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Calling all SOLO Traders... Submitted by Elijah Lineberry on Sat, 2007-09-01 00:20.
At the Auckland SOLO/Libertarian gathering a number of people mentioned they traded Currencies..(and other things?). I was reluctant to cover the following subject/s at a social gathering, especially when I had imbibed a couple of martinis, but feel I should have a "word to the wise" about derivatives trading, and give everyone the benefit of my years of experience. The following may seem strange to many people, but it has served me very well for a decade and helps to eliminate 'risk' and recklessness. Firstly, a bit of background.... Regardless of what you are trading, whether it be gold or currencies or corn etc, they will be divided into 'lots', or 'contracts'. With Currencies this should be around $100,000 ...for example, if you wanted to trade NZD/USD it would be $100,000 NZD compared with the USD (which is $70,195 USD as I write this)...or Euro/USD (€100,000) is $136,390 USD as I write this...or whatever. A trader is required to submit a margin in order to trade...with NZD/USD the margin should be around $3000 NZD. Now for the 'Wisdom' part Let us logically assume a couple of things about markets, whether it be currencies, gold, pork bellies (doesn't matter). 1. Each day the price will go up, go down, go sideways. Let us assume a couple of things about 'Human Nature' as a trader.... 1. Greed will capture you very, very, VERY quickly. To overcome the human nature aspect and make a profit, you need to develop a plan and stick to it (however tempting it may be to break your plan at times). What I do is this...I work on a profit margin of $125 NZD for each contract, or 'lot' I am trading. Very, very simple. Seek a small profit from a large number of transactions over a long period of time, rather than trying to make your fortune by Labour Weekend. If a trader has, say, $15,000 as their 'capital', and the margin requirement per contract is $3000, they can have 5 contracts at any given moment. $125 x 5 contracts = $625 [per day] ...which starts to add up after a while. I would then suggest that profit is sent directly to your bank account, whilst retaining the $15,000 (or whatever) as your trading capital. Some helpful suggestions... 1. I would strongly urge you NOT to reinvest profits and go for bigger trading positions whilst still 'inexperienced'...but rather to trouser your money, to live on, or make investments in other areas, or whatever. 2. I urge you to never, ever be away from the computer for more than a few minutes (to make a cup of tea or have a cigarette) whilst you have open positions. Learn the discipline (however tedious at times) of always following the market whilst you have open positions. 3. I also urge you to close out all positions at the end of the day (whatever time that may be!)...it is very important to get into this habit. Methodically following a plan of this nature has worked very well for me, over a very long period of time. So draw up your own plan...your own strategy, perhaps with a slightly higher profit per trade? say, $140? and stick to it...stick to it through thick and thin, however tempting it may be to alter. What I have said may surprise some people...and they will rush off and ask others about the merits of my strategy...all I can say is that it serves me very well.
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I have looked at
I have looked at www.tdameritrade.com. Am I right in saying that you only pay US$9.99 per month, for unlimited trading?
No, US$9.99 per trade. Ameritrades Fees
When they say "unlimited" they mean "unlimited shares per trade".
When I picked ameritrade there were only a few US traders that would allow non US citizens to trade and ameritrade were easily the best, but that was a few years ago and I'm sure there are better places to trade now.
Elijah, Reed.
Thank you very much for the info. As you suggest Reed, if you are only starting with a small amount, the fees in NZ and Aussie are prohibitive (something like $30 minimum per transaction).
I have looked at www.tdameritrade.com. Am I right in saying that you only pay US$9.99 per month, for unlimited trading?
Book Suggestions
It's been awhile since I've read them but Jack D. Schwager's books, "Market Wizards" and "The New Market Wizards" were excellent as I recall. In them he interviews various top traders to find out what makes them successful.
Gerald
p.s. How to you make a small fortune in the stock market?
Start with a large fortune.
A
book I would recommend for information about shares is 'The Zulu Principle', by Jim Slater.
It is a bit out of date in terms of the companies he mentions, but the 'glossary' is wonderful...he talks you through all the terminology, and is invaluable.
I get my business news information from Reuters, which I pay for.
The Herald and NBR should be avoided...probably for similar reasons Lindsay bemoans the illiteracy of Radio and Television reporters
Matty - I'm planning on
Matty -
I'm planning on getting in to the stock market game in the next couple of years and I'll be sure to bookmark this post. Any advice on how to get started?
I know you are asking Elijah but I'll answer this and hopefully he'll fix any bad advice I give.
IMO if you are interested in trading... start now. There is no reason to delay starting. Some places will allow you to open a trial account, perform trades in real time with actual market data and pretend money - so you can start your education without risk. I prefer to do my learning with real money involved and some places will let you start trading with very little money (I saw one yesterday - 50USD minimum - www.hymarkets.com).
The sooner you start trading the more likely you'll be able to take advantage of opportunities when they arise.
If it's share trading in particular that interests you and you are dealing in small lots I would recommend using a US company to trade through - When I last looked the NZ and Aus companies had high trading fees, slow processing of trades and primative software (this might have changed) - I use ameritrade.com for shares and options and they have been OK.
There is a bit of jargon involved so I have found reading some trading/investing books helpful for this but none have been particularly helpful for trading strategies.
Elijah -
Are there any books you would reccommed?
Where do you get your day to day info?
Do you find the NBR or the financial section of the NZ Herald useful?
I don't have any background in economic theory. I imagine it is handy to understand this. Do you know of any good economic theory books that will be useful for commodity trading?
Cheers
Reed
Never??
2. I urge you to never, ever be away from the computer for more than a few minutes (to make a cup of tea or have a cigarette) whilst you have open positions. Learn the discipline (however tedious at times) of always following the market whilst you have open positions.
