This column was originally published on RealMoney on Feb. 22 at 2:33 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
Aspiring professional traders face a number of hurdles as they strive to make the transition from part-time to full-time trading. It looks pretty easy if you watch those silly
commercials featuring four trader-bikers doing the
on a cliff overlooking the ocean, a dad making a trade because his spoiled kid wants to buy the same pair of jeans that everybody else has and some guy making a trading pit-stop during a marathon that is curiously taking place during market hours. Looks great, but real life rarely mimics what we see on television.
Here are a few of the more common pitfalls that can take most traders out of the business before they even get started.
1. Lack of capital.
Most traders are woefully under-funded. How much money do you need to make each year to be comfortable? If you are a man of modest needs, it's probably because you don't have much money. After all, if you had more money, you'd have more needs; that's human nature. Aspiring professional traders who don't need to make a lot of money still can be woefully undercapitalized. Do you need to make just $60,000 a year to live comfortably? Fine; if you can manage a consistent annual return of 25%, then you need $240,000 to trade -- assuming, of course, that you actually
make 25% each year.
Even if you have sufficient capitalization, you've got to get past that urge to always be in the market. After all, you're a professional trader, right? As such, you should be able to make consistent money in any kind of market. Here's the problem: I know a lot of professional traders, and none of them makes consistent money in any kind of market. Face it, sometimes the market just isn't user-friendly. It gives up profits only randomly and grudgingly.
If you get caught in an unfriendly market, then scale down or step away. But if you have bills to pay, you can't afford to do this, can you? So you find yourself trading in an unfriendly market with an immediate need to make money. Honestly, that sounds more like gambling to me. You're more apt to lose money in a tough market, resulting in a smaller trading account, which requires an even higher annual return to make your $60,000.
Even if you have sufficient capital and can afford to take a pay cut when the market requires it, there is still one problem: You have to make 25%. If you haven't done it before, and done it consistently, then you are betting your future on something you've never done. It's great to bet on yourself. Winners do! But only losers put all their chips on the table when the deck is stacked against them.
If you can get past these three challenges, you'll have a chance to quit your lousy job and make a living doing something even more stressful.
Let's get a frame of reference for current market conditions. The
has been in a tough trading range for the past few months.
Since December, the only trend has been east to west. Sure, the market is volatile enough to trade, but follow-through has been conspicuously absent. Until the S&P makes a new yearly high, I'd be cautious. The path of least short-term resistance is down, although the large trading volume between 1250 and 1275 is likely to halt the decline. I'd be a buyer on any test of 1250, and on any breakout to a new high.
Yesterday's hero is today's goat.
has declined on 11 of the past 14 days. That begs for a snapback rally. This weekly chart shows the long-term trend line that has defined support since mid-2004. Intuitive Surgical now is testing that support line. If support holds, consider taking the opportunity to buy. But if the trend line fails, the next level of support is clear down at $75.
has been churning for the past month, and Tuesday's close was the highest one of the year. This could be the breakout that starts the next leg higher. But I'd consider waiting for a bit more evidence before committing to this trade. After all, the S&P appears to be rolling over. If the broader market remains weak, Amdocs will have a tougher time moving higher.
broke out last month, fell back to test the breakout level and now is moving higher. This move could have some legs, and I'd loose stops clear down beneath the support level. Tenaris begs for the scaled entry.
The uptrend in
( TRZ) is obvious on this weekly chart. But look at the past six months or so. The stock has been trading sideways, as it did back in 2004 before it started the next leg higher. Relative strength always firms up at the midline, which characterizes an uptrend. One problem with an entry at this level is the stop placement. Any pullback cannot be distinguished from a reversal until or unless the uptrending support line is tested. On a percentage basis, that's a long way down. As I have previously noted, these "loose stop" scenarios lend themselves to multiple buy points.
Be careful out there.
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Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick has lectured throughout the U.S. on the proper use of technical analysis and options trading. At the time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback;
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