Author: AliCatCapital , Last Modified, 2022-03-09

Category: money Keywords: Is-it-easy-to-trade-stocks-online-for-a-living

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Is it easy to trade stocks online for a living

Disclaimer:This article is for information and educational purposes only. It is not personal or professional financial advice. If you are not a finance professional, seek personal financial advice from an appropriately qualified professional. Trading carries risk. Most traders lose money. You should not trade with money you cannot afford to lose.

1. Is it easy to trade stocks online for a living?

This is not an easy question to answer, but the honest answer is yes and no, let me explain. Yes, it is easy to trade stocks online because software applications make it easy. No because it is extremely difficult to become any good at it.

Traders today have an abundance of online trading applications to choose from, mostly pushed by discount brokerages or technology entrepreneurs. In many ways this is wonderful, as it opens the world of investing to the masses, and theoretically at least it makes markets fairer and seem more efficient. But don't be fooled.

Up until just a few decades ago, investing was predominantly limited to the few. Wealthy high net worth individuals with privileged access to high fee charging, bow tie and brace wearing stockbrokers. This was a world of the well connected, inside tipsters, and highly manipulated markets.

Unfortunately however, unlike the wealthy or high net worth individuals, who take advice from professional wealth managers today, online discount brokers offer execution only services which give ordinary retail traders access to online order management systems, and sometimes limited value sell side information.

Order management systems simply facilitate trading by accepting buy and sell orders. Unfortunately order management systems themselves provide little or no guidance on how to do so successfully pick stocks and trade profitably. This is not their purpose. Sell side research is often of little value, which is why it is generally freely available.

Its purpose is marketing for the broker, an so can be of limited use. Sell side research is often packaged and presented in glossy brochures with regulatory disclaimers often buried beneath glossy headlines often highlighting out of context performance metrics.

Such research is designed to promote trading and investing which of course drives up the brokerage fee.

Buy side analysts and traders on the other hand tend to conduct their own research. They tend to be better informed about the real prospects of a company because they build their own valuation metrics, benchmarks, and trading models. These models are what I refer to as trading systems. They are processes and tools designed to limit risk and maximise profits. Therefore, learning how to conduct proprietary research will be a valuable skill for any trader.

Investment bank buy side traders engaged in proprietary trading and hedge fund managers, have access to research departments with qualified Chartered Accountants, Chartered Financial Analysts, Quants with PhDs, MBAs and Management Consultants, all professionals trained in data analysis and research. Yet ordinary people can and often do outperform these professionals. Apart from those "lucky" traders who do so temporarily through pure chance, successful traders put in the work it takes to managed risk, but more on that later.

2. What are the most common types of traders?

The term trader means many things and trading is not a one size fits all game. Institutional traders, Investment Bankers, Corporate Bankers, Corporate Traders, Investment Managers, Hedge Fund Managers, Mutual Fund Managers, Retail Traders, Treasury Department Traders, Government Traders, Brokers, Middlemen, Arbitrageurs... the list goes on.

This article is aimed at helping retail traders looking for impartial information.

3. What activities are traders involved in?

Trading the buy side. Trading the sell side.

Derivatives trading, trading structured products. Trading commodities. Trading securities with close correlations to underlying markets or securities.

Arbitrage trading, looking for price discrepancies. Different platforms quote prices differently, so platform arbitrage is possible. Trading price anomalies. Trading rumours. Trading the social media influencers, trading the trades of other leading traders, based on social media and other trading platforms.

Trading Digital Coins, Currencies and Modern Blockchain Linked securities.

Trading online games, trading player scores. Trading Crypto Assets.

Junk bond trading, trading gilt edge securities and all risk assets in between.

Trading the Guru picks, following the analysts, trading the index. Trading over the counter off market assets.

There are as many trading strategies as traders, so this post is about trading principles, developing a trading strategy based on sound principles is better in my opinion that trading on the fly, or gut feel. I prefer to analyse the numbers and make what I hope will be informed decisions. Remember, you will have to live with your trading decisions, so is it not better to be prepared?

4. What makes a successful online trader?

If you manage to trade without losing money you are beating 90% of traders. Because the plethora of discount brokerage platforms are not trading systems as such, anyone can buy and sell stocks and similar securities, however not anyone can do this profitably. To be successful you must be profitable.

