Becoming an independent trader

[sdd80]

Dear all - I appreciate all feedback and suggestions on my questions and thoughts. Apologies in advance for the long post - just thought it useful to summarize my full situation to get best advice.

For 5 years I have been interested in becoming a independent trader. I am drawn to the flexibility of lifestyle, not having a boss, having geographic independence and so on.

I have read most of the classic books on trading, technical analysis, money management, psychology and so on. However, I have not executed a single trade, ever. From a theoretical experience I'm not a newbie but from a practical experience I am a total newbie.

What do you suggest as a next step in my education/path to becoming a trader? I think I've done enough reading and need to move on to something more practical. Should I sign-up for a training class; or hook-up with a mentor; or start experimenting on my own? I am fairly comfortable with experimenting on my own though I am not sure where to start in terms of developing a trading system. Perhaps the practical experience I lack is what's preventing me from having practical ideas to build into a trading system.

In terms of capital - I have around $300k in savings - yes I can lose all this money without impacting my life. I have read that insufficient capital is a problem for many new traders so am curious whether people think my capital is anywhere near sufficient. I guess it would be necessary for me to also state my goals, and please feel free to tell me my dreams are crazy or unrealistic if you really believe this.

In about 10 yrs time I'd like to be making $1million/year as an independent trader. To get there, I'd like to gradually transition from my current career into full time trading, without experiencing a significant impact on my annual earnings/lifestyle. I am currently in a successful consulting career and I make roughly $200k/year and if I continue in my current career I'll be making roughly $1 million in 10 yrs. This career choice is relatively safe, and the probability of my achieving that level of earning within 10 years is fairly high. However, I absolutely hate what I do and I will not be happy if this continues to be my life.

I am 33, single, no kids (that I know of), no mortgage or debt.

Thanks in advance for all feedback, suggestions, and criticism.

 

[sf631]

Your post caught my attention - I am in a somewhat similar journey. I'm a former strategy consultant (quit the lifestyle about 8 yrs ago) and I can empathize about the split personality of that path -- interesting, lucrative, generally secure, and somewhat miserable. I transitioned into an operating company (industry, not finance) role, found it somewhat dull, and after a couple of years into that path took an interest in finance and trading for the intellectual challenge of it.

Since then, it's been a very methodical (some might call it slow) journey. I'm still full-time employed, but now see a pretty clear path to trading for myself full-time, for all the same reasons you mention (geographical freedom being a top one).

I am running a few trading systems (more on this choice later) successfully, and need to build either my capital or rate of return, preferably both, by about a factor of 2x to feel comfortable cutting off my employment income stream.

So, given that I'm not fully down the path, but am further along than it sounds like you are, I'll share some thoughts. Take them with the caveat that I'm not fully where you seek to be, but am headed in that direction. As a former consultant, I'll use bullet points

* You absolutely need to start trading, for real, right now. Start small, where the gains/losses have significance but not that much significance. Paper trading is not the same thing, nor is reading books or building models. It's all psychology.
* Start with a $30K acct (you need $25K to get a margin account, so go a bit above that to allow for drawdowns). Even 18 months ago, I would have been paralyzed at the thought of a daily loss of a few hundred dollars (I'm not the vegas type), now my heartbeat doesn't rise until 10x that. If you want to make $100K a month, you'll need to be able to endure some pretty massive drawdowns without flinching, best to start now getting comfortable with $500 drawdowns so someday you will build tolerance to endure $50,000 losses (in one day).
* I strongly suggest a brokerage like Interactive Brokers, where you pay per share commissions (hint: choose unbundled fees) because you can scale much better. As long as you're trading in at least 200 share blocks, there isn't a real difference between the cost structure on a $25K acct and $250K and $2.5M (there is a real psychological difference though, so it will take a while for your mind to scale up). Trading at Schwab or somewhere will encourage you to trade too large because you'll be tempted to amortize the flat commission over a bigger trade, or alternatively you'll end up trading small and never being able to overcome the commission

