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In This Issue:

Chad Butler of RJOFutures wants to know
if your ready to learn more about trading futures.

July 12, 2007 | Read Past Issues
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So You Want to be a Trader?

So you want to be a trader? Being a full-time or part-time trader has a romantic ring to it, but people often dive headlong into trading without considering some critical factors. To begin with, you must find the trading style that suits you. Consider your personal risk tolerance and available risk capital-these are two important, critical elements.

Next, think about the time you have available to devote to trading. Are you looking to make trading your full-time job? Or are you approaching this from the standpoint of extra income or capital appreciation? If you already work a full-time day job, will you really have the time to devote to day trading? If you are dead set on short-term trading and you work a 9 to 5 job, you might consider looking at foreign markets or currency trading. With global and electronic trading taking hold, trading has become an around-the-clock proposition where you can trade at odd hours-even through your U.S. brokerage firm.

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Are you single or married? Do you have other personal commitments? If you are flexible (i.e., single and not tied down to a specific job), and you are absolutely set on short-term trading, you might consider finding a job that works around your trading schedule. That frees up the appropriate time to trade, while helping free your mind from the concerns of making the rent. By having a job when you are starting, you are not forced into a position of having to dip into your trading capital when you have a bad month. This can be critically important since trading with the rent money puts you in a tough spot psychologically.

A friend of mine was working an 11 to 7 job. He was just beginning to trade on the floor at that time and his job was close to the exchange. This gave him enough money to cover his monthly expenses, and allowed his morning to be free to go on the floor and trade the bond market opening (7:20 a.m. in those days). He didn't have to worry about trading to cover his expenses; that was already covered. All he had to focus on was protecting his capital and hopefully growing it. He didn't even make a trade the first few weeks. He was able to stand down there and learn what was happening around him.

If you do not have that type of flexibility with covering monthly expenses or with your time, you might want to consider putting away your dream of being the next great day trader and focus on something realistic. Longer-term trading, in my experience, requires much less time commitment and can work into an inflexible schedule. My personal style of long-term trend following requires about 30 minutes of research each evening across a number of markets. For someone with less flexible time, you will likely need to be flexible with the markets you choose to trade. Don't pick a market just because you like that particular market, or you just "have a feeling" about it. Make sure the markets you trade are suitable to your time frame, your risk capital, and your risk tolerance.

Remember, there is no one singular right way to trade. There are traders that are successful using technical or fundamental analysis, short-term scalping methods, long-term trend following, and any number of other methodologies. We have covered some factors to consider when choosing the type of trading you are going to be doing, and you should have some idea of where your time requirements are going to land you. Now we need to focus on money management and discipline.

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Money management and discipline are two key elements to trading that are all too frequently overlooked. I have run across a great many traders, especially beginners, who make the mistake of focusing on finding that perfect entry technique-whether picking bottoms and tops, trend following, or some other method. But without money management and discipline, your plan is incomplete and likely to fail. These traders begin by searching for a "perfect" entry and say they will build a plan around that, but they never come back to money management-and they lack discipline.

Michael Covel, author of the book Trend Following, sums up money management as follows:

Trading correctly is 90% money management, a fact that most people want to avoid or don't understand. However once you have money management down, your personal psychology will be 100% of your trading success. Once you have the rules, you still need to follow them!

I used to believe that although I could teach trading techniques, how to construct a plan, and what type of money management to employ, I could not teach someone to have discipline. However, I believe that if someone has the appropriate elements of their trading plan, all they need to do is stick to the plan. Discipline will follow. If the rest of your trading plan is on automatic pilot by virtue of being well thought out and defined, your only psychological focus is to remain committed to the rules. >From that point of view, I believe that those without discipline can learn it, as long as they remain committed to that end.

If you make mistakes along the way, learn from them. There is an old saying that if you make a mistake but learn from it, it was no mistake. Trading is a journey and you must always step back and look at where you came from, where you are going, and learn how to stay focused on that path. If you stray from the path, dust yourself off and get back on it.

This is by no means meant to be a conclusive discussion on how to be a trader. As I am sure you are aware, trading is a fairly complex business. But I hope that I have given you some thought-provoking questions to answer, as well as some key points to consider. This article is only a beginning. There is much more to consider and to learn.

About Today's Author:

Chad Butler is a Senior Market Strategist with RJOFutures, a division of R.J. O'Brien. His 16 years of market experience includes option spread trading, diversified trend following, and development of a number of index arbitrage programs.

Chadís published work appears in McGraw-Hill's Complete Guide to Single Stock Futures, Futures Magazine, and other trade publications. He currently writes for various commodities newsletters, including RJOFutures MarketNews and has been a featured seminar speaker teaching his various trading techniques to audiences large and small.

Years Trading: 16