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I wanted to go back to reflect upon the more general business aspects of trading, namely:

1. How to survive the learning curve.
2. How to plan your future in this business.

Everyone who starts trading usually makes the following incorrect assumptions:

1. It will take them just a few months to learn how to profitably trade the market.
2. Books and seminars can teach you how to trade.
3. They can take a small account and bring it up to a very large sum in a short amount of time, just like Tim Sykes and other traders profiled in the news.
4. After achieving this, they can take a wee wee on their mean, abusive boss’s desk and say goodbye forever to a day job.

The truth is quite different by comparison:

1. It takes years to learn to be consistently profitable, as you learn to develop your own style, understand different market environments, and go through your own cycles of inspiration and having to become re-motivated.
2. Seminars and trading education are wickedly over-priced in exchange for the time-instruction value you receive, and there is no guarantee that you will be getting credible education from market professionals that have a proven track record (and if so, why are they teaching and not trading?)
3. The only way to run up an account real fast is to take a lot of risk AND happen to fall into a cycle where your style is in tune with the market. The sad thing is that most of the time this ends with an account blowing up, as the market never tells you when your lucky streak is about to run out, yet your risk keeps increasing. By the way, nobody realizes it but Tim Sykes’ hedge fund ended up closing down. Now you know why he’s showing up to Trader’s Expo hawking his for pay website.
4.  Trading is a profession that has high earnings volatility. That is a main reason why traders either have spouses/parents who have a day job, or they start their own businesses on the side. More often than not, those side businesses are related to trading education (that explains the plethora of books, signal services, and seminars you see out there!)

Given these unpleasant realities of life, what do we need to do to be successful in this business?

1. We need to develop a statistical edge in the market, in a manner that suits our personality. This is done through observation and much trial and error.
2. We need to train ourselves emotionally and understand our vulnerabilities.
3. We need to have adequate risk capital in order to grow our business.

Putting it in a nutshell, that is really all you need to do. And if it were only so simple.

Teach Thyself, for no one else will

As with any business, in order to succeed you need to invest time, capital, and sweat. At the same time, success is not just the combination of those three elements, but is also largely determined by our own ‘business strategy’. You can give money and time to a hard working person, but if they don’t operate efficiently, it will take them longer to succeed than someone who is operating efficiently (even if they have less time and capital). Efficiency is simply doing less of what is wrong and not working, and finding the most optimal and lowest cost path as quickly as possible.  

In most professions, you are trained first through an academic institution, which gives you background or ‘domain’ knowledge, and then are hired by a business that gives you practical, hands on knowledge that builds on what you learned in school. Doctors, for example, go to medical school then work as interns at hospitals. That is a maximally efficient path, in that your journey is optimized for you to be producing for your practice as soon as possible.

Retail traders by comparison face a much tougher and less efficient route. Due to the large amount of people drawn to a Wall Street career, there  are extremely high barriers to entry if you want to work at a bank or hedge fund. You have to be young, a graduate from a pedigree business institution, preferably with an athletic bent, and have exceptional math and programming skills to stand a chance. This makes it virtually impossible for the majority of people who want to succeed at trading to learn by sitting next to a professional while getting paid a salary along with a top health and dental plan.

Furthermore, most aspiring retail traders simply aren’t interested in intense 14 hour work weeks and being yelled at by floor managers. They pursue trading because they want to get away from an authoritarian environment and have control over their lives. Institutional traders, by comparison, aren’t interested in unplugging from the grid and trading from some remote island. They surrender their freedom and autonomy in exchange for steady paychecks that help pay for their Friday night clubbing and weekend getaways to the Hamptons with their Harvard buddies (and oh yes, lets not forget that pressing student loan payment!)

Proprietary or ‘prop’ trading firms which give traders firm capital to trade while training them and paying a ‘draw’ have become less and less common, and consequently the barriers to entry are getting higher at the firms that still offer this option.

At the same time, trading arcades which require risk deposits and/or training fees continue to thrive, often masquerading as prop firms. The quality of the education at these firms is highly suspect, as there is no incentive for the firm to see the trader succeed other than to receive their training fees and commissions/desk fees. Various independent “trading education institutions” charge exorbitant fees in return for basic knowledge that can be gleaned from textbooks at a much lower cost, or even gotten for free over the internet. They may show you a few effective strategies, but sooner or later those strategies are going to require a different approach, or will be totally unsuitable for a given market environment. You’re going to have to figure that part out on your own!  