Most traders lose money and if you are going to trade online you should be prepared to lose a lot of money before you get good enough to succeed long term. Trading like any other business is a skill that you can learn. But like any other business it requires a lot of hard work to develop those skills.

Most people give up or are unwilling to put in the 10,000 hours to become truly competent. Read Malcolm Gladwell to fully understand what this is, but in essence it means taking about 5 years to get good at something.

5. Why should you listen to me on this matter?

Well you probably shouldn't. The best advice might be your own gut, but also take professional advice if you are going to make a large financial commitment.

Never trade with money that you can't afford to lose, or that you will need in the short term. You should be willing to sit on a trading position for a long time.

Very short-term trading or day trading is financially disastrous and should be avoided at all costs or it will cost you all!

That said I am a finance professional, a qualified accountant with large banking and consulting as a career background. I have earned my living through a combination of Online Trading, Management Consulting, and Investment Management for over 15 years. I have worked for the world’s largest Consulting Firms and Investment Banks and held senior positions as director and sat on the boards of Large Corporate banking for the UKs largest bank.

Banks and consulting firms pay for advice; they get tailored advice and a highly bespoke professional service.

So although I can provide general information for education and entertainment purposes only, you probably should have some back up plan.

My advice will help a few people, and I say a few as I believe that only a few people should trade online. Most people should keep their day jobs and opt to invest passively either ISA and Mutual Funds or pay for personal financial advice.

6. If most traders lose money, why do they continue to trade?

Being your own boss has some advantages:

• 1. Escaping the so-called rat race is probably the number one reason to take up trading. Trading is a business and if you trade in a business-like manner, you could have financial freedom. Only you and the markets determine your performance. There is no discrimination, the market is as brutal for you as it is for everyone. The market does not care that you are from a minority, or a particular gender or race. The market does not respect your family history or your personal connections. The market does not care whether you hold a PhD, MBA or sweep the roads for a living. We are all equal in the eyes of the market. Educated people obviously have an edge, but ordinary people can and do outperform the professionals. Sometimes there are reasons for this.
• 2. Trading is flexible and, in most cases, can be done from anywhere because of the internet, so travelling or living abroad is no impediment to running your online trading business
• 3. There is always the slim possibility that you could make a lot of money. Although you need money to make money.

7. Why do online traders lose money?

It is a widely known fact that most traders do in fact lose money. There are a few reasons for this, here are some that come to mind.

• 1 Trading is not net neutral, it's a bit like the game of roulette, even if you win 50% of the time, your fees and taxes will ensure that you lose. The odds are firmly against you.
• 2. Timing the markets is impossible, so the chances of you doing this successfully are slim.
• 3. Most traders use order management systems, these make trading easy and encourage traders to over trade. This drives up your trading costs, resulting in high fees and low profits.
• 4. Most traders do not conduct original research, so they are trading on the back of second-hand information. To succeed as a trader, you probably need to conduct some original research. This is not as difficult as you might think, but it will form the basis of your personal trading decision making and prevent you from acting like a lemming. If you do some analysis, you at least have a personal point of view.
• 5 Most traders have no idea what risk management is, and consequently fail to manage their risk. Warren Buffet is oft quoted as saying rule Number 1 is never losing money, and rule Number 2 is don't forget rule number 1. Unfortunately, he does not teach people how to do this. This is where putting in place a personal risk management strategy comes in.
• 6. Most traders are not financially literate, if they were, they probably would not opt for trading. I ran a department in a bank before I ever opened a trading account, I had developed expert level financial modelling skills, and skills modelling financial markets. I also ran a finance department for an international garment manufacturer, building currency and cash flow hedge models and using sophisticated forward rate agreements and letters of credit. I therefore had at least some edge. I still had to learn the hard way. I still learn today.
• 7. Most traders do not know how to value companies, this means they buy and sell on price alone not value. Valuation is part art, part skill, and part judgement. Judgment comes from experience. Valuations are never right or wrong, they are simply a basis for decision making. Without a perspective on value, you are gambling. As Mr Buffett says if you buy below value you will make a profit. He also says he can't tell when you will be right, but you will be right at some time most of the time.
• 8. Traders think they will make a lot of money, yet they do not have sufficient capital. To generate large sums of money in absolute terms without taking on too much risk, requires you to have a large capital base. Hedge fund managers trade a small portion of their own capital alongside other people’s money. This is a form of leverage not unlike how banks fund and manage the assets they invest in. Making a living from a small capital base requires taking inordinate levels of risk, this inevitably leads to most traders blowing up.
• 9. Traders do not leverage their positions, banks and professional traders understand leverage and how to manage this effectively.
• 10. Traders are distracted by the Noise of the Media. Media broadcasts intentionally sensationalise financial markets news and so frighten many traders out of positions they otherwise should have held.

