Should you leave your day job to trade?

I would like to address this question as thoroughly as I can, so I ask you that you read on through some biographic data, so you know exactly who I am and how I arrived to my conclusions. Here I have decided to give up my anonymity hoping that you could benefit from my experiences and perhaps ask a few questions for further clarification.

I was born in November 1956 in Caracas, Venezuela where I lived and studied until February 1975. I then went to Brazil as an exchange student, where I obtained my Doctor of Veterinary Medicine degree. In 1980, I moved to Ontario, Canada and in 1986 I obtained my PhD in Veterinary Pathology. Later I move to the USA were I worked in scientific and academic institutions and in 1991 I began working in the Pharmaceutical industry in New Jersey. At the time I began to save sufficient money to develop an interest in finances and the stock market. The first book I read was "Personal Finance for dummies", although I was convinced I was not one. After reading Peter Lynch's book "Beating the Street", I began to invest in the stock market. In 1995 I began to read about the Elliott wave. It soon became clear that I could trade options based on the predictability of the Elliott wave theory. Looking back, I realize now that I was lucky to enter the market at the time of the biggest economic expansion in US history. Thus I picked a very good moment to begin trading options. I multiplied my trading money 10 fold by simply keeping track of 20-30 stock and buying calls after corrections and selling them at the peaks, based on my own Elliott wave analysis.

Trading options proved favorable when the market turned bearish, I had already been mostly out. I lost relatively small amount because my positions were mostly in options, and I saw few opportunities. BUT years of bear market taught me that it is a lot easier to make money buying calls in a strongly bullish market like the market of the 90's than it is to make money in a bear market like that of the early 2000's. Buying puts can be risky because declining stocks usually fall quickly but they also bounce back rather quickly, leaving you little time to react. In no mood to lose more money in a market I could not read very well, I turned to Optionetics in September 2002, ironically, just one month away from the market bottom. The proposition that one can make money consistently, whatever the market direction, was appealing to me. So I set myself the goal to make money consistently, with or Optionetics' help, but their courses seem a good place to start, since I had already had much experience trading calls. At the time, I had become financially independent because of some very fortunate investments. Although I found myself in a position to never have to work again, I needed to be sure that I could make money beyond my basic needs. I wanted to explore the world and contribute significantly to some important causes in third world countries. Both my wife and I stopped working and I decided to occupy my time in finding a way to make money consistently.

On October 7th 2002, I was sitting in a conference room in a Hotel in L.A. at my second Optionetics basic seminar. The first one in September was hosted by Tom Gentile. This one was taught by George Fontanills himself. I remember his forecast was that the market would remain low until the summer of 2003. In fact during the that second day of the Seminar, Oct. 7th 2002, the Dow approached 7300 and it was only 2 days away from its historical low. I remembered well, because it was being displayed by George's e-Signal real time quotes.



I learned about the basic spreads, but little about how to select candidates to apply those strategies. Of course there was Advanced Get, and its type I and II trades. To me, the only consistent thing about Advance Get was may consistent disagreement with its counts. I gave the program the benefit of the doubt and tried it for a year or two. Today, I can categorically say that I could never truly agree with the counts the program produced. I was forced to remove Advanced Get of my mind as a step toward my goal of consistent trading. Today I use RET, which allow me to select my favorite count from a selection of high rated counts.

The basic courses were too superficial, I thought. So I attended the advanced seminar, still in search of my "consistent income" strategy. Remember, I could invest quite a bit of money, so it did not matter to me that I could have occasional winning trades, I wanted trades that I could risk 20-30K at a time, but I did not like the prospect of losing all of the capital invested in a trade. Investing $1K per trade did not seem attractive either because I can only keep track of 20 positions at any given time, so my trading limit would be 30K. At that rate, I was not about to get rich. In the advanced seminar, I felt free, liberated from the constraints of the basic spreads, free to be creative in the search of my goal: find the elusive consistent trading system that would allow me to place individual trades of $20K to begin with, but eventually $100K or more!!! Otherwise, trading was just busy work. So I put all of my energy on back testing as many strategies as I could. My goal was to finding an options trading strategy that would:
1. Allow me to place fairly sizable trades.
2. Give me the freedom to travel without checking on my trades daily, the way I used to do in the 90's.
3. To make money consistently, even if it is a 10% to 20% per year.

I began to experiment with Butterflies. I even invented my own which I called the "Dragonfly". It seemed to me that a Dragonfly, a double Butterfly with 1 year before expiration on Blue Chip stocks seamed ideal. I could identify stocks moving sideways (long term). I kept detailed notes on my strategy and system, and began to trade it. At first it worked very well, except for one minor detail: I could not help myself but to watch the trades on a daily basis anyway, on the fear that each day could be the day in which the stock would move aggressively, and of course one of them DID: MRK!!! A sinking feeling came over me when the stock fell, overnight well below the area of my double butterfly. Thus, my sure thing trade had failed. Eventually MRK did go back up to approach the lower portions of my lower butterfly, but I spent one whole year agonizing over a single trade. It was not a joyful experience.

