The Real Cost of being a Proprietary Equity Trader

Quote from lescor:

It sounds like that article is basically saying that day trading can be tough, that you can encounter all sorts of problems and that you won't necessarily make as much as the advertisements claim.

And the premise of your sounding the alarm bells on the dangers of prop trading (although I infer from the article that you refer to this means daytrading in general) is based on this?

Anyone who endeavors to start trading as a career and does not fully understand all these issues upside down and backwards deserves any pain that the market metes out on them. It's not like the prop firm's advertising is the only form of information on what it takes to trade for a living. The resources are endless, this site being the main one I recommend to everyone who asks me about trading.

There is simply no excuse for failing and then saying "I didn't know", or "I was duped". None. If that is your line, then you probably failed because you can't take responsibility, not because you were taken in by the hype of the big bad prop firm.

When you step up to the plate, you know the risks. And if you don't, then you shouldn't be in the game.
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Corey,

thanks for the participation, however, this isn't about me, or my success, certainly not failure....

its about being aware and openly discussing the realities....care to post your real or imagined expenses and how running your trading business has gone? Most of the traders so far, have not, and I don't care to speculate why, nor will I draw negative conclusions as to why. (hint)

again, by sheer coincidence this article hit the stands at/around the same time as this thread....

beside, there were more paragraphs to that article...so there's more to it before it finishes...

perhaps one might ask the writer what his motives were in publishing that article, and some of your questions might be better suited to him...(just a thought)
 
Don.....One Question?

Why have you not allowed your traders access to other products?
The futures groups have attracted most of the quality equities guy left OVER AFTER THE BUBBLE?

WHY HAVE YOU NOT ALLOWED OPTION AND FUTURES?

JUST WONDERING?

CT
 
I read this site from time to time, but finally decided to register so I can respond to this post.

I have been a prop trader since 99. I ran a group of 25 traders a year into the business. We were big swingers and most of the guys made a killing. Here are some of the most important things I learned about this business.

Some people are doomed to failure because of their attitude.
Some people will fail because of their expecations. Others will fail because of their work ethic. And still others will fail for the usual reasons, discipline, money managment, etc.. If your serious about being a trader here is what I suggest:

First, start with a reputable firm where you dont have to worry about any capital investment you put in. Second, work for a group that has succsesful traders. I mean guys that are making atleast 2K a day on 100K tickets, a 2-4 cent average is a good trader on that volume. The most important thing to be succsefull is to have a good mentor, someone that will work hands on with you. This person will have a stake in you and you will probably not have a great deal. But that doesnt matter at first, the main thing is to learn to be profitable. Any good trader who can make those numbers will have a good enough system for you to learn.

Allow yourself atleast 6-9 months of learning and not making any money. You are launching a business it takes time to get it off the ground. If you have pressures to make money to pay expenses, you will put too much pressure on yourself and increase the chance of failure.

Stay away from negative people, negative perspectives. I read so much of it on this site. LEARN from your mistakes. Memorize every day in the market. If you trade XYZ, watch every trade go off, watch every level 2 movement. At the end of the day go over the charts, go over what happened and what could have tipped you off so you can look for it next time. STOP being pessimistic and starting working your ass off. ASK QUESTIONS. Figure out why something happened. I have learned so many patterns that institutions display when buying or selling, that over time I saw them get smarter and trade better for more liquidity.

Don't trade for pennies, trade for momentum, trade for the dollar. Trade stocks that move. Start with 100 shares, take your licks, and learn how to punch back. The best type of trading for me is when I know I am right or wrong right away. That is trading at the moment of truth. When you learn to be right, you will learn to punish them. When your wrong get out. Take losses, its part of the business. Dont be emotional, trade like your a computer. I hear all these guys talk about all the programs in the market. The programs have brought trading back for the real traders. The programs provide alot of liquidity and volatility in todays markets. I love them. They are so predictable.

Just some thoughts...

Also, I consider myslef a high volume trader but I have nowhere near .0015 in comissions. I'm more at .004 and .0035 at another broker. Those costs are all inclusive, NO OTHER CHARGES. So I dont know about all those fees that everyone is listing. Can someone tell me who is offering these rates at .0015 -.002. I would make so much more money at that rate. Sounds like a clearing rate to me.
Thanks.
 