8. How do online traders manage risk?

Understand the bid offer spread, and that broker platforms can present information in a way that appears to overstate the valuation of your assets / trading positions and understates your transaction costs. In other words, you cannot trust the way your brokerage presents the numbers you must make sure that you mark to market as best you can. Otherwise, you could believe that you have more liquidity than you really have. Platforms quote mid-market prices, before transaction costs. When you try to execute a trade the price you get may not reflect the price on the ticker and costs will be deducted. You should therefore make some attempt to understand the real value your portfolio positions. Professional traders are required by accounting regulations to Mark to Market, this means valuing a position at the sell valuation and deducting the cost to sell.

Remember markets are dynamic and stock prices move constantly. Most brokerages are using delayed price information, so the quoted price can be up to 20 minutes out of date. When you execute orders, make sure you take account of the execution price quoted, as this might be very different than the price you expected to buy or sell at.

If you opt for best execution rather than a fixed quoted price you could lose out because of price slippage, you might want to hedge your slippage risk by familiarising yourself with limit orders, thus if you cannot execute within a trading limit the order is cancelled. Limit orders are designed to protect traders from the downside.

Each company that is publicly traded has a risk value called a beta factor. To make money in a risk adjusted way it makes sense to consider the risk on your invested dollar. Putting money to work should involve both diversifying your positions to avoid over exposure but also a consideration of the risk adjusted return or expected risk adjusted return.

If you can earn 5% on your capital with a low level of risk, taking double the risk to earn less than double the return is a bad strategy. Traders seek Alpha. Alpha is Returns at an appropriate level of Risk. Graphically this is known as the securities market line or capital markets line. Being able to graphically represent your positions on the Capital Markets Line will help you to see which positions are over exposed, it will also help you to allocate different amounts of your trading capital based on expected risk adjusted returns.

When trading a position, I typically plan the trade. This requires stock selection, based on a filtering mechanism, then capital allocation based on risk, which can be obtained using a combination of historical price analysis and projected Monti Carlo simulation.

Once I have identified a portfolio position I want to trade, I typically back test the position.

Back testing is not an exact science, but it at least allows you to dummy trade the portfolio. Some people called this paper trading.

If the portfolio successfully passes the back test, I have a trading plan, I will execute the plan and manage the portfolio.

9. What is the difference between investing and trading?

Trading is a shorter-term activity. Active traders aim to buy a stock with the sole intention of selling the position.

Investors on the other hand buy stocks for the dividend income they generate. I do both, for different reasons.

When you trade your own money you are at liberty to choose how you want to manage your money. Trade or invest it is your money. If you manage other people’s money, they will want to know what your strategy is. Some investors are happy for you to trade and take a share of the gains, others prefer dividend income and are keen for you to preserve positions in companies which offer a high dividends yield.

This post is about trading, not long-term investing. The selection criteria are different as the holding periods and financial payoffs are different.

10. What are the most profitable trading strategies?

Day trading, swing trading position trading and longer-term trading are some of the approaches to holding duration.

Short term trading carries the most risk.

Fundamental trading, technical trading, trading on News, Trading on a hunch, trading on your self-generated information. Trading on your personal experience with a company or its products. Trading based on your opinion of the company leadership team. Trading on your view of the economy. Trading on your view of the financial markets. Trading on disasters, trading on market corrections, trading on a sound knowledge of valuation principles.

Trading Stocks and ownership securities, trading bonds and loan securities. Trading on distressed securities, trading spinoffs and special situations. Trading on potential mergers and acquisitions.

11. Which books should I read to improve myself as a trader?

As previously mentioned company valuation is part art and part skill. I leaned valuation as part of my accountancy training, but I also learned to apply valuation by reading some very good books.