* Consider systematic trading (i.e., program trading) using a platform like NinjaTrader or OpenQuant. I suggest this both because it's a very powerful way to get hypothesis driven and rigorous about your methodology, and because it makes it easier to time-shift your work to 9pm in the hotel room, weekends, whenever. Systems can be built and tested outside of market hours, being a fully discretionary trader really can't be done away from market hours
* Your goal of $1M per year in 10 years is admirable, and pretty lofty. $300K is a very nice starting capital base, but you'll need to grow it 16x to make large enough to have a reasonable chance at $1M a year w/o taking huge risks, leading to likely blowup. This means 30% per year *post tax*, without living off of any proceeds. That really means you're continuing to work, put some of your fat paychecks into your capital account, and living below your means (you're probably already doing this if you have saved so much $$$ in a decade). System trading makes this easier, but keep in mind that it's a lot of work, and these are aggressive numbers to hit. But you knew that already. IMHO, if you want to make $1M a year so you can grow your capital rapidly and eventually make 10x that amount, right on. If you want to make $1M a year so you can live large and trade from your yacht at the age of 43, you're headed for a blowup. Compounding is a great thing, but compounding only works if you keep your draws modest.
* A reading list suggestion, if you haven't already. Jack Schwager's Market Wizards series (3 books). They're interviews with mostly eclectic self-made trader millionaires that have come into the lifestyle from a variety of backgrounds, and have quietly done amazing things. I re-read these books every year or so, because they debunk the myth that "exceptional" performance is consistently beating indices by 5%. For a long while, my mental model was that I could make 15% per year return, max, on the assumption that the market would return 7 or 10% and truly exceptional edge would maybe double that number. Reading about guys that have posted 100% annualized returns for a decade changed my idea of what was possible. Now, I'm aiming for 50+% a year, hitting probably half of that, but not limiting my view of what's possible. This is necessary (but not sufficient, of course) because you need to keep a belief that what you're seeking is possible. Somewhere between the business school professors that claim it's impossible and the get rich quick schemers (some on this board) that claim it's easy lies the truth.

 

[Zen Student]

Quote from sdd80:

Dear all - I appreciate all feedback and suggestions on my questions and thoughts. Apologies in advance for the long post - just thought it useful to summarize my full situation to get best advice.

For 5 years I have been interested in becoming a independent trader. I am drawn to the flexibility of lifestyle, not having a boss, having geographic independence and so on.

I have read most of the classic books on trading, technical analysis, money management, psychology and so on. However, I have not executed a single trade, ever. From a theoretical experience I'm not a newbie but from a practical experience I am a total newbie.

What do you suggest as a next step in my education/path to becoming a trader? I think I've done enough reading and need to move on to something more practical. Should I sign-up for a training class; or hook-up with a mentor; or start experimenting on my own? I am fairly comfortable with experimenting on my own though I am not sure where to start in terms of developing a trading system. Perhaps the practical experience I lack is what's preventing me from having practical ideas to build into a trading system.

In terms of capital - I have around $300k in savings - yes I can lose all this money without impacting my life. I have read that insufficient capital is a problem for many new traders so am curious whether people think my capital is anywhere near sufficient. I guess it would be necessary for me to also state my goals, and please feel free to tell me my dreams are crazy or unrealistic if you really believe this.

In about 10 yrs time I'd like to be making $1million/year as an independent trader. To get there, I'd like to gradually transition from my current career into full time trading, without experiencing a significant impact on my annual earnings/lifestyle. I am currently in a successful consulting career and I make roughly $200k/year and if I continue in my current career I'll be making roughly $1 million in 10 yrs. This career choice is relatively safe, and the probability of my achieving that level of earning within 10 years is fairly high. However, I absolutely hate what I do and I will not be happy if this continues to be my life.

I am 33, single, no kids (that I know of), no mortgage or debt.

Thanks in advance for all feedback, suggestions, and criticism.

If it is true that you have $300k, firstly do not pay any of it to anyone for services. You can't buy access to useful knowledge in this industry. Knowledge which enables profitable trading is closely guarded by those who hold it and used by them to make money. The only way to buy knowledge is to invest in a fund - all the good ones are private / closed to new investors, which leaves you with the mediocre and the bad. Tough luck.

