How To Get Started in Active Trading

David Jenyns and Stuart McPhee, well known, experienced traders, discuss the merits of keeping part of one’s trading float back from active trading.

David: We have a question: do you recommend having all your trading capital in active trades or should some be kept as cash, and if so what percent?

Stuart: For example, my super fund I always have roughly ten percent in cash because, and this is probably more specific to Australian taxation law, during the year you have an obligation to pay tax, pay as you go.

But having said that, if that isn’t a requirement for you and trading opportunities present themselves, there’s no reason to keep some cash set aside. Using nearly everything in active trading is a great idea in the trading system.

David: I’m in a similar frame of mind about that. If you’re looking to trade the markets and you’ve set aside your trading float that’s your intended purpose for the money assuming you have appropriate trading candidates. My gut feeling would be you should have, whenever possible, all your money invested. Obviously, it comes back to your system, making sure you are getting the signals. You don’t want to put your money in just for the sake of having all your money in.

But I don’t see any reason to limit, oh, I’ll keep ten percent of the trading float just sitting in the account, just accruing interest, not involved in active trading. It’s part of how you structure your wealth creation; you’ll have a certain amount allocated for your trading float, you’ll have a certain amount allocated for your real estate, you’ll have a certain amount for cash in the bank. I see that separate from my trading float.

Also with regard to backtesting you can see the utilization of your trading float. You can enter your trading float in before. You can see over a set period of time whether you’re fully utilizing or partially utilizing your cash and I always try to get as close to the top of that band as possible. So I’m as close to being maxed out as possible without being maxed out all the time.

If you’re maxed out all the time and new trading opportunities pop up and you don’t have any capital available, it’s going to throw out your backtesting a little bit because with trading opportunities or investment trading you may not have been able to open.

What is the least profitable scenario and the most profitable scenario and you find that gap widens the more you fully utilize your cash.

You don’t want to be maxed out as possible when you are doing backtesting. But definitely the major part of your float should be used for active trading or trade entry.

The Hidden Secret of a Perfect Trade Entry

I think most professional traders already know the secret of a perfect trade entry, but it’s the newbies who insist on searching for the Holy Grail of trading. Well, you need look no further because the secret of a perfect trading entry is that there’s simply no such thing as a perfect trading entry. Unfortunately, you’re never going to find that perfect magical indicator that tells you when to get in and when to get out.

As I’ve just mentioned, while the pros are aware of it already, those who are new to trading need to accept the fact that a “perfect” indicator does not exist.

What is it that drives people to believing that it does exist?

According to dr van tharp who is himself a much respected trading guru, the reason lies in the fact that many novice traders believe that if they’re actually involved in the selection and entry into a trade, they somehow have some measure of control over the market. He also goes on to compare this phenomenon with the behaviour of many people who play the national lottery. Of course the lottery players he’s referring to are those who favour choosing numbers which are relevant to their personal lives, such as birthdays, anniversaries, and etc.

These people choose these numbers because they believe the numbers are ideal, thus giving them a greater chance of winning. Of course, their combination of numbers has the same chance of winning as any other combination would have, but the difference is, there’s a certain degree of emotional attachment involved. This tends to impart a feeling of power and/or control over the final outcome and this is the exact same reason why traders want to do the same with their trade entry.

What you need to realise is, you are in total control of your circumstances when you enter into a trade. Only you can decide whether or not you should proceed or back away. On the other end of the scale, once you’ve actually entered into a trade, you have absolutely zero control over the way the market behaves.

Contrary to what you may currently believe, the amount of money you make on a trade depends primarily on how much you put into a trade and when you exit the trade, and not when you enter it.

Let’s try and shed a bit of light on this by looking at an example:

You’ve decided to buy some stock and according to the trading system you use, you should buy at $10 and exit at $12. Now let’s consider two scenarios. In the first one you have $1000 and in the second you have $5000.
1) You purchase 100 $10 shares with your $1000. When they reach the $12 mark you sell and as a result, you rake in $200 in profit.
2) With your $5000 you are able to purchase 500 $10 shares. Here again, once they hit $12 per share you sell. This time your profit stands at $1000.

So, as you can see in the example above, the amount of money you make is determined primarily by how much you invest initially, and not by your trade entry. This is in fact the very foundation of good money management.