C1-TradeCraft Widows and Orphans "FULL ON" Plan (Working Draft) (c) 2010

Chapter 1:

Situational Awareness


Here is what you will learn in this chapter:

 What you need to consider before becoming a successful fulltime trader.

 What resources, tools and considerations are required for success.

 What lessons did I learn based on my own experience?

Time Commitment

Time is the most precious resource that a Trader or for that matter anyone has. It can’t be bought or sold and it can’t be reclaimed. There is an opportunity cost to pursuing any entrepreneurial pursuit. You need to factor that opportunity cost into your life. It doesn’t matter if you choose to do this either full-time or part-you’re your wife will be widowed and your children orphaned. I was and still am single Dad and I can attribute my current single status to my pursuit of trading. Current research on what it takes to be good or expert at something requires about 10,000 hours of both learning and experience. If you put 40 hours a week into your trading you will have in 5.8 years achieved expert status. If you put 80 hours a week into this effort you can of course shrink this down to less than three years, but don’t forget that achieving expert status is not just learning it also involves applying what you have learned in the real world. In the Coliseum where every warrior and dangerous man-eating animal is ready to eat you before lunch. Certainly, your background and or current experience can give you an edge and give you a head start, for instance I have always been enamored with stocks, business and investing. I was fortunate to have worked in a large money center bank right out of school in the Wall Street area which exposed me to a near insider’s view of the capital markets. As it turned out this was an early hindrance in my trading as I had built up strong ideas about trading and they were hard to let go. I had the mindset of the traditional Buy and Hold investor. If you are reading this and you are of this mindset blow it up. If you are a value investor blow it up. If you envision yourself a competent analyst type it may have some use, but recognize that it can also be a stone around your neck. If you work in technology and have been in a few start ups or seen a few technologies come and go like fashion fads, this might be helpful. That is me after banking. If you are a sailor, not a motor boat enthusiast this also will serve you well. I don’t mean to disparage anyone else reading this with a different background, I can only talk about what I know from my experience.  In fact you need to weigh everything I write and put it in the context of your experience. 

So take that for what it is and realize that you may end up widowing your wife and orphaning your kids if you don’t have a plan, set goals and set expectations. I suggest you discuss with your family as you need to build in a preventer so that you don’t go ROGUE. Going ROGUE is a situation when you have a relatively painful loss that you turn into a catastrophic loss. You read about ROGUES every so often as they are the individual that "they" hang in the public square charged with bringing down the odd venerable centuries old institution, or in the day traders case wrecking marriages and tearing families apart. So do your part to build a failsafe in case you go ROGUE and you don’t realize it yourself.

Obviously the more time you spend on your education the quicker you can cut the learning curve, but while reading this book, and articles, forums, blogs etc. etc. will fill your appetite for assurance and confidence you cannot supplant real trading experience. I will suggest that you will need at least 1,000 roundtrip trades 2,000 actual commission trades before you can get that steely 1,000 tick stare. 2,000 trades on AMERITRADE at $10 per trade is $20,000. So there is your first realization that we are going to need a bigger boat. DUN DUN... [Ominous Theme from Jaws] I’m getting ahead of myself.

Oh and one more quick thing. When I started I often had the realization that if these guys that wrote all these books on trading were so successful why were they writing books for money. It dawned on me that it was because by the time they learned to trade they didn’t have enough capital left and needed a fresh source. Like me

Full-time vs. Part-time

I personally don’t do anything unless I am “full on” to me either you are in or you are out. So when I go in I go all or none. When you think about how our brains are structured and how the neurons fire it is all or none, in computers a 1 or a 0. On book I included in my reading list for you was Sun Tzu’s Art of War, the original one is fine although Dean Lundell wrote Sun Tzu and the Art of War for Traders which is also helpful. There is a strategy Sun refer to about getting your Army to fight when you are fighting with a vastly outnumbered force. His recommendation was to burn the boats and spear the horses so that there is no option for retreat. It is essentially fight or die. I remember my girlfriend not really approving of my new harebrained idea to day trade and she asked a legitimate question. What is your “Plan B” and I told her as a matter of fact I don’t have a Plan B. We broke up shortly thereafter for about 2 months.

My recommendation is have a plan Band also add a Plan C, D…Z this is the prudent thing to do. Build this into your plan. Of course I will discuss this later. To do this requires enough capital so that you can live for 12-18 months without any income coming in and take that number and assume that you are going to spend half of that over and above your allotted trading capital.