Second, do not start allocating chunks of your net worth for tuition expenses. You might be able to afford funding a futures account with say $15k and losing it all over a few months. You might even convince yourself that it helped you learn something. However I can assure you that the whole exercise would be a waste of time and money.

Undercaptialisation is an excuse. You need enough for 1 contract in a futures market with a decent range. If you can't make money on a 1 lot, having capital to trade 10 doesn't help you any more than being able to afford to lose $15k rather than $5k on a 1 lot. Assuming you can day trade accurately, going from 1 to 5 contracts in a few months with organic growth isn't unusual. Thereafter you are limited by the liquidity of your market so growth cannot continue at that rate. One million a year is very possible in futures - if you know enough to make this you can make much more.

Onto you and your goals. The main thing which stands out is that you are not happy in your current career. If this is the case, do something else. Money never made anyone happy and sacrificing your life to it is an utter waste. You will have lost some of your youth and vitality in 10 years and time is something you can never get back. We all get one chance to live our lives. Choose happiness for yourself and put everything else in the back seat.

You claim to be unhappy in this profession but think you can transition to making seven figures in the next few years. Surely your dislike of this will sabotage any such success. You already don't see this in your future.

Well how do you transition to trading? First, need to assess yourself to find out if you are suitable. This requires accurate self knowledge, accurate knowledge of what is required of a successful market participant, and analytical skills.

First, people bullshit themselves about who they are and what motivates them all the time. Know yourself and your motives.

Second, it seems that you do not have a relevant background which means you'll know next to nothing about markets and constructing accurate trading models. Major disadvantage. You might know yourself, but you don't have a copy of the "job spec" for what you are interviewing for. Capital is not the requirement. People are made to think that anyone with an account can have a go. This keeps the industry ticking over. Much like you cannot get a job from a poor man, only a certain class of individual has surplus wealth with which to speculate. So the markets cannot be funded by losses from the poor, but from the middle/professional classes. You are attracted by the lure of independence, good money, no boss, etc. This is the dream which serves to snare nearly everyone.

So lets get real? Are you a problem solver? How will you approach solving this particular problem, unassisted? You will be completely unassisted as those who hold the answers will not give anything more detailed than very general guidance. Without a background, how do you propose to get to grips with what makes markets move? It is possible to do so from scratch, by asking the right questions and applying logic and reason?

Sound like you.....?


If so, this will be an interesting and engaging challenge. Live trading will not happen for you in the next several years while you continue market research and constructing / testing an accurate methodology. You will balance this with your existing professional commitments until you are certain enough of your prospects to leave your current career, live from your savings, and start live trading with the minimum of 1 contract, growing organically from there.

A warning: if you are intellectually lazy, gullible, after easy money etc this is not for your. There will be many individuals who claim to wish to help you - the obvious ones will want payment for goods or services. They are easy to avoid. The more difficult will be the ones who seem to offer so much all for free apparently just to be helpful. They are the ones to avoid like the plague. They are getting something from you, and it is not the currency you wish to pay and likely not a price you can afford. Check who they are and consider their motives....

If you immediately understand why the truly successful keep quiet as mice and it is all the others who offer much help and advice then you may have the awareness to progress your learning further.

 

[wiesman02]

First you need to understand that out of 100 people that attempt this profession with similar goals and motivations as you, only 5 end up making it. 95 of those fail.

if you are willing to accept those odds, and are willing to lose your life savings, then go for it.

if you fail, you will be dirt broke, have a hole in your resume, and might have difficulty finding employment

If you are okay with the above scenarios then go for it !

 

[Zen Student]

Bloody hell, the first one to beat me to what I thought would be the first reply to this gentleman. And it proves my point!

Quote from sf631:

* You absolutely need to start trading, for real, right now. Start small, where the gains/losses have significance but not that much significance. Paper trading is not the same thing, nor is reading books or building models. It's all psychology.

