Tuesday, December 22, 2009

A Few Hard Realities for Traders

Here are a few lessons that I've seen traders learn the hard way. My hope is that putting them out there can prevent a few train wrecks:

* If you don't save a good portion of your earnings in successful years of trading, you won't last during the less successful years;

* If you don't have a solid nest egg of savings to support you while you're learning trading, you won't survive your learning curve;

* Everyone has a passion for trading; if you don't have a passion for learning to trade, take a pass on financial markets and find the field of endeavor that offers intrinsic reward;

* If you're living for your trading, you won't make it trading for a living. Other things need to sustain you in the lean times, particularly the things that are more important than markets;

* The ratio of time spent working on your trading to time spent actually trading is predictive of long-term career success;

* In any performance field, the percentage of participants who can sustain a living from their craft is under 5%; always have a Plan B;

* No one can make you successful as a trader if you lack the requisite talents and skills; a mentor can, at best, help you make the most of the talents and skills you possess;

* Even if you are very successful as a trader, your annual income will be a fraction of your leveraged portfolio size;

* Your risk and reward will always be proportional: count on drawdowns of at least half of what you hope to make in markets;

* Psychology alone cannot make you a successful trader, but it can make you an unsuccessful one;

* Quiet markets reveal the best traders;

* Over time, your risk-adjusted returns are more valuable than your absolute returns;

* Trading is a business and, as such, must always adapt to changing market conditions;

* If you can't make money consistently when paper trading, you won't be successful when your capital is on the line;

* If someone promises you trading success, keep a close eye on your wallet.



Victor said...

Thank you kind Sir for your thoughtful and honest advice. I send you my deepest appreciation and best wishes for a wonderful new year.

Matt Fahmie said...

"Quiet markets reveal the best traders"

How do you define "the best traders"?

Quiet markets lead to quiet or no real opportunities. Especially if you pay retail commissions and your method requires volatility.

Are you implying the ability to step back when the markets lack any real volume and volatility as a quality of your said statement, or are you implying that the best adapt to the condition and trade it anyway, even if the opportunity the condition offers is not worth risk, especially when paying retail commissions?

I agree with everything else, maybe this is just a matter of semantics, but I read that statement and thought to myself, "It's the holidays, no range, no volume, no volatility, no outsized opportunity, at least on the day timeframe. How does this current market condition reveal the best traders? If anything, it reveals the trading addicts?" As with everything in life and markets, I guess it would be relative to the context in which it is applied.


-Matt Fahmie

Ziad said...

I agree with Matt. I'd also like to understand how quiet markets reveal the best traders, and what is really meant by that.

Thanks and Happy Holidays!

marketmania said...

Just an idea, but a "good trader" does not HAVE to trade..."Sometimes nuthin is a pretty good hand!"

sdfsdfsdf said...

Is a very strong motivation toward learning trading specified as an addition?

I am reading and synthesizing information as passionately and obsessively as I can.

I am a novice, and for me, when markets are in bull mode, I am practicing trading just a fraction of my float - for practice & feedback.

When I first started trading my attitude was that (a) buying and holding stocks would be better than doing same w/ mutual funds, (b) Exchanging stocks on a fairly straightforward technical basis would be better still, and (c) profitability should scale with knowledge and experience thereafter.

I am 9 months in and my attitude has totally changed. I now think that once I dropped out of buy and hold in any way, I dropped myself into some pretty deep doo-doos, and the learning experience is one of clawing oneself inch-by-desperate-inch away from any and all loss-making habits, attitudes and activities and back even towards the kind of profitability that one could have had in the mutuals.

Like jumping out of a plane and waiting for the chute to open.

My current humble opinion is that profitability does not scale with skill: Its like an option, at some point, suddenly I may reach a point of personal development where I will be "in the money". That is one reason I continue to trade as I learn: I see, by feedback, in a microcosmic way, whether I have yet crossed that boundary.

Moreover, I now don't think that progressive personal development draws one progressively from longer to shorter timeframes, I humbly think that without being intimate with what is happening on the shortest timeframes, I won't get off the blocks.

That is why I am obsessively learning, and I spend time in the markets while learning - to get the feedback. I am not sure the latter is, therefore, addictive, but the former could be :) Maybe I live to learn, and to learn to master myself, and hopefully obviating addictive impulses is not in itself addictive.

OKL said...

this is one of those "i wish someone had told me from the start" things.

then again, i probably wouldnt have listened either.

Tricky said...

"Even if you are very successful as a trader, your annual income will be a fraction of your leveraged portfolio size"

By "fraction", do you mean that it will be a small percentage? Strictly mathematically speaking, "2/1" is a fraction and I would love to have a 200% return on my leveraged portfolio size.

I really like your posts and also wish you well at this holiday season.