Friday, November 02, 2007

So You Want To Trade For A Living

I receive quite a few emails from aspiring full-time traders. Some hope to land positions with trading firms; others are looking to make a living by trading independently. Here are a few considerations for those thinking of making the leap:

1) Make sure you're adequately capitalized - This is, in my experience, the achilles heel of most traders who aspire to make a career of their market participation. If you start with a capital base under $100,000, you have to make a huge annual return on your money year after year to sustain a decent living. That leads traders with small accounts to take outsized risks, and those risks are what eventually blow them up. As a relatively new trader, you'd do *very* well to make 20% on your money per year after costs. If you can't make an adequate living from 20% returns, you know you're undercapitalized.

2) If you're not adequately capitalized, focus on building a track record - It doesn't matter if you're trading small. If you can show consistent returns from your trading and sound money management, you'll have something to take to a proprietary trading firm to land a position. They will front you capital, and you can get your start in the business. If you don't have the track record, however, you'll find many doors closed. Motivation and a passion for trading don't substitute for experience and demonstrated skill.

3) Make sure you have a durable edge - Before you quit your day job and pursue trading, make sure you've traded in a variety of market conditions over a variety of market cycles. Look at it this way: if a person with a track record of a few months asked you to give him money to trade for your account, would you pony up? Probably not. For the same reasons, you should establish a sound track record with solid profitability and good risk management before you make the full-time leap. Make as many of your mistakes as possible *before* you go full time.

4) Make sure you have reserves - Just as many new businesses tread water their first year, many traders struggle to cover costs when they go "live". After all, to cover commission, equipment, and software costs alone requires a fair return on capital. You should have more than a year's worth of living expenses available as liquid capital before you go full time. A second income (your own or from a spouse) also helps tremendously. This will take pressure off your early performance and help you focus on making good trades, rather than making the rent money.

The bottom line is that starting a trading career truly is starting an entrepreneurial business. The same dynamics that lead to success in startup firms--from knowing your markets to having a solid plan to being well capitalized to executing on details--apply to aspiring traders. If you can approach trading with the mindset, work ethic, and creativity of a successful entrepreneur, you have a real shot. And that's what entrepreneurs live for.


The Trader as Entrepreneur

Joining a Proprietary Trading Firm


Anatrader said...


I concur with what you have listed as essentials to become a trader for a career.

The outcome will stand a trader in good light when he wants to join a proprietary firm to trade other people's money (OPM).

Adam said...

As someone who has made the transition from serial entrepreneur to full-time trader of my own capital, I have some observations that may be relevant here:

1) Make sure you’re adequately capitalized:
I strongly agree that initial capital in the range of $100,000 is essential for absorbing the losses sure to occur due to inexperience in market analysis, position sizing and cash management. I paid approximately that amount in tuition in the process of trading into and absorbing lessons the market had no reluctance to teach. Maybe I’m a bad student and others can do this at less cost; it took some time to discover what sort of trader I am.

2) If you’re not adequately capitalized, focus on building a track record:
It goes without saying ~ and so it must be said ~ that one should keep a detailed trading diary (I write mine by hand), impeccable, transparent records and review one’s current theories, practices and results constantly against historical ones. I have no wish to be a prop trader, but such things are surely good to show in a job interview. It must be said, however, that making 20% on $100,000 is easier (and it’s not “easy”), than making 20% on five mil of OPM. It’s a fundamentally different game.

3) Make sure you have a durable edge:
I came to trading after multiple careers as serial entrepreneur. I sold my day job. Don’t quit yours! I opened my first personally managed account during the dot-bomb when momentum and hysteria made up for lack of skill. The edge I imagined I had was as durable as a Tootsie Roll on hot asphalt. When I took up trading full-time, I traded away a significant portion of dot-bomb gains in market conditions I didn’t understand.

4) Make sure you have reserves:
Read Brett’s advice on this 20 times, copy it out by hand, and live it. Reserves aren’t only cash on hand. I’m married to a woman who has whole-heartedly supported each of the risky pastimes I’ve ventured into. Be sure your spouse or companion fully understands the risks entailed in trading: volatilities, downsides, frustrations, as well as the upsides. She or he should be a fully informed, good partner in the game. Just as you wouldn’t bet your next mortgage payment, don’t bet your marriage.

Brett Steenbarger, Ph.D. said...

Hi Adam,

That is great advice; the best advice always comes from hard-earned experience. Thanks for passing that along. Many aspiring traders neglect building the foundation along the way to a career--


John Forman said...

Hi Brett,

It's nice to see someone being very blunt on the subject of the initial trading stake, and also the alternative of trading other people's money after developing a good track record. I would toss in to the mix that trading for a living also requires a different mindset, and sometimes a different trading approach, than normal trading for wealth building. It's the subject of a blog post I wrote a while back: Trading for a Living vs Trading for Wealth Building.