Question

My question is simple, but best explained by telling what I want to do. I want to invest 100% of my money into stocks and make a net profit of .5% everyday. Buy, hold for 1 – 7 hours, sell and bank the .5%. Compounding everyday at .5% would be very profitable and I could retire in
only a few years. Here is my thinking: stocks go up, down or sometimes do nothing. So all I need is to know is which stocks will move today, by at least .5%, and in which direction. It is true that most stocks move everyday! The expected return .5% is normal within most stocks daily range. The problem I have is pulling all the information together to say that there is a 95% chance that XYZ will drop today. The 0.5% is net after trading cost $10 + $1.50 per contract and the spread.

Answer

In today’s option trading blog I’ll answer a question that makes it all sound easy. I’ve seen similar numbers used in infomercials. If I have $100k and I make $500 each day, that is 10k a month and $120k a year. All I would have to do is to make a half a point on a 1000 share stock trade each day to make it all work. If I compound that .5% daily, in the course of 10 years… I should be able to wipe out global starvation with my riches. I don’t want to sound demeaning in my response. The question is frequently asked and there are many “gurus” who claim it can be done.

First, let me bring you back down to earth and say that a 120% annual return is not achievable on a consistent basis. If a life-long trader does it once in his career, it is quite an accomplishment. I know that there are people who have turned $10k into $1 million but they were in the right place at the right time and luck played a huge role in their success. For every “rags to riches” example, there are 10,000 people who blew their account out. If these returns were easily attainable, one out of every five people you meet would be a stay-at-home trader. Stay at home, spend time with your kids, be your own boss, live the good life… these are the heart strings that are pulled by “snake oil” salesman who want to show you the path for a mere $3000. I’ve been in this business for over 17 years and you might have interest in reading about my experience of “going pro”. My story made the cover of Active Trader Magazine – September 2006.

Now, let me address some other parts of you question. Can a person trade in and out of positions, scalp the market and make profits – yes. Because of the short term nature of the trade, slippage and commissions take a huge bite out of profits. That means that options are out of the question. You have to trade stock and you need to find a company that caters to proprietary stock traders and offers a $.005 (half a penny) flat per share rate. Live data feeds, charting and advanced order entry features are a must. This is a very hard living and having done it, you’ll be tired at the end of the day. When you add up data feeds, health insurance, internet connections, software applications and computer hardware, you can expect the first $2k/month to go to overhead expenses. This type of trading is a grind and it is a very emotional experience. It can take 2-4 years just to get profitable. In the question you addressed the issue of being able to predict the direction of a stock. Bingo, that’s the whole problem! Expect to spend months reading about technical analysis and money management. Then expect to spend at least two years finding an edge and developing an approach. We’ve been in a major 4-year bull market and the trading has been fast and relatively predictable. When that ends, so will the careers of many scalpers (until the next major trend).

I believe the better way to trade is to form an opinion and to spend your time on research and analysis as opposed to reacting to every tick and blip on the screen. If you think about the richest traders in the world (George Soros and Warren Buffet) they did not scalp markets. They did extensive macro research and took long term positions. In day trading stock, you are not taking any overnight risk so you can’t expect to make large returns. If you form an opinion and take a directional stance for at least a week, your returns (and risk) go up dramatically.

As a professional trader, I expect to make 25% a year regardless of market conditions. This “tiny” return will drive many glory seekers away and that’s ok. There are many other people that will sell you a pipe-dream of riches. I have a systematic approach that has taken me years to develop and there are many years when I exceed my expectations. Day traders and option traders who have been around the block recognize the quality of my research and rely on it for trading ideas. Since I used your question, you can try a OneOption research report free for a month.

This is the easiest business to start and the hardest one to grow. Anyone with a wallet can pull up a chair.

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