How I Make a Living Trading Stock

People are always asking me how I make a living trading stock. To be honest the question gets a little old, but whenever I meet someone new and they learn this about me it always piques their interest and they inevitably ask the question. I understand why since so many people have tried yet so few seem to succeed. Most successful traders, myself included, were in this spot at one time and it's because we asked those who had already succeed that we're now successful ourselves so I try not to seem annoyed when answering them. This article is part 1 of a series of articles titled, "How I Make A Living Trading Stock".

Although I have a strong background in mathematics and computer science and have spent nearly a decade programming trading systems, the truth is, most of the trading specific knowledge that I consider to have made the most difference for me came from a handful of books. Here is my required reading trader bookshelf

1. Market Wizards: Interviews with Top Traders, by Jack D. Schwager
2. The New Market Wizards: Conversations with America's Top Traders, by Jack D. Schwager
3. Trade Your Way to Financial Freedom, by Van K. Tharp
4. Safe Strategies for Financial Freedom, by Van K. Tharp

These books truly changed my life and have allow me to make a living trading stock. Of course my actual bookshelf has another hundred or so books on trading and the markets, but these I consider the bread and butter of what I do. The Market Wizard books are classic interviews with some of the true legends of trading and are both insightful and inspiring. It was Ed Seykota's interview in the Market Wizards that inspired me to make a career developing automated trading systems. He's considered one of the pioneers. But without any doubt I can honestly say that the two books by Van K. Tharp are responsible for 90% of my success. These two books are about risk management, money management and trader psychology.

You may notice there are no books on technical or fundamental analysis on my list. I understand this may seem like heresy but let me explain. It's not that I don't think these are important because I do, in fact it's crucial to the success of any system. Nearly all of the automated trading systems I've developed over the years are based on technical analysis. It's technical and fundamental analysis that gives me the signals that tell me what to buy, when to buy it and when to sell it. But the reason these books are not on the above list is that I seldom actually pick my own stocks these days.

I've been getting my stock picks from the Doubling Stocks newsletter which is based on an automated trading system, or robot, named Marl. Every week I receive an email with some penny stock picks that I then trade. This might sound too simple to be true but it is. The stock picks Marl comes up with have a very high rate of moving in the right direction, but more importantly, the system has a positive expectation. Obviously not all picks will be a winners, but when you look at all the winners and all the losers, as well as the average size of the winners and losers you can come up with a number called your expectation value. If it's above 0 (positive) you're can money in the long run, if it's below 0 (negative) it will be impossible to make money in the long run. As an example, if my system has an expectation value of 0.25 that means that in the long run I will earn $0.25 profit for every $1 risked.

That's not entirely true. The expectation value of the trading system needs to be high enough above 1 such that you can also overcome commissions and slippage. The Doubling Stocks newsletter provides pick with just such a positive expectation.

So now that I have a stock picking system with a positive expectation my only job is to focus on money management and risk management. The reason I believe the Van Tharp books are so significant to my success is because it was his first book, "Trade Your Way To Financial Freedom", that really made me understand that once you have a positive expectation, money and risk management is by far the most important aspect to success. It's proper money management that truly makes you money as a professional trader. In fact, even with a positive expectation you can still find yourself losing all your money if you don't know how to manage your money and your risk.

Too many people spend all their time trying looking at chart patterns, various indicators, entry and exit signals and place too little emphasis on money management. If you're trading more than one stock at a time then this can actually start to get fairly complicated since your money and risk management now involve portfolio management as well. My advice for most struggling traders is to spend more time studying risk and money management and how it effects your bankroll. If your position sizing is off then you're going to have trouble making money even with a positive expectation system.

The final piece to the puzzle is trader psychology. Having the discipline to do what you know you're supposed to do is an obvious requirement for success. Unfortunately I can't comment to much on this since everyone's psychology is different and I'm certainly not a psychologist, but Van Tharp is! It's actually one of Van Tharp's strong points. He's been a trading coach to some of the most successful traders in the world. He knows what he's talking about so I'm simply going to defer to him and his books on this issue. The point is that understanding why I would break my own rules and failed to have the discipline I needed was a crucial step in becoming a successful trader and allowing me to make a living trading stock.

1. Find a system for choosing stocks that has a positive expectation. I highly recommend the Doubling Stocks newsletter based on Marl the trading robot
2. Understand that position sizing and other money and risk management techniques will have the next most significant impact on your bankroll and is crucial for any hope of success. I recommend the two Van K. Tharp books previously mentioned
3. Discipline. Mastering you trader psychology. If you play poker you probably know what I'm talking about. Again, I recommend the Van K. Tharp books

So now when people ask me how I make a living trading stock I can simply point them to this article. If you're a Doubling Stocks newsletter subscriber you may want to check out the Doubling Stock Bonus Pack where I help Doubling Stocks users make the most of the stock picks they receive.

The Doubling Stocks Bonus pack
http://www.MrAutomate.com/DoublingStocks.html

If you're looking for a review of the Doubling Stocks newsletter check out
http://www.MrAutomate.com/DoublingStocksScam.html

thanks,Tom Sanders
http://www.MrAutomate.com

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