Trading for a Living Is Different Than You Might Think

I thought this article could address a couple of misconceptions concerning what traders actually do. There is an underlying strategy conveyed in this article, so stay with me. The biggest misunderstanding by those that don't trade is that traders have an idea about which way the major indices are going. This is not necessary to be successful at trading for a living. If it were, we would probably fail. In fact, I can't think of any person or set of trading rules that can pick market direction consistently.

Trading for a Living is about understanding what the investment community has to choose from when making a particular investment and then identifying what choices they have made. For example, a natural choice that has to be made by an equities money manager is choosing between low dividend, highly volatile growth sectors (like Technology) and a high dividend, low volatility sectors (like Utilities). Because there are only so many dollars to be invested, money will naturally flow out of one sector and into the other, depending on the risk environment. As a trader, once I identify this price action, I can apply my entry trading rules to capitalize on the investment that is being made. Most novice traders don't look any further than the instrument they are trading. This is why most traders fail.

Another example would be Crack Spreads in the Energy Sector. A Crack Spread is the difference in price performance between Crude Oil and the components that are "cracked" or made from it. Crude Oil by itself is not very useful but once refined, or cracked into other components, it becomes very valuable. The two biggest components cracked from Crude are Gasoline and Heating Oil. It's natural that when a long position is taken in Gasoline, it get's hedged with a short position in Crude. Trying to trade crude by itself is an impossible task due to its volatility but identifying when these two aggressively spread apart creates a trading opportunity that trading rules can be written for.

A second misconception is about the length of time traders hold positions. I am sure that I am going to ruffle some feathers with the comments in this section. Although trading rules vary when it comes to hold times, I have found that most professional day traders (like me) have an average hold time of less than 15 minutes per position. Most people not familiar with trading for a living think that average hold times are longer. Remember that the term is "Trading for a Living" (with the keyword there being "living"). I can't do this unless I take profits. The general perception of the public on hold times is that if your hold time is really short, you're not a trader, you're a gambler and if you're hold time is really long, you're not a trader, you're a money manager. My perception of the public is that my bank account is bigger than theirs and I only work 4 hours a day.

This leads me to my last trading misconception concerning the hours a trader works. Generally speaking, the morning hours provide greater volatility and therefore greater probability for winning trades. If I compared all the trades I have ever made based on the time of day, I am certain that I would find that trades made prior to 11am in the morning have a higher probability of being winning trades. Since all trading rules are written around probabilities, I usually trade mornings only. The public perception of this is that we work very few hours. The reality is, I am up at about 6am and I trade until about 11am (sometimes 10). I usually don't trade the afternoons. I use this time to do research or as personal time.