By Don Dawson, Online Trading Academy Commodity Futures Instructor
Many times people come into the trading arena because they lost their jobs, are looking to supplement their incomes or think this is an easy way to make money. Trading is much like any other business in the sense that you get back what you put into it. I feel those who come into trading treating it as a part-time job will struggle tremendously. With a business that has a statistic of approximately a 90% failure rate in the first 6 months, you must work very hard to survive in this field. If you decide to take this on as a part-time career, just be prepared to work hard or harder than you would a full-time job. This is no place for slacking or taking for granted attitudes.
With that said, trading doesn't have as bad of a track record as it sounds compared to other worthwhile endeavors. Think about this: How many people try out for a professional sport and actually make it to the pros? My bet is probably around 5-6%, if that.
I bet we all know somebody who went to many years of school to become a doctor, lawyer, engineer, accountant, etc., and they ended up quitting because it was more demanding than they thought. As you can see, these careers parallel trading pretty closely.
Trading, like other professional jobs, requires the trader to be dedicated and diligent in order to achieve a high level of success. Many traders fail in this field due to inexperience and they have just thrown their hard-earned money into the wind thinking this was going to be some kind of get-rich-quick scheme. I like to tell my classes, "This will be the hardest easy money you will ever make."
The trading community is made up of all types of traders from many different backgrounds and we each bring our own unique skills to the marketplace. Since the writing of the book Market Wizards, we have all been very interested in the traits of these winning traders. I will discuss some of these traits later.
Let's review the questions from the student and give some answers.
How do I know I'll be a good trader?
He commented he had come from the construction industry and could tell if a person was cut out for that type of work within a week. Trading is such a unique type of career. Short of a physical or financial limitation, it would be very difficult to tell if a trader will make it or not. Each of us will learn at a different pace. The other part of the equation is that people measure success in varying degrees. My experience from being around traders, both losing and winning, has shown me a few things that help with the decision of becoming a trader:
- People that start from the ground up with trading seem to have an edge over the people who just jump into the markets with both feet without taking time to educate themselves or to understand the markets they are trading.
- These people also learn to think in terms of probabilities so when there is a loss they know that this is part of the trading business and it will not shake their self confidence.
- They have studied the markets and found or put together a strategy that is tailor-made for them. They do not take somebody else's style of trading and try to make it work for them. Each of us has our own risk and reward objectives. If we try and incorporate somebody else's style, we will not be comfortable and will not use the strategy consistently as it was intended.
- Good traders tend to be more flexible than bad traders. You will have difficulty if you come from a background where everything is black and white and try to apply these same characteristics to your trading.
- People who think for themselves without having input from somebody else before they make a decision tend to do better, also.
- Have patience before you start trading. There is no hurry to get started trading. Get your education, study the markets, learn or design a strategy, learn about your strengths and weaknesses and then paper trade or start out with a very small size of contracts until you are comfortable.
When does one say enough is enough and quit?
The learning curve for trading has been made much easier with the advent of internet research, education on the markets, online trading, publications and networking with fellow traders. My general rule of thumb is 18 – 24 months on average - remember everybody will learn at a different pace. After this period you need to sit down and ask yourself some questions about your trading career:
- Have I gone through the process of learning the markets I trade and created a trading plan to follow each day I trade?
- Do I follow my trading plan regardless of what the market is doing?
- When I place a trade am I allowing the trade to go to my exit points (stops or targets) without getting out too early?
- Have I truly accepted the fact that trading is a probability business and that two or three trades should not affect my self confidence if I lose?
- Looking back over the last two years has trading affected my personal life in a negative way?
- Do I have to use substance abuse to cope with my trading?
- Is my money management plan being followed very strictly?
- When I do have a losing trade, do I have the patience to wait for my next setup or do I force a trade looking to get my money back that I lost?
- Do I still have the same strong passion for trading I had when I started?
- When I started my trading business I also created a business plan to help guide me through my career. Am I on course with what I had written in my business plan?
These are some of the questions you need to ask and be honest with yourself. Trading, like any other business, is not for everybody. Just like everybody who works for GM will not become the CEO of the company, every trader will not be successful or become a millionaire. And you know what? That is perfectly fine. The important point is it is no big deal if you gave it a try and it did not work out. Perhaps trading is not your calling. Do not take it as a personal failure. Also, don't give up on working in the financial industry. There are other jobs available that you may well be qualified for now that you have some trading experience. For example, maybe trading is not your calling, but perhaps becoming a market analyst and giving recommendations is. You will be very surprised at the number of people who could not trade their way out of a wet bag, but can give the best trading advice in the world. Even the sales side in the financial industry is lucrative and now with your extra trading experience you will be able to relate to the end users and be more valuable to your employer.
