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November 17, 2012 - Trading for a Living - By Zacks Investment Research
Ever wonder how some people seem to be able to make money in the market no matter what?
Why some people are successful enough where they can trade for a living?
For some, it seems like a dream, akin to fantasizing about being in the movies or winning the lotto.
But for others, it's not a dream. It's what they do. And there are way more people doing it than there are famous actors or lottery winners.
But it didn't just happen overnight. It took hard work and dedication. But for most, it was likely a labor of love.
What's interesting is that in most fields where people have reached a high level of success, you'll find that it doesn't necessarily take extraordinary smarts or some ultra-special talent to make it.
It's really just about doing things that have proven to work and then doing them over and over again.
The key is knowing what works.
But you don't need to know everything that works. Just some things that work.
(And at the same time, stop doing things that don't work.)
You Don't Have To Reinvent the Wheel
The Zacks Rank is one of the best rating systems out there. Over the last 26 years, the Zacks #1 Rank (Strong Buy) stocks have shown an average annual return of 26% a year, beating the S&P 500 in 23 of the last 26 years. That means, annually, you're beating the market more than 88% of the time.
That's a spectacular track record. And that one item alone could help an investor transform his or her portfolio.
Once you've decided to become a better trader, you need to define what that means.
'Making more money in the market' is a fine affirmation. But how much money are you trying to make each year? What percentage gain are you shooting for?
For example, if you decided to eat better, that's a great decision. But what does that mean? Before you go to the store, you'll need to decide what kinds of foods you'll buy more of, and what foods you'll buy less of.
If your goal is to lose weight, how many calories will you eat per day? Essentially, you'll be creating a meal plan to help you accomplish your goal. Without that, your decision to eat better is only a wish, rather than a real plan.
This is true for anything. And the same applies to trading.
If your goal is to make 15% a year (baby steps -- the Zacks Rank #1's average 26%), how will you do it? How much will you need to make each month to accomplish this goal?
If 15% a year is your goal, then you'll need to average 1.2% a month for a compounded return of 15%. If your goal is 20%, then you'll need 1.5% a month. For 26%, you'll need 1.95% a month.
Now you have to put that plan in motion.
From the list of roughly 220 Zacks #1 Rank stocks, you'll then select which ones are right for you.
Are you a Momentum trader or a Value investor? Are you interested in Aggressive Growth stocks or maybe Growth and Income combined?
As soon as you decide what type of trader/investor you are, it'll be easier to find the stocks you're looking for.
Think about the last car you bought. Once you decided what kind of car you wanted, you probably started seeing them everywhere. They didn't just magically appear. They were always there. You just became aware of them.
It's the same with stock picking. Once you know what you're looking for, they'll become easier to find.
This will keep you on track. As long as your stock picking is in alignment with your trading style and your goals, it will help you get into the right stocks, and keep you out of the wrong ones.
Of course, markets don't always go up.
A good trading system should help you outperform the market in both good times and bad.
But sometimes, there are special situations that can be best taken advantage of through the use of Exchange Traded Funds (ETFs), options and even shorting stocks.
The trader who is knowledgeable about these types of products, and how and when to use them, can take their trading to an even higher level when these opportunities present themselves (like now).
Whatever your trading goals are, whether it's to trade for a living or earning x% per year on your investments, the time to begin is now.
Put your trading plan together.
You don't need to be the next Warren Buffett to succeed. You just need to do a handful of things right. And the commitment to do them over and over again.