There are some pre-requisites to being able to carry out valuation, one of the most obvious ones is to get good with reading financial statements and the other is becoming good with spreadsheets.

Here is a list of some of the books I have read and found helpful but do your own research and feel free to post questions.

• The Intelligent Investor by Benjamin Graham the mentor to Warren Buffet
• Confidence Game by Bill Ackman
• Fooling Some of the People All of the Time by David Einhorn
• Financial Modelling by Simon Benninga
• Excel for Dummies by J Walkenbach
• Liars Poker by Michael Lewis
• Boomerang by Michael Lewis
• The Big Short by Michael Lewis
• Dumb Money by Joey Anuff
• The Financial Times Guide to: corporate finance, financial modelling, derivatives, banking, stock valuation
,
• Dr Paul Wilmott on Quantitative Finance of stock valuation.
• Barbarians at The Gate: The Fall of RJR Nabisco by Bryan Burrough and John Helyar
• Property and Money by Michael Brett

Disclaimer:This article is for information and educational purposes only. It is not personal or professional financial advice. If you are not a finance professional, seek personal financial advice from an appropriately qualified professional. Trading carries risk. Most traders lose money. You should not trade with money you cannot afford to lose.

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Is Trading Stocks Online for a Living Easy?

1. Is it Easy to Trade Stocks Online for a Living?

Trading stocks online is accessible due to user-friendly software, but becoming proficient is challenging. While online platforms democratize investing, success demands dedication and skill.

Decades ago, investing was limited to the wealthy. Today, discount brokers offer online trading to retail traders. However, the abundance of platforms doesn't guarantee success.

Online brokers mainly provide execution services, lacking guidance on successful stock picking. Sell-side research, often free, aims to promote trading but may lack value.

Unlike institutional traders, retail traders need to conduct their research. Developing proprietary research skills is crucial for informed decision-making.

2. What are the Most Common Types of Traders?

The trading landscape includes various roles such as institutional traders, investment bankers, retail traders, and more. This article focuses on providing impartial information for retail traders.

3. What Activities are Traders Involved In?

Traders engage in diverse activities, including buy-side and sell-side trading, derivatives, commodities, and digital assets trading. Establishing a trading strategy based on sound principles is essential.

4. What Makes a Successful Online Trader?

Success in online trading is elusive; most traders lose money. To be profitable, one must manage risk, a skill often overlooked. Becoming a proficient trader requires dedication and years of learning.

5. Why Should You Listen to Me on This Matter?

While I offer general information based on a finance background, personal decisions should be cautious. Seek professional advice and avoid trading with money you cannot afford to lose.

6. If Most Traders Lose Money, Why Do They Continue to Trade?

• Escaping the rat race: Trading offers autonomy and potential financial freedom.
• Flexibility: Trading can be done from anywhere with internet access.
• Possibility of significant earnings, though initial capital is essential.

7. Why Do Online Traders Lose Money?

• Trading is not net neutral; fees and taxes ensure that even a 50% win rate may result in losses.
• Timing markets is challenging, making successful predictions unlikely.
• Order management systems encourage overtrading, leading to high fees.
• Many traders lack original research, relying on second-hand information.
• Risk management, financial literacy, and valuation skills are often overlooked.
• Insufficient capital and lack of leverage understanding contribute to losses.
• Media distraction: Traders are influenced by sensationalized financial news.

8. How Do Online Traders Manage Risk?

Understanding bid-offer spreads, being cautious of broker platforms, and implementing strategies like limit orders are vital for effective risk management. Traders should diversify, consider risk-adjusted returns, and plan their trades.

9. What is the Difference Between Investing and Trading?

Trading is short-term, focused on buying and selling positions. Investing is long-term, often for dividend income. Selection criteria and holding periods differ, and understanding these distinctions is crucial.

10. What are the Most Profitable Trading Strategies?

Trading strategies vary, from day trading to fundamental and technical approaches. Short-term trading carries high risk, and traders should explore strategies aligned with their risk tolerance and financial goals.

11. Which Books Should I Read to Improve Myself as a Trader?

Enhance trading skills by reading books on company valuation, financial modeling, and market insights. Recommended books include 'The Intelligent Investor' by Benjamin Graham and 'Financial Modelling' by Simon Benninga.

Is it easy to trade stocks online for a living

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