Yeah, but this is what Take Profit and Stop Loss settings are for, especially if you're trading a currency that is one of the more reliable ones, like EUR/USD or USD/YEN. If one sets a Take Profit at a modest price and all the indicators are soundly in place going in one's favour, then it's pretty safe to walk away - actually sometimes preferable because then one isn't just watching the minute by minute rise and fall which can be rather hair-raising.
Thanks Elijah!
I'm planning on getting in to the stock market game in the next couple of years and I'll be sure to bookmark this post. Any advice on how to get started?
Yes
Broker One are a good firm.
www.brokerone.com.au (based in Sydney)
With regards to the share
With regards to the share price falling below $34-57..that is what I meant about writing options on the same parcel of shares half a dozen times a year to eliminate that risk.
Once the January options expired and you wrote an April Call, the premium received would bring that figure down to about $30, and June Calls brings it down to about $26 and so on...(I cannot remember the last time AT and T was at $26 per share).
OK, message received and understood.
If I were to suggest a commodity for a beginner to start with, it would be Soybean Oil on the Chicago Board of Trade...
I'll do that. I am currently set up for trading currencies, US stocks and US options but not commodities.
Do you have any suggestion of who to trade "Soybean Oil on the Chicago Board" through?
Yes
Reed, it is termed 'Covered Call' options.
With regards to the share price falling below $34-57..that is what I meant about writing options on the same parcel of shares half a dozen times a year to eliminate that risk.
Once the January options expired and you wrote an April Call, the premium received would bring that figure down to about $30, and June Calls brings it down to about $26 and so on...(I cannot remember the last time AT and T was at $26 per share).
With regards to a commodity, you need to select one (if you are a beginner)...and concentrate on that.
Some tips..
1. Calculate how much the price needs to move for the profit margin you require, and track its daily trading history for the last wee while to see how volatile it is and whether price movements of that amount are likely and sustainable...(the more volatile the better).
2. Watch the market for a few days before trading and see what happens so you can try and pick up patterns which emerge...for example, take the opening price each day and see how much the price rises from the opening before it starts to fall.
You may find that the price never seems to rise more than, say, 0.7 cents per unit from the Opening price for the day, before it runs out of steam and eases back.
As it eases back...do any patterns emerge there? you may notice that when it drops 0.4 cents per unit a flood of buyers rush in and it starts rising again.
Track how far above and below the Opening price it moves each day.
Keep careful note of the time this happens...does a pattern emerge? ..for example, does there always seem to be 0.5 cent rise in price in the 10 minutes after the market opens? (as traders are filling 'overnight orders')..before easing back within 20 minutes of opening ...(as the traders having put through their overnight orders all bugger off outside for a coffee and a smoke)
I am a great believer that markets move at similar times each day...most traders are creatures of habit...and timing is the key to success.
Keep tracking these simple matters for as long as it takes until you get the hang of it and see clear patterns emerging...(do not rush! do not feel silly because after a week of close analysis you cannot seem to pick any patterns clearly, in time the penny will drop!)
If I were to suggest a commodity for a beginner to start with, it would be Soybean Oil on the Chicago Board of Trade, as it meets a number of criteria and only needs to move 18 points to meet my profit margin suggestions.
Elijah - I'll give that
Elijah -
I'll give that option strategy a go. Is this termed "writing a covered call"?
You could lose money if the share value dropped below $34.57 or is there more to this strategy?
You don't have to answer my other questions but they weren't rhetorical.
If I tried your other strategy with the (lack of) knowledge I have, I'm pretty sure I would have the same odds of making money as I would loosing money.
Cheers
Reed
I am pleased someone brought up Options trading, as it is great fun and very lucrative!
What traders, especially new chums, are encouraged to do by their Brokers is to buy Call options and then attempt to sell the Call option at some point in the future.
With 1001 variables, and a 'loaded dice' against you, this seems a very bizarre activity designed solely for the enrichment of the Broker!
What I do is 'write' Call options.
This is where you purchase 100 shares in a company, say AT and T (America's version of Telecom)...currently sitting at $39-87 USD per share.
The cost of this would be around $5500 NZD.
You can then write, or sell, January 2008, $50 Calls for $5-30 as a premium.
What this means is that someone will agree to buy 100 AT and T shares from you for $50 per share between now and January 18th, entirely at their discretion, and pay you $5-30 per share for this 'option'.
It is a game you cannot lose...(which is what I mean about having a loaded dice against the buyer)
Whatever happens you get $530 USD in cash (the premium they pay you)...around $700 NZD after the Broker fees.
If the price rises to a level where it is profitable for the other chap to exercise his option, he will pay you $50 for shares you paid $39 for.
If you take a longish term view of this you would see that you could write Call options on the same parcel of AT and T shares half a dozen times per year...pocketing $600 or $700 each time...(not a bad return on a $5500 investment).
If a chap uses the money raked in from premiums to purchase additional shares...and write options and collect premiums on those shares..(and use the money to buy additional shares etc. etc) ...it very quickly becomes one of the easiest ways to make a profit, whilst eliminating "risk".
(Goodness knows why this sort of thing is not taught in Primary Schools so children would learn something 'useful')
Fantastic
Elijah -
I was hoping you would share some of your knowledge.
I do trade, but I cant call myself a trader - so far with shares, options and currency trading I have managed to lose about as much as I have gained.
How do you determine what to trade? Do you look for something that is stable?
How do you determine your entry point and your expectation of the direction the market will go?
If the trade goes in the opposite direction than you were expecting how do you determine when to bail out?
Risk
This fits very well with Ken's risk strategy, doesn't it. (Briefly, that strategy is this: rather than accepting the conventional wisdom that high risk and high profits go together, seek instead those opportunities in which there's high profit and little risk. They do exist.)
Cheers, Peter Cresswell
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