Great post SDLI. I do have a question about your advise though. You said to find a group of traders that are consistently making 2k/day on 100k shares making 2 to 4 cents per share. In another paragraph, you said to not fight for pennies go for momentum and dollars.Is that not a contradiction?

Thanks
 
Quote from TradeCobalt:

Don.....One Question?

Why have you not allowed your traders access to other products?
The futures groups have attracted most of the quality equities guy left OVER AFTER THE BUBBLE?

WHY HAVE YOU NOT ALLOWED OPTION AND FUTURES?

JUST WONDERING?

CT
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That's simple, there's not enough money in futures for them. They make more money off of stock commissions than they would off of futures. I would speculate that his answer though will be something like this: Futures is a zero sum game, Stocks are not. Why are stocks not a zero sum game? Because stocks have earnings and that is where the edge lies.
 
Ken, I wasn't referring to you personally in my post, so please don't take any offense.

Yes, we're openly discussing the realities of trading in this thread. My argument is that these realities are so self-evident than anyone contemplating entering the business would fully know them ahead of time. You seem to be taking the angle that the truth is hidden by prop firms, that they are essentially pulling a bait and switch on starry-eyed wannabes.

No doubt there are uninformed people entering this business. People with very unrealistic expectations of what's involved. In fact the high failure rate would suggest that those people represent the majority of those who step up and take their shot. The point I'm trying to make is that those people are 100% responsible for not doing their homework. It is not the fault of any prop firm, whether they made grandiose promises or not.

As to the motivation of the writer of the SFO article you posted, I'd venture to guess it's a pay check. The article is nothing more than a re-hash of the story told umpteen times over the last decade: "Day trading sucks in dreamers who are enamored by the idea of making gobs of money with no apparent effort and who love the rush of it. Most end up losing their money. Daytrading is a losing game according to such and such a study, blah blah blah." Magazines need content, writers need income. No earth-shattering revelations in this story.

Since you asked, my real trading expenses run about $1000/month for things like market data and news subscriptions, office expenses, supplies, etc. I have about $10,000 in computer hardware that is paid for and constantly depreciating. I am probably well on the high side of most people who trade from home, but to me it's low overhead for the kind of business I run.


Quote from limitdown:

Corey,

thanks for the participation, however, this isn't about me, or my success, certainly not failure....

its about being aware and openly discussing the realities....care to post your real or imagined expenses and how running your trading business has gone? Most of the traders so far, have not, and I don't care to speculate why, nor will I draw negative conclusions as to why. (hint)

again, by sheer coincidence this article hit the stands at/around the same time as this thread....

beside, there were more paragraphs to that article...so there's more to it before it finishes...

perhaps one might ask the writer what his motives were in publishing that article, and some of your questions might be better suited to him...(just a thought)
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I am sure he means that 2-4 cents is an average which can be very good. I dont think he means look to catch 2-4 cents and get out. On your winners, you'll catch lets say 80 cents and your losers you'll lose 5-10 cents. Over time, if you avg all your trades, you'll be ahead say 4 cents. I believe thats what he means. I could be wrong though...

Quote from GATrader:

Great post SDLI. I do have a question about your advise though. You said to find a group of traders that are consistently making 2k/day on 100k shares making 2 to 4 cents per share. In another paragraph, you said to not fight for pennies go for momentum and dollars.Is that not a contradiction?

Thanks
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Steve is correct, I mean an average. $2000 on 100000 shares gives you a 2 cent average, but you dont want to get there by trading for pennies. You can work out whats a good risk reward for you, but I usually like to only lose 5-15 cents and try and make over 45 cents. And the number of shares I'm trading should tell you that I am getting in an out and minimizing risk and taking profits.

Once again, I have been in the prop business from average commissions of 2 cents to where they are now around .004. As a trader that works for a firm, they provide everything, software, analytics, news, sqawk, no desk fee. So the only expense I have is a per share rate as I mentioned. Does anyone reccomend any solid firms with a great system that I can get commissions under a similiar setup for under .003?
 
continuing the current Octover 2005 article.... (there's a limit of characters on each post to being under 10,000 words, so I had to break up the article into pieces)....http://www.sfomag.com/homecoverdeta...ber&YearID=2005


continuing article


Is Anything Moving Out There?

