Are we trying to sell you something? In this series of articles we try to determine how people are making money on the Internet. We will try to give an objective view on every subject we investigate – we have no affiliate relationship to anyone specific mentioned in this series. Don’t be surprised if we conclude that this subject might not be a good way to make money. All opinions expressed here are just that – our opinions.
Why Are More Tech People Try to Get Rid of Their 9-5’s?
- Tech people work under harsh conditions. Where overtime is the exception in some fields, in IT ridiculous hours are the norm. Your spouse and children turn into strangers because you see them so little during the day.
- Career prospects. Developers and IT teams are not the blue-eyed boys or girls of most companies. Sales and Accounting steal the limelight while the IT Crowd is stowed in the basement.
The adverts say: Tired of the 9-5 grind? Want to make money from home? Try trading on our online platform! You’ll work only 2 hours per day and finally live the life you always wanted.
This sounds a lot like a Multi Level Marketing (MLM) pitch, and if people are trying this hard to sell you something, please tread carefully. The vast majority of first time traders fail without proper conditioning or the guidance of an expert. We attempted to get a number of first time failures and saw articles with figures ranging from 70% to 95%.
Why do Traders Lose Bigger when They Start to Lose Big?
Here is a real-life example, consider the following scenario:
Let’s say you have a successful trading strategy that succeeds in 60% of cases (60% is above average for most trading systems). But because the laws of statistics are a harsh mistress, you will eventually hit a losing run of 5, 6, or let’s even say 10 losses in a row.
But I can program a stoploss you say, meaning most of my capital is preserved. (A stoploss is a way to tell your broker to sell if the stock loses more than x percent of its value.)
So let’s say you hit a stop and 6-7% of your capital is gone. This is not good since you are supposed to make money on a daily basis; how else are you going to feed the cat, the spouse and the kids?
You enter a second position, and whack, 6-7% gone again? Now that cold feeling sets in as you realize you just lost the equivalent of an Aspen ski holiday or a medium sized car.
Your hands start to shake, you have trouble thinking objectively and you jump on the next trade with a vengeance (which also fails as you left the sanity of your trading system behind somewhere in the previous trade).
…And so on until you face a massive wipe-out of a large part your trading capital. Not a pretty picture but a scenario most traders are familiar with.
Golden Rules of Trading
Here are a few common sense guidelines/lessons to live by. I personally did not follow them initially – and subsequently lost a farm load of money.
- Don’t borrow money to trade on-line. Never borrow money from your house mortgage to trade. Don’t take your pension payout to start trading.
- All traders initially lose money. Some come back after they have learned expensive lessons.
- Don’t think you can leave your job to trade.
If you don’t have a proven, tested (tested by YOURSELF) trading system, you do have a proven system – for failure.
Different Ways to Trade
Want to write a program that trades for you? You’re a tech geek – of course you do. All you need is to find a profitable trading system, input the parameters of your system into the program and let it run. The advantage of this is you take emotion out of trading (see the shaking hands scenario we described above). Taking emotion out of trading eliminates many bad decisions, but also finding a successful trading system is damn difficult. It could work perfectly for 3 days and then just start to lose money.
This is the new trend in trading. Spot a trader on the platform with a good track record? Allocate a percentage of your portfolio to this trader and the system copies the trades of this trader on your funds.
With robo-advisors you pay money into the company’s account like you would into a hedge fund. Depending on your risk appetite (with a company like Wealthfront you select a risk profile from 1 to 10), the robo traders then allocate your funds into the ETFs of their choosing to try to get you a ton of profit. Their commissions are wafer thin, and this is already a big step in getting you a better profit than you would with a normal broker.
Hooking up With a Mentor
This is how we recommend you start your trading career. Most mentors have a site you sign up with, and at a cost you follow their trades and learn their system. The trick is finding the right mentor, but thankfully there are many review sites that will highlight the internet community’s experience with the trader in question.
No Trading System, No Success in Trading
Let’s look at a couple of long-term investment systems (crawl before you learn to day trade) that eventually will make you money. I am not affiliated with any of these – I make no profit from your clicking on a link or going to these pages; they are purely informational and neither should I be held responsible if you lose a lot of money following them. Some of them have made me money (and some I recommend based on their successful track record).
The Little Book That Beats the Markets (you can get the book on Amazon)
Time period: Medium- to Long-Term Investment
In this book, Joel Greenblatt, Hedge Fund Owner/Manager of Pzena investment highlight a very simple but amazingly effective strategy. He has a formula to identify 5 stocks that are currently undervalued, and then buys them for a certain period of time, after which he will sell them and reapply his formula to identify new candidates and purchase them. He has a proven track record and can show evidence of great earnings over time with this system.
The Golden Crossover System
Time period : Long-Term Investment, but can be applied on the shorter term as well, perhaps even intraday.
This, in my humble opinion, might be the daddy of long-/medium- term investment strategies, the one to rule them all, the one where you sit and wait for years for the right moment to come along, but if it does, your chances are that you will make it extremely big with as little as one trade. (A description of the golden cross is here.)
For this system you need to have kept your powder dry – i.e., have a wad of cash ready to jump in. This strategy works extremely well after a big crash. An example was to wait till after the crash of 2009 and then buy an index-following tracker of the DOW when the golden cross occurred. This would have placed you at a massive profit after just a year or two.
Conclusion: Are People Really Making Money with Online Trading?
In our opinion, trading can be profitable, but keep in mind this is a long term relationship. In the beginning we can liken it to picking up a date. If you rush into it with a couple of one-liners you are going to go home with nothing.
Trading is not for everybody. Some people have the “Right Stuff” – while others go home with a black eye.
Find a good mentor, join his trading community, learn the system and see if you can keep your head above water. Trading is a perpetual fight where one day’s losses can kill you. It is not sexy and it is not easy.