Editor’s note: Ian Murphy has been trading his own account full-time for five years now. Prior to that, he was trading a traditional account with a full-service broker over the phone and has traded part-time since the late 90s.
Throughout his career in the markets, Murphy has maintained detailed records of the highs and lows of his trading experiences, documenting the lessons he’s learnt along the way into his first book Way of the Trader: A complete guide to the art of financial trading.
“It took me a long time to realise the trading styles that suited my resources, personality and lifestyle but once I had that nailed down, I began to get some trading strategies and then it was just a case of consistency,” Murphy tells Opto.
“It took me a long time to realise the trading styles that suited my resources, personality and lifestyle but once I had that nailed down, I began to get some trading strategies and then it was just a case of consistency”
Indeed, Murphy specialises in three prominent trading strategies: day trading, swing trading and trend following – “which is widely considered to be the most profitable style of trading but which is one of the most difficult to practice because you need to sit in a position for long periods of time and do nothing”.
“So, because I was trend following, I was engaged with the markets and had a lot of time on my hands [to write],” he explains. Murphy has also created an education programme for traders, as a follow on from the book on his website: murphytrading.com.
The following is an excerpt from his book, published with permission.
Chapter one: The job – Is trading a job or a business?
In this opening chapter, we’ll look closely at the activity of a private trader and examine aspects of the profession which may surprise people thinking of getting involved.
Working in paradise
About 30 years ago, I decided to move to the Canary Islands. I had been there for brief holidays and concluded the sunny beaches offered better prospects than a floppy-disc factory in Limerick.
When I got there, things weren’t as rosy as I had imagined and after spending a few weeks handing out fliers for pubs and clubs, I got a job on a construction site.
This involved carrying floor tiles up 20 flights of stairs in the heat of summer. After six months, the building was finally complete, and we had a bit of a celebration to mark the event.
That evening, as I sat on the rooftop eating a sheep’s head with my Moroccan workmates, I couldn’t help thinking this was not the high life I had in mind.
Just like an image of a tropical island, working as a trader can look very attractive from a distance. Faraway hills are always greener and may even appear to be made of dollar bills. But trading is a difficult task and is not profitable for the majority of people who attempt it.
There is no shortage of market advisors and we are all familiar with the usual clichés, ‘Buy low and sell high’, ‘Cut your losses and let your winners run’ and ‘Buy the rumour, sell the news’.
All of these are true but are much easier said than done. Many market advisors are like fringe politicians: they always know what others should be doing but somehow, they never manage to be in a position where they have to take financial responsibility for their opinions.
All politics may be local, but all trading is global. When we connect to the market, we plug into an unfiltered display of the financial impact of all human activity and this can come as quite a surprise.
“All politics may be local, but all trading is global. When we connect to the market, we plug into an unfiltered display of the financial impact of all human activity and this can come as quite a surprise”
Every meeting held, every barrel of oil pumped, every machine sold, and every shot fired – they are all distilled to their economic essence and expressed on our screen.
Most of us are unprepared for the enormity and complexity of this experience. Modern society is constantly holding our hand and creating structures designed to protect us from ourselves and others.
In a world where uncomfortable truths are avoided for fear of causing offence, the naked directness of the market is shocking. From the market’s perspective, our trading endeavours are just another flow of data to the exchange, feeding into all the other data it receives.
It is indifferent to our feelings and opinions and has no understanding of us as a person. All it perceives is a tiny packet of data telling it to execute an order, buried among millions of similar orders.
A business – but a different one
Trading is an exercise in the transference of capital based on the assumption of risk. We might think we are buying and selling shares, but we are actually running a small business which trades in risk.
Therefore, when we start to trade, we need to retire from the concept of doing a week’s work for a week’s pay and we should dedicate the same level of commitment to our new trading business that we would to any other.
“Trading is an exercise in the transference of capital based on the assumption of risk. We might think we are buying and selling shares, but we are actually running a small business which trades in risk”
Trading is a little different from other enterprises because we plug in and out of our income source when it suits us. We can trade for a few weeks this year and do nothing for three years, then trade for a solid six months and stop again.
In the meantime, we have no customer base to maintain or employees to support. Another wonderful aspect of trading is the ability to quickly grow an account without having to expand our business to accommodate the increase in turnover.
For example, a trader can place a $200 trade or a $2 million trade from the same computer, in the same market. Because of its nature, the market has an infinite ability to assimilate any amount of money thrown at it and give the corresponding return on investment.
If a financial instrument increases in value by 15%, the guy with a $200 trade makes $30 and the guy with $2m in the same instrument makes $300,000 – but no extra effort is required, and it all happens in the same place at the same time.
What’s more, a trading business never has to chase debtors for payment because all transactions are settled immediately. This is a huge advantage because many start-ups spend half their time running the business and the other half trying to get paid.
“What’s more, a trading business never has to chase debtors for payment because all transactions are settled immediately. This is a huge advantage because many start-ups spend half their time running the business and the other half trying to get paid”
And finally, when the day comes that a trader has enough, he can simply stand up and walk away. There is no costly infrastructure to be dismantled or ongoing liabilities to manage.
Cash is king
It goes without saying, we need money to trade and the larger our account, the easier it will be to generate a living wage. Most folks don’t have a lump sum to begin with, so they need to save.
This will require effort and personal sacrifice. They need to eliminate all unnecessary expenditure and divert every penny to paying off any short-term high- interest loans. This process will also nurture the habits of discipline, patience and diligence which they will need to trade.
Newcomers should start by trading a simulated account of the same size they intend to trade with real money. If they don’t manage to get a lump sum together, a steady track record on a simulated account is an excellent calling card if they plan to manage other people’s money.
“Newcomers should start by trading a simulated account of the same size they intend to trade with real money. If they don’t manage to get a lump sum together, a steady track record on a simulated account is an excellent calling card if they plan to manage other people’s money”
No barriers, no rigging
Professions with high barriers to entry tend to be very profitable and lack competition. On the other hand, professions which are easy to enter pay less and are highly competitive.
The trading profession has no barriers, so the profits are elusive and the competition intense. The market is a work environment like any other.
The existing professionals need to get paid and they know where to find the cash. The legal and medical professions aren’t rigged against newcomers just because the old hands are plugged into the money flow.
When entrants to these professions have naive ideas of making a fortune, disappointment is sure to follow. Likewise, the trading profession isn’t rigged against new traders.
The new guys need to appreciate the complexity, composition and subtlety of the environment they have entered. They must learn the ropes and serve an apprenticeship like everyone else before them.
“The new guys need to appreciate the complexity, composition and subtlety of the environment they have entered. They must learn the ropes and serve an apprenticeship like everyone else before them”
By Ian Murphy, an independent trader and founder of Murphy Financial Trading based in Ireland.
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