Trading is an emotion-driven business, so leaving one's job to do it for a living is very much like becoming a professional gambler. My experience with the Dragonfly had taught me that becoming a professional trader is a bad, bad idea. I concluded that it is better to begin by setting up an account and declare yourself in the hands of "lady luck". Only bet that which you are willing to lose. Your job is to find ways to limit your losses, and increase your probabilities of success, but accept that no matter what strategy you choose, you are at the mercy of what the market decides to do. Elliott wave analysis, conventional analysis or fundamental analysis will only reduce your chances of failure and increase your chances of success. The options' strategies, are merely instruments to execute your system. In other words options strategies by themselves do not represent mechanisms to increase your success rate. They are merely instruments like stock shares or mutual funds to put your analyses to the test. You still have to be right on timing and direction, not to mention volatility. Since no one knows the future for sure, you are merely making educated guesses.

I have studied and back tested a variety of options strategies and they may all result in success or failure. The leverage you gain is a double edge sword and you will be cut if you manage to choose the wrong candidate. I am not trying to convince anyone not to trade, far from it. BUT I DO want to convince you NOT to expect "consistent success" but rather understand that there are good times and bad times for traders, and that you are NOT always going to come out a winner. Rather, be happy when you have more winners than losers, and not feel like a loser yourself, when your trading is not stellar. I set out to find ways to make money consistently trading options. In the process I have added a lot of knowledge to my already considerable understanding of Fundamental and Technical analysis. I DO love the Elliott wave, but I understand that all methods are often ambiguous and what appears to be a sure thing may result in dismal failure. I have 16 years of investing and 11 years of trading under my belt, and 3.5 years of intense 9 am to 5 pm (or should I say 6 am to 2 pm here in California) testing of options and options system. I am still learning, still searching for that elusive "consistent" trading strategy. BUT I have learned already quite a bit along the way.

Success in trading is not taught by anyone. If you are truly a successful trader (whatever that means), you are not likely to start a business that teaches others what you know. BUT you start a business to MAKE MONEY teaching others what they think you know. I have spent 3.5 years doing nothing but testing, back testing, paper trading and actually trading. Yet I still have the same goals as at the outset, and I have persevered. I am willing to listen to anyone that could teach me differently, but I have concluded that trading is merely gambling. To be sure it is gambling with the odds in your favor, and you can increase those odds, but it is still gambling. I have to conclude that anyone that does not spend 8 hrs a day for 3 years is not qualified to teach anyone. Yet I am willing to learn otherwise.

Option strategies such as Bull Call Spreads, Call Ratio Calendars or PCCRC's are merely instruments, just as stock shares are instruments with which to trade, or invest. Factors such as time, volatility and vertical move in the stock (the greeks if you will) are the factors of your risk. Select an options' strategy is to Greek the risk from one greek to another. Owning the stock carries a risk, so does owning gold or a mutual fund, or even having your capital is inherently risky. Ultimately, you reduce that risk not so much by selecting an options strategy but by selecting the right strategy to fit your expectations of the stock movement. When your selection is correct, you can make money rather quickly, and you can make lots of it. But you can also lose every penny on each trade. Understanding that both outcomes are quite possible is essential to abandon fear and greed and begin a systematic approach that would increase your chances of success and protect you from your own emotions.

My first, and most important recommendation is: do NOT leave your day job, unless you can live with a 5%/year return on your nest egg, and that you have an additional amount of capital, outside that nest egg, which you are willing to lose, completely. Second, develop a system as detailed as possible. Write it all down. Every observation you make needs to be on paper. Here is one example: "holding a vertical position through earnings is particularly risky and violent moves in the stock price may occur. You should be hedged or out of all positions before the earnings report". Third, even if you think you have a failsafe system, many of your positions may lose you money. To avoid losing large amounts of money, diversify. No matter how large or small your account is, you should have a variety of positions that fit your expectations, but be willing to cut your loses at some pre established point. If you begin with 10K, your positions should be $1000 or thereabouts, and be happy when you make 30% in each position, but don't let your loss be greater than 50% in each position. You may say "¿how do I get ahead buy making $300 and losing $500?" Hopefully you'd make $300 in most, make $800 in some and lose $500 in few, but you should not feel bad about taking profits, if you begin to have doubts about the continuity of the trend. When to get in and when to get out are subjects of experience and feel for the markets. Still, you are bound to make mistakes, and such mistakes are the cost of doing business. Don't ever feel bad about exiting too early, feel really bad about leaving too late. Accordingly, you should not feel bad about cutting your losses at $500. I am certain that there will be bad times, and good times, rather than a consistent stream of cash. Your job is to act consistently so that when the market cooperates you make as much money as you can.

I have been discussing 2 basic approaches to trading in this board. 1. The Sarmiento system that selects from stocks that jump 5% in price and more than 200% in volume in a day in question. 2. The PCCRC for high fliers that select from stocks that have the largest increase in price over the last 90 days. I can'?t claim that I make money 100% of the time using these approaches, but they are my best shot at success, based on what I have learned over the years of exposure to the stock market. I am no guru, to be sure, but I have seen what gurus have to offer and they are usually based on myth, rather than reality. It is easy for people to shift the responsibility of their own success to a guru. We doubt ourselves thinking that there is always someone out there that knows better than us, so we are willing to let them tell us what we need to know, instead of giving ourselves credit for our ability to learn and apply what we learn. Our error is often based on our lack of respect for our own abilities, and thus we fail on the first step to success: preparation. Thus we are far too willing to listen to someone or try something that would make us rich quick. Success comes to those who prepare and your luck will be a created when your preparation meets the opportunity. In the markets opportunities are there every day, it is your job to recognize them, thus you MUST prepare.