Time Crunch Trading

Successful trading, as with any other meaningful activity, requires the proper mindset. We will delve more deeply into the topic of trading psychology in a later chapter, especially as it pertains to part-time traders. There are, however, a few related topics which need addressing upfront.

Motivation

Can you clearly state what motivates you to be a trader? Is it the potential for large profits? Is it the excitement? Is it the challenge of puzzle-solving? Maybe it’s something else.

Do you know what your trading goals are? This doesn’t necessarily have to have anything to do with money, by the way. It is just a question of what you hope to get out of being a financial market participant.

Motivation is a very serious consideration. At the top level, it can help you decide whether trading is even something you should be doing. The markets tend to quickly weed out those who are trading for the wrong reasons. For example, excitement and consistent profits do not go hand in hand for a great many people. Although some do well operating in highly emotional states, most do not. It is quite often a good idea to find other sources for that “rush”.

At the same time, motivation can be directly applicable to the way one trades. For example, if you want to supplement your normal income, you are likely going to take a different approach than if you just want to handle your retirement account.

Expectations

Clearly, anyone who trades does so with the expectation of making profits regardless of whatever other motivations they may have. We take risks in order to gain rewards. The question each trader must answer is,  what kind of returns does he or she expect to make? This is a very important consideration, as it speaks directly to what kind of trading will take place, what market or markets are best suited to the purpose, and what kinds of risks are involved or required.

Let us start with a very simple example. Suppose a trader would like to make 10% profit per year on a consistent basis with as little variance as possible. There are any number of options available.

If interest rates are sufficiently high, the trader could simply put the money in a fixed income instrument like a Certificate of Deposit, or a CD, or perhaps a bond of some kind and take relatively little risk. Should interest rates not be sufficient, the trader could use one or more of any number of other markets (stocks, commodities, currencies, etc.) with varying risk profiles and structures to find something which suits the need. The trader may not even have to make many actual transactions each year in order to accomplish the objective.

A trader looking for 100% returns each year would have a very different situation. This individual will not be looking at the cash fixed income market, but would have to go elsewhere to achieve that kind of performance. It would also mean taking more risk (at least it should, anyway).

As you can see, your goal dictates the methods by which you achieve it. The end heavily influences the means.

There is one other consideration, and that is one’s willingness to lose. All traders have drawdowns. A drawdown is the distance (measured in % or account/portfolio value terms) from an equity peak to the lowest point immediately following it.

For example, say a trader’s portfolio rose from $5,000 to $10,000, fell to $8,000, then rose to $12,000. The drop from the $10,000 peak to the $8,000 would be considered a drawdown, in this case of $2000 or 20%.

Each trader must determine how large a drawdown (in this case generally thought of in percentage terms) he or she is willing to accept. It is very much a risk vs. reward decision.

On one end of the spectrum are trading systems with very, very small drawdowns, but also with low returns (low risk – low reward). On the other end are the trading systems with large returns, but similarly large drawdowns (high risk – high reward).

Of course, every trader’s dream is a system with high returns and small drawdowns. However, the reality of trading is often less pleasantly somewhere in between.

The question might be asked, what does it matters if high returns are in the objective? It is quite simple. The more the account value falls, the bigger the return required to make that loss back up. That means more time, something part-time traders do not have a great deal to spare. Large drawdowns mean long periods between equity peaks.

The combination of sharp drops in equity value and lengthy time spans making the money back can also potentially be emotionally destabilizing, leading to the trader abandoning the system at exactly the wrong time. In short, the trader must be able to accept, without concern, the draw-downs expected to occur in the system being used.

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