Transition from your 9 to 5 to Trading
for a Living
Part time? Full Time? How about One Step at a Time?
by Don Bright
I interview dozens of
potential new traders every month, and the question of Transitioning from the safety of a paycheck or business venture to
successful trading comes up often. No
need to leave job security behind, in my opinion. Let’s discuss a few
scenarios.
One of the first things to
take into consideration is to realize that trading is, indeed, a business, and
must be treated as such. (See “The
Business of Trading” TASC, August 2008). So, with this in mind, let’s cover
some business basics. One of the primary reasons for lack of success in any
business is lack of capital. I’m speaking of capital to properly run the
business at this point, not “living expenses” which we’ll get to a bit later.
There are many books and seminars and TV ads that attempt to convince the
public that money can be made with their products with only a $25,000 retail
brokerage account, this is extremely difficult in my opinion. Can and should
you invest your own money with a retail account? Sure you should! Do your
homework and trust yourself, not a stockbroker, to make investing decisions for
you. But investing is not trading for a
living. For our assumptions in this treatise, let’s assume an average stock
price of around $50 per share. Merely buying 1000 shares of a single stock
would tie up all your capital and margin. If you intention is to simply make
$100K per year, this would require some extraordinary vision and a lot of
overall risk. The strategies that our traders use, for the most part, require
about $1 million or more to work properly. Bear in mind, I’m
talking about “use of capital” not “abuse of capital”- and certainly
not engaging in excessive risk. (Explanation of business model: Our
traders can put up $20K or so, and then use our money to trade with, thus
having the ability to engage in strategies that I will outline below. All
P&L goes to our traders, we trade billions of shares and only keep a portion
of their low commission costs).
OK, now that we’re thinking
of starting a Trading business, let’s think about how to get started. Let’s
assume you’re working a “normal” job, with a little flexibility, as most of us
are. Time zones can actually play a part, as you will soon see. A great
majority of my traders engage in what we call the Opening Only Strategy that has been discussed here in the past.
This is one of our most lucrative single strategies, and has been working well
for decades. Our traders place orders to buy or sell short a number of shares
at pre-determined prices, prior to the opening print on NYSE stocks. We go
through a pre-market calculation to determine limit prices that we would like
enter this trade….if the stock gaps up or down from the previous day’s closing
price. For example, I place 2000 shares to buy and 2000 shares to sell short in
about 50 stocks each day (Bright Trading places about 40 million shares of this
“opening only” variety each morning). I don’t want to be filled if the stock
opens at a “fair” price based on market conditions. I only want to be filled on
gaps prices. I try to get about a 10-15%
fill rate, giving me stock, either long or short, on 5-8 stocks on average. The
big edge is that I know that if I am filled, the NYSE Specialist is also filled
at my price, in my same direction, long or short. Over the decades, even with
all the changes on the NYSE, this is still a true assumption. I take profits
with an automated program, or cover losses when they happen, and am usually finished with this strategy within 5 or 10
minutes (rarely longer than that). Our new people have averaged a 75/25
win/loss rate within the first couple of weeks of their starting date. We have many traders who engage in this
strategy, and nothing else, when Transitioning to a
more full time trading career. This
allows for a half our prep time and a half hour trading time. Many make a good
6 figure income doing this, and this alone. Great way to keep
your job while augmenting income and/or preparing for the move to full time
trading. This requires the “use” of capital that I described, but not
the “abuse.” Using a $million or more to make $100k or more per year.
Another strategy that only
takes a half hour or so takes place at the end of the trading day. This
strategy revolves around the MOC (Market on Close) imbalances that are
published by the NYSE starting at 20 minutes prior to the closing bell. All day
long various funds and groups place orders to buy or sell great number of
shares at the very last price of the day, the “market on close” price. We
filter for larger imbalances, either to buy or to sell, and immediately place
orders that go along with the imbalance. We can then either take profits, or
increase share size, for the next few minutes based on market conditions. We,
as professional traders, can submit MOC orders to then close, or offset the
imbalance during that last 20 minutes. So, again, a strategy that
can me done in a very short time frame.
Now to time zones. I have
always traded in the Pacific Time Zone, where the market opens at 6:30 AM and
closes at 1:30 PM. Many of our local traders, while transitioning, will come in
at 6AM, trade the opening, and go to their jobs at 8 or 9AM. They then return
for the last half hour of the day during lunch. Of course, your time zone may
be different, but if you have some flexibility in your job, you too can
transition this way.
I never advise anyone to quit
a job to start any business venture, and trading is no exception. Traders need
to keep a cool head, and not be worried about making house payments or feeding
their families, especially during the first crucial months. I do suggest to
those who find themselves retired or out of work to have enough money in the
bank to cover expenses for a year or so while getting things rolling. So, take
things one step at a time, keeping a level head, and start your trading career
one step at a time. After you achieve a comfort level, you can easily move into
a full day of trading with several more techniques.
Don Bright