BS"D 

Dear Samech, 

Once again your list of questions is longer than my original letter. Cause we're old friends (and because you are one pushy lady!), I'll sidetrack to discuss some of the things you brought up, but remember, my main goals in this exchange are twofold:

• To Shorten your learning curve: As they say in marcom, "Shorten your time-to-market" 

• To focus on Options: Your expressed area of special interest.

Ideally, as a trader your education will continue over a lifetime. There are a zillion things we could discuss, but right now I'm trying to build a foundation based on certain reality principles. For example, we need to consider: 

A. What will be your level of trading involvement: 

• Fulltime Trader Make a respectable a living. 

• Part-time Trader With an eye to growing (funding and time) into a fulltime Trader

• Casual Trader Hobbyist: Make a few bucks and have a good time. 

• Investor Low risk/Low return: Earn just a bit better than bank interest. 

B. What funds do you have available (Never trade with money you can't afford to lose):

• Well Funded Wide comfort zone, multiple contracts, diversified portfolio 

• Properly Funded Check out this rule of thumb (per S.L., aka Tbondtrader): "Your account should be at least 8 - 10 times the margins applicable to your trades." That would mean, to trade 3 markets, 3 contracts each, with a margin of per contract $800, times 8 you need about $57,600 in your account. 

• Short Funded Anything less! Ridiculously Under Funded Go out to supper and a movie. Better yet, give it to charity and help make this a better world! 

C. Set your trading goal:

• Get rich quick 

• Revel in excitement and have a danger rush. 

• Make money to live 

• Interesting hobby 

• Brag to your friends. 

• Gently increase your equity. 

D. What will you Trade (Hope to discuss this in the very near future): 

• Stocks Which ones? Why? 

• Commodities Which markets? Why? 

• Options Buy? Sell? 

• Strategies? Which strategies? Why? 

E. Select a time frame to trade: 

• Long Term Months to years 

• Short to Medium Term  

• Days to months 

• Daytrading Never hold an open trade overnight.

F. Know your limitations and constraints: 

• Available Time What hours of the day can you follow the market? I have one e-friend who is unbelievably knowledgeable about trading, but he works a fulltime job, with no computers around. For years he has been searching for a system sufficiently sophisticated for his tastes that can be traded off end-of-day data - in absentia. Last I heard, he's trading by having his non-trader wife listen to his trading program throughout the day for signal alarms. She contacts him via a remote beeper. I think he then asks to go to the washroom and runs to a payphone to call his broker. YUK! 

• Comfort Zone How much are you comfortable risking per trade? My valued e-friend, and first trading mentor, B. put it this way, "Your comfort zone is very important to successful trading. If you exceed your comfort zone, you will self-destruct, on a regular basis. It is critical to define what your limits are. Many people would feel ok about going to the casino with $100 and playing the games within that limit, meaning that they are ok if they lose the whole thing. But how about $1,000 or $2,000 or even $10,000? You will be into a white-knuckle experience if your comfort zone is violated, and it will happen sooner or later. No art or science will prepare you for it fully, but you can avoid it until you are surer of your ability. You do it by trading very small and using reasonable means of defense (stops and/or options)." 

• Datafeed and such Will you be subscribing to data or joining those constantly surfing the Net in search of free data and charts? Real-time, delayed, end-of-day? 

G. Which approach will you take: 

• Mechanical Always Buy and Sell according to predefined signals. This avoids the debilitating affects of Fear and Greed, but requires extensive funds to weather potentially large Drawdowns. 

• Discretionary Buy and Sell according to your judgment under the circumstances. 

• Fundamental Analysis Evaluation of economic, political, psychological, etc. influences on the market. I personally don't use this approach. I feel there are way too many possible parameters. Will the war in Nicaragua make the price of bananas go up or down and how will that affect Orange Juice? Oh yeah? Forgot to mention that the U.S. Congress has agreed to subsidize the crop. And there is a freeze in Florida. And . . . Even if I have "all" the information, I can never be sure that my logic will reflect future market action. Usually not. 

• Technical Analysis The study of market action, primarily via charts, formations and statistics. 

• Hybrid: Technical & Fundamental Analysis I think this is the best. Basically technical analysis tempered with a strong awareness of the fundamentals. 

H. Which method fits your style:

OK, enough. I assume you've gotten the picture, 'cause the list goes on and on and on. Let's hope that the next few letters will address enough of these areas (albeit VERY superficially) that you can zero in on YOUR reality principle. I'm already burned out and we didn't get to the actual discussion yet! 

So, I'm just going to outline a couple of things and leave it for YOU to do the work filling in the blanks. In my last letter I sort of danced around the question of whether trading is a business or gambling. To a large extent, that lies in the attitude of the individual trader - wittingly or not. 

Although many of the examples I will bring are drawn from casino and poker (for their pure descriptive power), you know me well enough to know that I prefer a business-plan approach to the business of trading. 

Remember the "statistic" I presented last letter? "Eighty percent of all new businesses do not survive the first 3 years." Now, let's look at the profile of the investment curve of a successful company start-up (the other 20%): 

• First Year Large initial investment. Expect to lose money the first year. 

• Second Year Some capital investment. Expect to start breaking even, or even show a miniscule profit in the second year. 

• Third Year Capital investment generated internally. The successful new company (trader?) can expect to show a profit in year three. 

NOTE: Entrepreneurs who gain the appropriate skills and experience (learning curve and paper trading in our case) before jumping in the deep water, exponentially increase their edge; thus, their chance of being among the elite 20% who survive the first two and a half years of doing business (trading).

Sorry, Samech, but we've outstripped my time constraints. Next time, we'll be better zeroed in on YOUR reality principle, and maybe we'll have time to work through some examples on the Trading Target Calculator [I HOPE!] for an even clearer picture. 

Be well, 
Asher

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