Part-time is very likely the safest way to start, cause at the very least you will have a day job, which will help cut the expenses will incur and take a great deal of pressure off of you to do well with trading. I am sure it is possible to do extremely well right off the bat, but I believe since only 10% of the people who attempt to day trade fulltime are successful. Taken one step further the 80/20 Pareto Rule indicates of those 10%, 20% will be enormously successful. So as you can imagine starting out right from the get go, with making big money is near impossible, this is no quick rich scheme. The odds are slightly better than winning the lottery, but not much more. Immersion is the key, read anything and everything you can about trading, especially the recommended reading list I provided. Note the recurring themes each author presents. It’s difficult, capital preservation is essential managing your risk is extremely important, knowing your self is actually the hardest thing you will do. Considering doing this part-time requires you give some thought as to when you want to be in a position of doing this full-time, think in terms of years, at least a couple, and only after you have a established a positive and consistent trading record.

$$$ Commitment

Trading requires capital; I’ve often seen it cited that you will need at least $50,000 of seed capital to start cold. Some Traders have recommended at least $100,000 to start, and it makes a difference if you are counting your living expenses as a part of that amount, because it will likely take you 18 Months to earn a consistent income of at least $35,000 per year. Think Hot Dog stand money, not Franchise money. Of course if you are in a similar situation like myself where I had a lot of the infrastructure in place you can start with a smaller amount. Now as a caveat $50,000 is in my view more than enough to start and the costs are front loaded so I will direct you on how to minimize the upfront costs and save the bulk of your capital for when you really need it, which is when you have at least 500-1,000 round trip trades under your belt. I know what you are thinking, “Gee 1,000 x $9.95 = $9,950 in commissions” yes I know shameful, but that is the cost for entry. There are also tips I will share to limit this cost. One thing to keep in mind is that quoted prices for online brokers are geared towards retail customer(s) or Investor(s) which are likely to make a few trades a month or a year. If you are an active trader, and can do at least 12-15 trades per month you can negotiate a lower commission structure. Keep in mind though you have to have the volume to back this up. I started out on TD Ameritrade, which I highly recommend as it is cost effective, stable and they have kept my interest by making big investments in the tools they provide and the choices.

Also, of the nice things about AMERITRADE at or about this time of writing is that they give you $100 in your account and a month of free trades when you startup an account with them and fund it for $25k or more. I can’t stress how important this is when first starting out and it is an enormous help when first starting out. I will explain how to take advantage of this offer in greater detail later on in the book.

Essentially you want to fund your account in a big way and why you want to do that is that you want to be in a position to not have any restrictions as to the number of trades you complete in a five day period.  This is an important consideration and it will require thinking about this, but I will provide a few strategies to understand and work within this restriction. 

Basically, in life there are two truths Positive/Negative, Long/Short, Plus/Minus, and in Computers a 1 or a 0.  Keep this in mind, a negative can be positive and a plus can be negative, it just depends on your perception.

One book I included in my reading list for you was Sun Tzu’s Art of War, the original translation one is fine although Dean Lundell wrote Sun Tzu and the Art of War for Traders which is also helpful. There is a strategy Sun refers to about getting your Army to fight when you are fighting with a vastly outnumbered force. His recommendation was to burn the boats and spear the horses so that there is no option for retreat. It is essentially fight or die. This is the option I chose, hopefully you will make a better choice than I that is why I am writing this so that you can make informed choices.  I remember my girlfriend not really approving of my new harebrained idea to day trade and she asked a legitimate question. What is your “Plan B” and I matter of fact told her I didn’t have a plan “B” she broke up with me two weeks later!  Don't say I didn't warn you...

$$$ How much is enough?

The quick answer is that you can never have enough, but the reality of it is, theoretically you can start with as little as $2,000.  However, you want to be able to start with enough capital so that you can get as many trades under your belt as possible as quickly as possible.  As I mentioned before a great deal also depends on is this money you need to live on, so on and so forth.  Starting out to accomplish "The TradeCraft Plan" You need at least $30,000 not including equipment as detailed in the infrastructure chapter, the goal is to start out initially with a lot of capital and then pare it back and keep half or three quarters in reserve.  At that point you would have the skills required to trade a relatively small account and build it up. 

$$$ Money to lose?

Remember you should also consider that this is money you can easily through out your window in a stiff breeze and still feel right as rain, because on many days that is exactly what you will feel like this is exactly what is happening.  The thing to consider, even if you don't lose your money to the market you will lose your money to the broker, the gremilns in your machine, the internet provider... etc, etc.  Get it out of your head that you will make money and be living a life of riley, cause that just doesn't happen.  If you do have a winfall, treat it as a fluke, be scared when you make money and deconstruct your trade, because chances are you made a mistake.  You just weren't punished for it.  Many times you will learn not to make a mistake, and yes you will still be punished for it.  One of your first assigments will be to go to the local library and take out the movie "Owning Mahoney" Starring, Phillip Seymour Hoffman, this is exactly what you want to avoid...  the gambler.  That is why you need a plan and a way to execute the plan.

$$$ Capital Preservation?

Size your risk, but don't risk your size or you'll have a bus ticket to Ohio in your breast pocket.  I don't intend to slight or offend any Ohioans reading this now, I was just refering to another character in another one of your assigment's Jesse Livermore, the world's greatest trader, who ended up checking himself out in a men's room in a Ohio, transit station.  We want to avoid this. 


My Favorite Roller Coaster!

blogger templates 3 columns | Thank You! Please Come Again!