Finally, there is the timing aspect of the day-trading environment. Good day-trading environments come and go. The day trader does not always have a continuous opportunity to cull profits from daily price fluctuations. The most deadly environment is one where there is very little movement. System sellers will insist that there are always stocks and commodities that move. All you have to do is find the right market at the right time. For example, the S&P 500 Index futures contract is one of the most popular day-trading vehicles. This is because the full S&P futures contract does not have to move very far to generate large gains. Leverage is impressive. Hardly a day goes by without modest price fluctuations. However, sometimes stocks and commodities reach a state of equilibrium. If intraday price ranges lack the breadth to realize profits, no day-trading method is going to work.

System developers encourage participation by pointing out the massive number of trading vehicles available. Foreign exchange, precious metals, penny stocks, new offerings, bankruptcies, mergers and acquisitions all have associated volatility. Federal Reserve policy can send markets soaring or crashing hundreds of points for profit potential in the thousands of dollars and hundreds of percentage points. But what if volatility dries up?

There is a tendency to become restless and impatient when markets fall into a volatility slump. It is in this environment that day traders become careless, over anxious, greedy and even desperate. A fundamental and exceptionally important rule is expressed by the saying, “You can’t squeeze blood from a stone.” In the day trader’s world, you can’t squeeze profits from an inactive market. Whether you use a ratio-to-open approach, swing trading or a random walk simulator, there must be enough intraday price movement to trigger your decision-making process, enter your trades and take your profits. It may be true that the current global economic picture is ripe for continuing intraday volatility. It is important, however, to accept the possibility that favorite day-trading vehicles can calm down or, alternatively, become too efficient to ante up intraday profits.
 
continuing the current Octover 2005 article.... (there's a limit of characters on each post to being under 10,000 words, so I had to break up the article into pieces)....http://www.sfomag.com/homecoverdeta...ber&YearID=2005


continuing article



Too Much Going On?

In sharp contrast, there also is a problem associated with excessive volatility and huge losses associated with some of the more popular day-trading markets. Most recently, crude oil and its sister products staged a massive intraday reaction to the potential damage of Hurricane Katrina. Depending upon when you assume the day begins, the evening session on Sunday, August 28 witnessed a swing in crude exceeding $4 and a contract change in natural gas approximating $20,000 per position. Within 12 hours of the reaction, energy markets retraced more than 60 percent. Any glitch in a day-trading methodology – inclusive of order entry and tracking – could have spelled disaster. In fact, some brokerage firms suspended day-trading privileges in the energy contracts as a preemptive measure against uncontrollable losses.

Consider that after trading a year or more for little bits and pieces of profit, the day trader’s entire effort could be canceled by a single volatile and unpredictable day. In fact, Katrina herself was a fooler that went from a non-event tropical storm to a Category 4 hurricane in about a week.

As astute investors realize day-trading drawbacks, they may set the stage for a swift and comprehensive exodus away from day-by-day techniques.

Take the Time to Make Wise Decisions
Not long ago, I attended a day-trading symposium in Las Vegas, Nevada. I was immediately struck by all the presentations that boasted perfect records. I thought to myself, “Wow, no one ever talks about losses around here!” Track record upon track record suggested Las Vegas was El Dorado in disguise, and every booth at the symposium had a copy of the key! When I played with the numbers and researched some of the claims, it was apparent that performance was reported absent of any of the pitfalls. Disclaimers should be taken seriously! Like any eternal optimist, I’d like to believe there is a way to get rich by spending just five minutes day trading in front of a computer screen. In fact, I’d be happy if it was as much as ten minutes a day.

One thing I have learned is that an entire day in front of any trading platform requires a personality few traders have. Whether you believe in the Almighty or not, we know that our time on this earth is limited and there is no physical evidence of a return trip once we pass on to the next life or simply get planted in the ground. Thus, time for every day trader is truly running out, and it is wise to make a definitive decision about whether such acute trading is worth the potential toll on time, resources, and even health. Keep that in mind when you set out to make your fortune day trading!
 
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