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