Most of us are not quitters. Which could be good or bad?
This is a good point. As I mentioned earlier about coming into trading with a black and white background, there are also some other attitudes that can be detrimental to your financial health. Ego is one of them. There is no place in the markets for ego. Ego has ruined more lives, families, trading accounts and worse. Ego will make you exit your winners early to get that good feeling it was right and make you stay in losers way beyond your original exit point because it does not like to lose. If you have ego issues, you will have a harder time knowing when to quit trading if you are ever faced with that decision.
On the other side of not being able to quit you have the people who are afraid to trade because they do not want to lose. So these people just end up walking through life in their sleep because they cannot pull the trigger. Under trading is almost as bad as over trading. If you are not comfortable trading, just keep your money in the bank where it is safe. Again, there is nothing wrong with this. You just don't need to be trading for a living.
At the end of your initial two years of trading you should ask yourself the above questions and then decide whether this really is for you.
What kind of person makes a good trader and what makes a bad trader?
- A good trader needs to stay focused while he is trading. This means if you cannot finish reading this sentence without looking out the window and saying "Oh look, a kitty," you may be distracted a little too easily to be a good trader.
- You must be good at following rules, especially if you wrote the rules. If you have report cards from your second grade teacher saying you had issues with following rules, you may have a little difficulty in trading.
- Being able to survive the isolation of trading is very important. This is not like an office environment where you have a cubicle buddy to share jokes with during the day. This isolation has to be dealt with or you could fall victim to placing trades because you are bored. Also, when you are in your office alone you will become more easily distracted. You may start to chat with friends on IM or start taking calls during the trading day. Ask any trader who has done this for a while and they will tell you of the traps you can fall into by being alone all day.
- Good traders know that the markets are forever changing and the only way they can capitalize on this is to keep up with the markets they are trading as they change. This is certainly a career where continuing education is a must. This simply means do not come into trading thinking there is some kind of pinnacle you need to reach and then you can rest. Trading is more about the journey than the destination.
- I will repeat the important fact that traders really need to understand that the markets are a probability business. Some people think trading will be easy just because they have a positive attitude. Well, that works well when the trades are winners. Once you have a string of losses your self confidence starts to waver a bit. This can lead to all kinds of problems for example, straying from your trading plan, trading on emotion, picking and choosing your trades instead of taking them as your strategy says – this is how you begin to pick the losers and let the winners go.
- Another very important asset for a good trader is having a passion for trading. You will need passion to survive the ups and downs of this business. Without it, you will give up very quickly.
In summary, trading is a tough business and just because you have acquired some funds for your account does not make you qualified to trade for a living. Spend some money on education before you trade. The tuition you will pay if you try and learn after you start is a lot higher. Keep in mind you must endure to succeed in this business. If you commit to learning how to trade and you allow yourself the time to absorb all the markets have to offer you in education, you will have a much better success rate. Remember, this is not a get-rich-quick scheme, but it can be a get-rich-slowly strategy if you follow all the rules.
While working on this article, I was having a little fun with my friend/fellow instructor, Debbie, and we came up with this list that we thought would be fun to read.
You might have trouble being a Professional Trader if you.....
- Have to take out a trailer equity loan to open your trading account
- Come into my class and make a statement like, "I just want to trade for the first hour of the day then go play golf"
- Have to use a life line to phone a friend, ask the audience or use a 50:50 before you can place a trade
- Think Shorting means not leaving a tip at the restaurant
- Hear somebody placed a hard stop and you think they locked up their brakes on their pickup truck causing them to spill their beer
- Come into a 5 day class and think that the following week you are going to quit your JOB and lay around the pool drinking foo foo drinks and trading for a living
- Reply to an ad for a trading system that guarantees you will make millions of dollars trading for only $29.95
- Have a trading plan that involves going to a pub before or during trading hours
- Tap into your neighbors cable box to get CNBC on your television but your wire is too short and you have to move your trailer closer to his
- Have the attention span of a gnat on crack and you cannot finish reading this sentence without looking out your window going "Oh look, a kitty"
- Call tech support because your cup holder does not go in and out of your computer anymore. Once there, they inform you that cup holder is actually a CD/DVD player
- Use up all your Ritalin medicine and you just had it refilled yesterday
- Don Dawson
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