No no no no NO. Emphatically no. Do not start dicking around in the market. It is not psychology. This is an excuse by people who have not done the work to understand. If your personality suffers from such issues that prevent the correct execution of a proven strategy then you are in the wrong business. You do not need to start engaging in inaccurate, unplanned, shoot from the hip gambling to assuage some fears about your psychology not being up to it.

Quote from sf631:
* Start with a $30K acct (you need $25K to get a margin account, so go a bit above that to allow for drawdowns). Even 18 months ago, I would have been paralyzed at the thought of a daily loss of a few hundred dollars (I'm not the vegas type), now my heartbeat doesn't rise until 10x that. If you want to make $100K a month, you'll need to be able to endure some pretty massive drawdowns without flinching, best to start now getting comfortable with $500 drawdowns so someday you will build tolerance to endure $50,000 losses (in one day).

No, you need $25k for an equity margin account. If you want 6:1 leverage, you can fund a futures account with $10k and trade 1 lot in the mini Dow futures. Exchange margin requirement is around $6k and IB discount this 50% for intraday positions. At $5 per index point there is plenty to spare. No need to ever fund your first live account with more than $10k or initially trade more than 1 lot when you have tested out your strategy.

This isn't about your heartbeat rising (a sure indication of uncontrolled risk and personality issues). $100k/month can be done at the rate of $5-8k a day with minimal drawdowns. Assuming accurate trading, you are looking at needing 10-15 lots in something like YM to achieve these returns. This shouldn't require more than $100-150k funding with possible risk around $8-10k in a worst case scenario. Accurate trading does not have "massive drawdowns" or "tolerance to endure" $XYZ big losses.



The rest of your post makes some interesting points, and I can see it is overall well intentioned. However, as you point out you are still doing the journey yourself. The attitude you have to risk / psychology / money management is not professional in my view. It is typical of the professional classes who have made a decently good income and have money to spare. This business is about optimising advantages and constructing accuracy. No need for haphazardness, gambling, blowups, etc to get to where one wants to go.

50% a year? Try 50% a month. 1-2% a day is very possible in futures, with liquidity limits not being an issue at the 1 million a year mark. Let the thread starter set his own standards for what he wants to achieve.

 

[Zen Student]

Quote from wiesman02:
First you need to understand that out of 100 people that attempt this profession with similar goals and motivations as you, only 5 end up making it. 95 of those fail.

Not relevant.

Quote from wiesman02:
if you are willing to accept those odds, and are willing to lose your life savings, then go for it.

Those aren't his odds and have nothing to do with him.
Dirt broke and risking everything on the spin of the roulette wheel not a requirement, sorry.

Quote from wiesman02:
if you fail, you will be dirt broke, have a hole in your resume, and might have difficulty finding employment

Yes, this bollocks is talked a lot by employees as a means to justify their caution in remaining employees. Daren't take a chance on yourself because if you "fail" then your life is over.

A gap on a resume. Big deal. How many people have them because they trusted their employers to remain in business and continue to employ them? The most conservative route isn't necessarily the safest. Bottom line: done well, trading is one of the most secure industries to be in, and done well after a few years in you'll never need to put out a resume ever again.

Unless you are a masochistic failure, you needn't bankrupt yourself or ruin your life if trading is not suitable for you.

 

[sf631]

@Zen, I don't take offense to your differing viewpoint - many paths, no single path is right for all.

You're right I'm straight equities, not futures. There are, no doubt, great riches to be had from the built in leverage offered by futures, but not my style. I will also concede that the goal of making $1M a year is something more suited to a futures trader than an equities trader, given the account size being considered. Maybe yours is the right path given the sort of returns being sought.

I think it's flawed reasoning, however, to tell someone to go back and study more until they've got the "correct" execution of a "proven" strategy. I don't endorse haphazardness or shooting from the hip, but I also don't believe that anyone figures out the "right" approach on paper, then starts executing live. That's magical thinking, and this board is littered with sad stories of those who have gone down this path.

