Saturday, May 23, 2009

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Can You Have The Time of Your Life for Trading Stocks?

I have never met a trader or investor who analyzed a trader’s time the same way I did. The daily stock market transactions go normally without anybody wondering about the minute details. Well, actually there are a lot of things about the stock market vs. stock trader that many people have never even thought about. Over time with my trading experience at Indiabulls – my first stock broker, I had to finally delve deep into the details of a trader’s time in the stock market.

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Although I did this analysis long before by the time I had hibernated from trading stocks, I did not get the will to blog it until now. I have been following a blog of Steve Pavlina, the most successful online entrepreneur, for the last few months. There are a lot of things to learn from his blog. He had recommended listening to audio books along with reading text books so that you can utilize certain time spent on simple tasks. This is what prompted me to look for audio books on Personal Development.

In my quest for some audio books, I ended up finding many new names in the field of personal development that I had never known before. Have you ever heard about Anthony Robbins? Or better Tony Robbins? I never did. Atleast I can’t remember. I found many audio books basically created from his seminars. It is surprising to discover this new success speaker only recently while he was there active since 30 years. So I looked for what could be there over Youtube: The Time of Your Life. This title had captivated me at first. I haven’t gone through this seminar yet. But his other one on personal training was simply powerful in motivating.

The Time in a Trader’s Life

When you look deeply into the time of a trader’s life, it feels very discouraging. For the kind of returns that can be expected with successful, consistent trading, any trader trading his entire life should be expected to become richer beyond imagination. The richness is only limited by his ability to move faster with the growing number of digits along with the finite limits of everyday trading that become too tight with larger capital. If not that, atleast we can expect good times with consistent trading profession.

Well, that may be true. But if we look deeper into the realities of time distribution in a trader’s journey, things don’t look the same anymore.

Let us consider that an average person works for 40 years of his/her life from 20 years of age to 60 years before retiring. If a professional stock trader were to do the same that means he/she gets to trade for 40 years.

In any corporate environment, the standard timings for work describe 8 hours of work days with 5 work days in a week. That means we have 8*5=40 hours of work time in a week. In a year, we have 52 weeks. So we get 40*52=2080 work hours. That is of course 1/3rd of the absolute time of a year.

The average employee works for 40 years, implying 20*2080=41600 work hours in his/her entire life. Let us consider this time as work time that earns his/her mainstream income. Of course there are holidays in between. But for the most part, over work in a corporate environment, or 6 day work weeks in a factory environment more than compensate it. That is they work for more than what they get or planned to.

Now the interesting things will be uncovered when we do the same for a stock trader. The stock trader’s life is never easy. Considering my earlier analysis (What is the Time to Trade in a Typical Trading Day?), the actual trading time that a trader gets out of a typical trading day is 4 hours. This is just half the time of any other average worker’s day. If we were to consider other issues like slow moving markets, fast moving markets, etc., then this time will be much smaller.

In a week there are only 4 trading days because one of the days goes away as a holiday. A holiday in the stock market cannot be filled with another day. The only consequence is effective movement of the stock prices on the next trading day. 4 trading days = 4*4 =16 trading hours in a week.

In a year there are 52 weeks. That means 16*52 = 832 trading hours in a given year. Compare this 832 with 2080 of a corporate employee. This is hardly anything. It is only 13% of the absolute time of a year. Effectively 3 hours per day. This can be consolation to anyone who say they don’t have the time to trade. Let me tell you, nobody has the full time to trade. Even if they have their time, the market doesn’t give them as much time they want!

Did You Think 40 Years is Full?

In a trader’s life, the 40 years are not completely active years of trading. There will be cycles of bull markets and bear markets. There will be dull periods. Sometimes the markets just don’t have the minimum amount of trading activity to make it profitable.

Professional stock traders who trade on the edge may trade all years of their life. But if we consider these intermediate periods that affect the mood, discipline of the trader, we can say that some amount of time goes for no activity for prolonged periods. They can range from weeks or months to years.

That means there is not really much time in a trader’ life to trade stocks. Neither in a typical day, nor in the day-to-day week, Nor in the years and decades. An effective trader waits for all the time and makes all his/her bucks in a single powerful bull market. That is enough of trading for a life time!

Believe me the Pareto Principle doesn’t work better anywhere else. In fact I learned the importance of Pareto Principle only after I started trading stocks.

What is very surprising revelation is that the time of a trader’s life cannot be taken for granted. Its value is not the same at all the times. You can think you will trade for all of your life. But actually you won’t. At the end of the day, the actual trading time can come out to be even 1% of your life time.

You Simply Cannot Afford to Miss Your Trading Time..

In a week’s time of 84 hours, there are only 16 active hours for trading stocks. You can have the time to eat, time to shop, time to sleep, time to waste and so on through all of your life. But you will not have enough time to do the actual act of trading. You really cannot afford to miss any time.

On the other hand the markets actually don’t need all the time to make their moves. Their speed is only limited by the matching of orders. That is essentially by the emotional behavior of the trading crowds. Another limiting factor is the speed of processors that execute and match the orders. Stocks can move in an hour the same amount of change that they have done for years in the past.

You will understand what I am saying if you have watched the markets on January 22 2008. You thought it right. Similar thing happened on the Indian Stock Exchanges the day before yesterday (18 May 2009). The markets got locked at a whopping 20% circuit limit in just a few hours. The stock charts showed staircase patterns with three stairs. Several finance professionals got amazed at this phenomenon of a life time. That, my friend, still says that the longer term down trend is still intact. And this is an incredibly crazy, powerful countertrend!

You have to do all you want to do within that tiny amount of time. If you play foul and spend time correcting them with more trades, you will never get the time again easily. Note that all this time is spread out over years, decades and cycles of bull and bear markets. You will not even have the right time to regret if you miss some cycle. So let me repeat again. You simply cannot afford to miss your trading time.

Hence planning is the best thing to do for facing this reality of trading time. You cannot have the time of your life for trading. But you can have few years of time that is well planned ahead. If the right cycle comes and falls in your time, then even 5 years of it is more than enough for a LIFE TIME!

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