Put quite simply, the only way to learn if you’re not in the lucky bunch that gets free training is to do it  yourself through countless hours of screen time and cutting your teeth. You have to be able to survive that learning curve, too.

Staying Alive

Until you’ve learned how to hack the market on a consistent basis and have the capital to trade, you have to find a way to survive as you learn. As one trader said, “you can’t live in a cocoon”. Even a simple life has costs: you have to eat, you need to have a roof, you have to go to the doctor to get checked out, and you have to have some bucks to have a little fun. Bottom line: there are economic pressures. You gotta have a gig to keep you afloat.  

The markets are hot at certain times of day, and other times they’re not. You can’t tell the market when you want it to move and when you want to sleep. Fortunately, there’s a fairly regular rhythm for trading which makes it relatively easy to set working hours (compare that to investment bankers and doctors who can end up working at a moment’s notice at any time of day or night!)  

However, depending on where you live in the world, those hours can run into conflict with your ‘day job’. Consequently, you end up being pushed to make difficult decisions. Either you elect to focus exclusively on long term trading, which may not be a good fit for your personality or for a given market environment, or you select alternate employment that accommodates the market hours you want to trade.

Unfortunately, positions that offer full time employment with respectable pay and medical benefits tend to be pretty firmly rooted in the 9 to 5 tradition, which is when most customer interaction takes place in brick n’ mortar businesses, with the exception of professions such as IT and medicine where shift work exists. The alternative is usually work that gravitates toward the ‘unskilled’ category, and consequently tends to be ‘dumb’ work that doesn’t pay well.

Another possible alternative is to start your own business. However, on top of finding a lucrative opportunity this requires one to spend considerable effort in ‘startup’, which often requires a significant time and energy investment. This will definitely distract from trading. Even if the business is successfully established, as a business owner there is greater responsibility for day to day operations as well as long term success.

In either case,  you may end up being forced to acquire a new skill set to be competitive in your day gig, and that requires time, and a learning curve as well.

Planning for the Future

We know there’s one question that is guaranteed to make traders get all hot and bothered on a forum, and that is when some newbie dares to ask ‘how much money can I make trading?’.

It appears that profitability is a function of 1) the overall long term statistical expectation of your trading methodologies, 2) your economic and psychological ability to trade at a certain size, 3) the amount of opportunities the market offers you in a given timespan that you know how to act upon, and 4) how good are you at performing as a trader (e.g. risk management, and understanding different market environments). What many don’t realize in the beginning is that 2 informs 1 to a significant degree, and that even if you are a good trader, point 3 is always your limitation – if it’s a trending market for a month,  your range bound strategy is useless. These are the reasons why the infamous charts of ‘what happens if I make 1% a day each day and compound daily’ always end up being theoretical gibberish.  

That said, our world is one where we try to minimize uncertainty as much as possible, especially in business. Financial projections for companies aim to forecast cash flows up to five years (sometimes up to 20) in advance. Do companies meet these projections accurately? Of course not! There are significant deviations from these expectations, which is why, incidentally, stock and bond prices move. Companies often beat or fail to meet the expectations of these models, which forces a change in assumptions and thus a readjustment in the value of equity and/or debt.

So where does a trader stand? It’s a very challenging task, because we have a responsibility as business owners to be accountable to ourselves (and sometimes to others as well) for our time and energy invested. What we can do in order to be as realistic as possible is to create certain milestones, just like a venture capital firm does for a startup. While time projections can and should be created (and for a venture capital firm this is a must – the fund has to harvest its investments no later than 10 years of the fund’s inception), the most valuable element is establishing clear milestones with regards to not only money made, but other successes, e.g. ability to handle different market environments, better balance of trading with your day job or side business, etc.

I believe it is absolutely vital to have non-monetary goals, even though this business is all about making money. With trading it is particularly dangerous to be reckless in terms of profit targets. It is too easy to put yourself in the position of a CEO who promises the moon to investors and then ends up taking crazy gambles to make his own unrealistic projections.  On the one side, realism is important, but it is likewise important to push yourself. Why make the minimum wage when you can be doing better?

As with every venture, there is one important thing that helps make it all happen: experience and learning from your mistakes. Much as I’d like to be trading multiple standard lots next Monday morning, I have to be willing to accept the learning curve and give it the room it demands. The only way I can make it faster is by being focused, working efficiently, and planning responsibly.