The OP also needs to find out sooner than later if this is something really right for them. And yes, right for their psychology. I stand by the suggestion that you need to trade real money before you can decide whether it's a fit. He has $300K in capital, and I think on a $30K (equities) account, would stand to make or lose $5K max in the next year, with a very, very, very low chance of blowing that account up. I also don't believe in the idea of "tuition" to the market, but I continue to think there's a level of clarity that comes from live trading that further study will never provide.

It's really up the OP to determine what path is best suited for him - just trying to share one trader's perspective.

 

[HATEtheRisk]

You can do it, man.

Just start and learn.

Listen to Zen Student.

But if can give you only one advice.

Dont touch your 300k, before you are not have done a great performance of at least 100 trades on a demo or paper.

And if so, then only start trading with maximum 10k and build it up.

Once you have build it up from 10k to 300k. you could put all your 600k together and push your account. or not. how you like.

But dont throw all your money into the markets, you must lose.

Stupid retarted people always think, to make money in the markets you need money.
Wrong, totally wrong, there is nothing what could be more fucking wrong than this incredibly fucking damitt stupid statement.

You dont need much money to make much money, you need experience and selfdiscipline and a library full of statistics for a perfect real working strategy weapon arsenal.

Trading is war and you are a soldier.
But you only have now the licensce to fight on the battlefield (= money).

But to win in the battle, it needs more, much more.

----------
Dont go into a trading class or waste money with courses and seminars.

Get yourself a good charting package and start to analyze the markets.
You might buy yourself a book about statistics - especially about stochastik and how does it work.

Because trading is all about stochastic - means about to analyse probabilities and how to forecast them and then how to react right on them, while watching them, and react if they change.

Trading is betting on odds.

You must become a probabilites scientist.

http://en.wikipedia.org/wiki/Stochastic
http://en.wikipedia.org/wiki/Combinatorics
http://en.wikipedia.org/wiki/Probability_theory

Some important words for your journey: Statistic, stochastic, Combinatorics, backtesting, forwardtesting, selfdisciplin, selfsuggestion, betting strategies aka risk managment.

 

[Zen Student]

Quote from sdd80:
In about 10 yrs time I'd like to be making $1million/year as an independent trader. To get there, I'd like to gradually transition from my current career into full time trading, without experiencing a significant impact on my annual earnings/lifestyle. I am currently in a successful consulting career and I make roughly $200k/year and if I continue in my current career I'll be making roughly $1 million in 10 yrs. This career choice is relatively safe, and the probability of my achieving that level of earning within 10 years is fairly high. However, I absolutely hate what I do and I will not be happy if this continues to be my life.

I am 33, single, no kids (that I know of), no mortgage or debt.

Thanks in advance for all feedback, suggestions, and criticism.

I shall take another stab, hopefully we can shortcut all the round the house discussions about each members own viewpoints and experiences and just address what needs to be done.

Full time trading. This means daytrading. You are not a massive fund and therefore do not need to scale in / out of positions over multiple days. So you establish and liquidate your positions intra day, not holding overnight / longer.

So your scope is what can be pulled out in a single day. Choose a liquid volatile market eg YM. Your objective is to make as many points as possible out of the ranges provided by each day. At a minimum, this means taking the bulk of the main biggest move of the day, every day. Build from there.

Requirement - accurate model to tell you whether the main move is up or down on that day. You are not looking to make losses on any given day.

Using YM as an example, an accurate and refined day trading methodology will be taking at least 40 net points daily in the current volatility. This represents $200/contract. You can trade 1 contract for every $10k in your account, for 2% a day return on your margin. Every 10 weeks, you double your account and position size, adding 1 contract for each $10k profit. By the time you reach 50 contracts, you will have your million a year. Grow from there.

Expect to spend several years devising the methodology required to get the 40 net points daily, or however many you end up with depending on how accurate your model and whether you include the smaller movements within the bigger picture "gyrations".

If you are looking for a "mentor" of sorts, try searching for posts by "cheese" on this site. He gives no details and makes no personal claims, however some of the information is valuable in terms of where to start.


