unfamiliar with the terms, risks, conditions, procedures,
etc. in trading, I highly recommend opening a traditional account with
a full-service broker. An online Internet-based alternative would likely
offer lower fees, immediate trade confirmations and other automated services,
but they won't make up for the disadvantage of being on your own. A full-service
broker offers procedural market knowledge and a possible assessment of
situational conditions that can be useful to anyone - even an expert trader.
When dealing with a broker, make sure everyone involved recognizes that
the money in your account is yours. It does not belong to the broker, and
he or she does not have to know your objectives. You should be in control.
Open an account with the expectation of making one or two trades. No broker
should expect continued business from you. Keep a minimum of resources
available for trading, and don't feel guilty about withdrawing your money;
you are not required to keep your broker solvent. If you are happy with
your broker and the way your account is being handled, keep it funded and
use it to your best advantage. A good relationship with a trusted broker
is a valuable asset.
Be wary of tips and unsolicited advice from your broker recommending the
liquidation of existing positions or entry into new ones. Brokers are not
necessarily qualified advisers, so check the track record and reputation
of your broker before taking any action. If you have your own trading plan,
don't let the broker lead you astray. If you don't want advice, say so.
A good broker, however, will point out delivery risk notices for futures,
margin requirements, limit-move risks, and perhaps relevant news and relationships
between products, etc. Your broker should routinely offer procedural information
that may be useful, but you should do your homework so that minimal assistance
becomes necessary.
Loose Lips
Your relationships with peers, and especially with your broker, can impact
your decisions, and not always for the good. Avoid the temptation to share
stories about trading experiences with your broker and friends. Such publicity
tends to elicit feedback that is not conducive to uninhibited trading.
If you must talk about your trading adventures, balance stories of triumph
equally with stories of humbling failures. Each success story will bolster
your courage to take on more risk, perhaps more than you can afford. There
is no advantage in adopting a behavior that can lead you to shed assets.
Great traders don't boast of their successes because they know that losses
are always on the horizon.
If you honestly
evaluate your ability to sustain a trading life, it is likely that you'll
find yourself better suited to selling your services than to making money
with money. There's no shame in that. In fact, it is the best course for
most of us. Even if you don't earn a living from the markets, you can still
benefit from investing disposable income. We hope these suggestions will
help you along the way. Focus on patience, honesty and relationships. These
are the intangibles that separate the master traders from the rest.
I wish you
great success.
Best Regards,
Bob Pelletier
PAGE 1
