Managing Trading Process for Income Generation

photo.cmsThere are numerous ways to generate an income and make a decent living. I have observed that many folks consider it a panacea to discussing about investing and trading with little bit intelligence. Irrespective of whether there is substance behind it or not, it at least creates an impression of smartness and being intelligent. At personal level, I respect every style of investing and trading. But I remain skeptical in the context of applying to my own situation. I want to follow method or style what works for me. There are different styles, methods, and strategies for investing in stocks.

Readers of this blog are already accustomed to my approach of investing in stocks and remaining focused on dividends. The investment management process I use includes qualitative and qualitative analysis and asset allocation based risk management process. This works for me. And I keep tweaking and adapting if there is a need to make changes. Out there, there are many individuals who focus on trading (swing, positional, technical, momentum, etc.) and some other folks focus on opportunistic or speculative trades. Like every coin has two sides, I believe there are pros and cons of every method. It really boils down to how one chooses to look at depending upon your personal situation. Every individual has to figure out what works best for them. I always keep asking this question, what is wrong in trading if one can generate income with consistency using trading strategies. It doesn’t work for me, so what, it may work for some other smart guy!

Having said that, I have (or had until now) observed that almost all of the trading strategies centered on making money using transactions fees and expenses. It is difficult to find (if not impossible) traders using their own money to many their own living (but not with transactions fees or commissions). I am sure there are quite bunch of them, but I couldn’t find in the environment I live in. This changed two months ago.

I happen to bump into one of my old classmate from Master’s class. We haven’t met since year 2000. He mentioned he is now a full time trader and trades everyday using his own money and for himself only. After have few long discussions over beer and Sunday football games, it kind of solidified my thought process that, one has to figure out what works for each individual’s situation. This friend of my mine lost his job during dot-com crash and was practically unemployed for more than six months. And that’s when he started dabbling into trading stocks. Like I have my investment management process, he also has his disciplined trading management process which he follows diligently. Summary of his process is as follows:

  • He trades only for himself, and nobody else.
  • Make minimum two trades or maximum three trades everyday.
  • Everyday 5.00am to 6.00am, enter trades with entry points, stop loss, etc.
  • Forget about the market the whole day until market closes. During this period he reads and studies about possible opportunities.
  • After the market closes, he does the admin work e.g. checking transaction completion, recording profits or loss, etc.
  • Everyday 10.00pm to 11pm, decide possible trading moves for next day. He is looking four or five trading moves. To avoid spur of the moment decision, he enters the trade next day in morning and not immediately (i.e. night time). In the morning he will narrow down to two trades (on some occasions three trades).
  • He trades with corpus of $80,000. All profits above this corpus fund are considered as his income.
  • If the corpus fund falls below $80,000, then it’s a loss and next day he has less corpus fund for trades.
  • Until the corpus funds reaches back to $80,000, he does not take income.
  • He has decided that the day this corpus fund becomes zero, he will stop trading.

With this trading process or strategy, the summary of results is as follows:

  • His yearly take home income has been averaging around $65,000 per year for last 6 six years. He uses $65,000 for his living needs, and ironically, invests his yearly savings using long term buy and hold approach.
  • In these six years, his corpus went down to approx. $66,000 only once and has never been below that value.
  • His success rates has been about 61%
  • He gets more time for family and himself.

I questioned him on why he does not grow his corpus (or let others chip in) or grow this is a business. Not growing corpus is related to his willingness to increase risk capital. He does increase his corpus fund occasionally. In last six years, he has doubled his corpus fund. He has concerns with reference to growing it as a business or letting other chip to increase the corpus. His answer was simple; he does not know how to make it work in that scenario. When he does that, his output requirements will change and does not have confidence that it will work to satisfy all the requirements.

Summary is; although I do not have a trading aptitude, who am I to say it is wrong when it works for this individual.

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2 Responses to “Managing Trading Process for Income Generation”

  1. Brendan Weselake says:

    Your first paragraph sums it up nicely.
    There are many roads to babylon. You have to pick something that works for you, and something you are comfortable with.

    If your friend can earn 60K a year from a pool of 80K then all the power to him.

    Personally I think I would fail at this style, and I also believe he is in the extreme minority to be able to do this with his consistency.

    Even WEB himself says he Microsoft, and related stocks because he knows nothing about them.

    IMO all investment styles will work provided you have the stomach to stick with what you are doing. Most people are so called value investors until tech stocks shoot to the moon. All of the sudden they are now momentum investors, joining the party too late, always chasing last years trends.

    I am still convinced that dividend growth investing is the way to go. Sure it is not infallible , as last years massive dividend cuts have shown, but i believe it to be the closest to the “holy grail” of investing.

    Not so much because it is a superior method, but because you can stick to your guns through bad times and not jump ship.

    You always focus on the growing income, and not the stock price.

    Even though I had 2 dividend cuts last year my income will be higher this year than last year. In fact from a dividend income perspective I have NEVER lost money. I have always made money.

    If that’s the best the “worst market since the depression” can do, then bring it on!

    • Hello Brendan,

      I couldn’t agree with you more. On personal front, like you, I also follow dividends growth/focused method.

      All investment styles exists because they work for somebody. right? And we can debate whether it works for an investor or investment manager. it’s all about the context.

      Thanks for stopping by!

      Best Wishes,

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