All "textbook" stuff is wrong and won't make your fortune. This mission will necessitate private study. Attached is an example chart last week YM intraday trading, 09.30 - 16.00 EST, each bar representing 5 minutes. Greens are buy indications, reds are sell indications, light blue is exit locations. Giving just 9 macro trades for the week yields 615 points for the week, or just over $3,000 per contract traded after commissions. No overnight holding is necessary. It is possible to construct this type of accuracy. These are main leg trades without adding any lower timeframe signals, short term target trading, or other refinements.

You'll notice that twice it is necessary to go at the open to capture the main or a decent sized leg for the day. If you put the last 1000 YM sessions into a spreadsheet you will see that the high or low of the day occurred within 8 minutes of the open a considerable percentage of the time. You'll also notice that some days while there are "micro" trades available the gyrations of they day only really offer one major leg to exploit, such as last Tuesday.

So set to thinking how you can get the function of each day, where it occurs in the cycle, and sort by templates across various timeframes. Analysis of price and time data is a step in the right direction.

This chart is simply an example of the type of trading which can be done. 600 YM points a week is certainly good enough to get to where you want to go, quickly. 2-300 points a week is also very good and will still get you there. Even 100 a week is not a slow process to compound. The key is accuracy - losing days should not be tolerated and understanding should be improved to the level where losing trades are a rarity. That is the level of understanding we are discussing for big success.

 

[Zen Student]

Quote from sf631:
I think it's flawed reasoning, however, to tell someone to go back and study more until they've got the "correct" execution of a "proven" strategy. I don't endorse haphazardness or shooting from the hip, but I also don't believe that anyone figures out the "right" approach on paper, then starts executing live. That's magical thinking, and this board is littered with sad stories of those who have gone down this path.

My observation of those sad stories where live execution results do not match the expectation is usually one of two obvious errors. The first being that through a backtesting fetish or curve fitting the trader has learned how to predict what worked in the past, which isn't necessarily profitable going forward. The second is that the "proven" strategy is simply a hodgepodge of untested or poorly tested assumptions with no logic which falls apart under the rigours of live testing.

What other advice can there be other than study until one understands how the market functions?

Quote from sf631:
The OP also needs to find out sooner than later if this is something really right for them. And yes, right for their psychology.

It starts with doing useful work on a trading methodology. If the OP isn't creative enough or a good enough problem solver to get anywhere devising a methodology, then he will find out sooner rather than later indeed. End of mission, do something else.

What is likely to prolong the necessary "sooner than later" is latching on to textbook stuff, forums, discussions with other wanabee traders, and various ventures down well trodden paths known to go nowhere. Even worse to get stuck in live, as inevitably he will know that he doesn't know and make emotional decisions. Then very easy prey to the "it is all your psychology" crowd - and he can spend years trying to repair his emotions without even the beginnings of a successful method.

Quote from sf631:
I stand by the suggestion that you need to trade real money before you can decide whether it's a fit.

On this point you are right as one could invent a successful methodology and not be robust enough to carry it out. However the time to find this out is when token trading the reliable method, not before devising one.

Quote from sf631:
He has $300K in capital, and I think on a $30K (equities) account, would stand to make or lose $5K max in the next year, with a very, very, very low chance of blowing that account up. I also don't believe in the idea of "tuition" to the market, but I continue to think there's a level of clarity that comes from live trading that further study will never provide.

The only clarity can be whether results meet expectations. Expectations should be based on a carefully considered and tested model so in most cases when the work has been done thoroughly should be in line. Making or losing $5k over the course of a whole year - a lot of time being spent on making decisions and executions and too little time in doing the research. Any outcome in the range of -/+ $5k on $30k account in 12 months is insufficiently successful for the OP's purposes.

My basic premise here is that there is value in the road less travelled. What does everyone do? Gets stuck in. Follows technical analysis, gurus, textbook stuff on the Internet, pop psychology. Starts with spare money, doesn't take it seriously enough, makes provision for "affordable losses". What do they get? The losses they so dilligently budgeted for.