What It Means to Trade From Home

By Michael J. Carr, CMT

Let’s start with the bottom line. When starting to trade, it’s best to plan on committing at least an hour a day as the minimum time required for success. If you don’t have that much time, then a system based on weekly, or even monthly, data might be a better entry level strategy.

Many aspiring traders think that they can start small and acquire great wealth. A little money can in fact grow into a large amount of money with a good system and a disciplined trading strategy. Unfortunately, too many traders also think a small time commitment will be enough to trade part-time. They don’t set aside enough time to be successful, probably because few understand what tasks they should do and how much time it takes to actually trade for a living.

Discipline may be the biggest part of successful trading. Entries and exits are defined by the system rules, and overriding the rules often leads to losses. Discipline also means completing all required tasks, and this takes time. It’s important to know what needs to be done and allow enough time to do everything. Part-time traders have full-time jobs and little time for trading. The solution to this is time management, and a good trading plan includes a schedule with required tasks.

It’s important to be realistic about time when creating your trading plan. If you only have an hour every Saturday, then it will be important to create a system that looks at weekly data, and monthly data would actually be more suitable. To use daily data, there will be something to do every day, and it may take an hour or more a day to complete all the tasks, which include more than simply counting profits.

A partial list of must-do trading tasks include:

1. Research and actively follow markets being traded
2. Review the system you’re using
3. Monitor open positions and review all trades, every day
4. Enter orders
5. Review account performance
6. Account for taxes

Some research is done before the trading plan is even developed. This involves finding an edge, deciding which markets to trade, and developing the system. But, research needs to be an ongoing process. Even after the system is implemented, good traders continue looking for new edges. They understand that markets evolve and their systems need to keep up.

Markets change over time. Electronic markets have replaced open outcry over the past few years, and high frequency traders have replaced traditional market makers. Volatility has increased, creating trading opportunities for those who can react quickly but leading to losses for those unable to keep up. Commissions have come down dramatically, and are now almost inconsequential. The upside is that trading costs are lower and the downside is that trading can now be done without thinking, leading to overtrading for undisciplined traders who no longer have a third party to impose discipline through higher costs.

Trading systems that work have also changed over time. Strategies that incorporate volume, for example, have required revisions as market structure changed. Volume is now higher, in part because of the market making activities of high frequency traders that react to price changes rather than drive those changes.  This makes volume data less meaningful in some ways.

Without research, this change can go unnoticed by the part-time trader. The underlying idea behind the system may still be sound, but in a faster market a shorter parameter may be needed. In other words, instead of using a 10-day moving average a 3-day average might now be optimal. The change would be driven by understanding the markets and logically identifying what needs to be done. Research can also unlock new trading opportunities as different products are offered by exchanges. Exchange traded funds are an example of this. These relatively new products allow even small traders to buy and sell sector indexes, a strategy available to only institutional traders in over-the-counter markets just a few years ago.

Research takes time, and often seems unproductive. It is difficult to place strict limits on what should be included in this task, which makes it easy to waste time. A simple approach is to follow several web sites with market related headlines and read at least a few different news sites each day. In the olden days, meaning the late 1990s, a subscription to The Wall Street Journal and an hour a day with this newspaper would allow traders to stay well-informed. While that seems like an outdated approach, it is actually a good way to think of this task.

Reviewing the system means downloading data and looking for trades in each market that is traded. Systems only work when all trades are followed. In systems trading, a successful day means following the rules, not necessarily winning or losing. If the system was developed using well developed logic, the system will be a winner in the long-run, but may be up or down on any specific day. Since any trade could be a winner, every trade must be taken to avoid missing the potential winners. Time needs to be set aside each day, or each week if a weekly system is being used, to look at what the system says.

After seeing what the system says should be traded, it’s important to review actual account positions to be sure they are correct. Mistakes can be made when entering orders and by monitoring positions every day, they can be minimized if they do occur. Leveraged traders need to check margin requirements daily to be sure their broker won’t sell a losing position to raise cash. It only takes a few moments to check an account each day, but part-time traders often neglect this task, especially when open positions show losses.

Account performance needs to be reviewed daily by active traders, mainly to ensure that cash levels are where they should be. Traders using weekly systems can get by with less frequent reviews, but should check every day. All traders need to look at their profits or losses and trade performance at least monthly. Is the system trading more or less than expected? Is the average trade size in line with historic performance? Is the percentage of winning trades over the past month, the past three months, and the past year consistent with the system history? Finally, traders need to consider if they are still comfortable with the system, or whether their research indicates that a change in the markets has impacted the logic their system is based on.

Tax payments for profitable traders are due to the IRS every three months, if the income will be significant. Even if quarterly payments won’t be required because trading only represents a small amount of income, traders need to review transactions from a tax perspective at least a few times a year. Those with full-time jobs can adjust their withholdings depending upon trading winnings or losses.

Trading requires a time commitment. Daily trading requires a large time commitment. Traders need to remember that they are competing against every other trader in the world. In order for a buy to be executed, someone else must be willing to sell. This means one trader will be right and one will be wrong on every trade. Professionals are in the market, often taking the other side of your trade. If you’ve put in the time to research and build a strategy that offers you an edge against that professional, you’ll do well. If you can’t devote time to trading, then it will be little more than an expensive hobby, with odds of success a little lower than casino slot machine players have.

In developing a trading plan, be realistic. If you have an hour a day, then trading can be profitable. With less time, a system based on weekly data can still be used, and monthly data can still deliver market-beating returns to help manage retirement accounts. More time can help make trading for a living possible.