Reader Questions Answered

Professional Trading: How Long to Get There, Are Good Genes Required?

I got a set of questions from a member of my mailing list over the weekend. They bring up issues that are the source of some intense debates among traders at times.

How long does it take for someone to be a professional trader?

How is preparation to trade successfully compared to training of an Olympic medalist?

Is trading hard or easy?

Is talent required to succeed in trading like genetics in sports?

Let me take the hard/easy question first.

The actual act of trading is incredibly easy. Click a button and you can buy or sell instantly. Anyone can be taught to do that. Trading with consistent success is definitely not easily accomplished. Actually, I should say that successful trading can also be easy, but the path to get there is most definitely on the hard side for just about everyone. To relate it to sports as the questioner has done, high level athletes are often said to make the execution of some skill look easy, but we know it took many hours of dedicated training and practice to reach that point.

Now, in terms of how long it takes to become a professional trader, that depends on how much consistent work and effort is applied. I’ve heard that bank training programs intended to bring a new person up to the point where they can be depended upon to handle the firm’s (and/or its customers’) money without doing too much harm can run a year or longer. That’s usually a combination of classroom work and on-the-job training with an experienced guide. If you figure 40 hour work weeks for 50 weeks a year you’re talking about 2000 hours.

Even that might not be enough time, though. I’ve mentioned previously the idea that 10,000 hours are required to gain a high level of proficiency (see this Trader’s Narrative article). That’s five years of 40 hour weeks, which actually just about fits. I think you’d probably find that the good Wall Street traders have at least that much time on the desk in the majority of cases. There are ways to speed things up a bit, perhaps, but it’s still a lengthy and involved process. In that respect it is akin to the development of an Olympic athlete.

As for genetics or talent, I can’t say with any authority. Obviously, some minimal level of mathematical ability is required. Beyond that you start getting into the nature/nurture debate. I personally think both are required and to some degree more of one can offset less of the other.

Reader Questions Answered

Learning Trading from Scratch and Starting Small

Here’s a pair of questions I received recently. They are from a brand new trader and really do well to reflect the types of questions and concerns people just coming into the market almost always have.

I just started off using the FXCM Micro demo account. Since the the account is demo, and it is loaded with $5000, i trade as if it is a game and gain some profit. so after a few days time, I register a LIVE account, but with very small capital like $150 only. Trading on LIVE account has different experience, i have more fear. And I hardly gain profit due to unable to maintain the margin of slightly bigger fluctuation.

So, the questions that come across my mind is:
1) Is that possible for a person with really small capital to gain profit (or generate profit to increase the capital) from the Forex trade?
2) Can a self-taught person learn Forex from scratch without attending courses (maybe because of financial status limitation) ?

My questions might seem naive but I do hope there is some one that could enlighten me with some advice. I am really looking forward to hearing from you again.

First of all, readers will have seen me say on a number of occassions that live trading is different from demo trading. This note confirms that. It’s why I have said repeatedly that I’m in favor of new traders getting their feet wet in real-money trading (with a very small deposit) as early as possible.

As for the questions:

Can someone with a very small amount of capital make money in forex?

Absolutely. A major advantage to forex trading is that the barriers to entry are low. It’s possible to trade small positions, and with the likes of Oanda you have no minimum account balance or trade size.

Having said that, if you start with a $100 account you cannot expect to make big dollars in profits. Even if you make huge percentage gains you still won’t have made much actual cash. That being the case, your best approach is to focus on the % return and not on the actual dollars. If you do that you will get a lot more satisfaction out of your successes.

Also keep in mind the power of compounding. You can start small, but if you generate consistent gains, and make contributions to the account along the way, you can actually turn that into a decent amount over time.

The thing to be avoided, however, is trying to swing for the fences. Many small account traders think “It’s only a little amount of money. It doesn’t matter if I lose it.” Then they max out their positions and take a big loss. You’re not going to grow your account that way, and the losses can be extremely deflating.

Can a self-taught person learn Forex from scratch without attending courses?

Again, the answer is “Yes”.

I need to add in a big “but” here, though. Trading education resources like books, videos, courses and such accelerate the learning process. For example, you’re going to move much more quickly along the learning curve if you read an book explaining things like price quotes, calculating P&L, margin and leverage, and order types than if you just fumble your way along. Think about how long it takes to read a book vs. how long it takes to work through all the inevitable basic errors and misunderstandings that are bound to come up without that initial knowledge.

This early part of the learning curve is something where educational resources are most helpful. That’s why I wrote The Essentials of Trading. Once you get beyond the introductory education, experience becomes the most important driver of knowledge and expertise.

Now, having noted the value of basic education, I am not a fan of people paying huge amounts of money for it. I’ve heard of new traders spending thousands of dollars on seminars and such. That’s a massive waste is almost all cases. You should only ponder a higher expense course or program after you have a good foundation and a strong awareness of where you need to develop your know-how and skills.

Trading Tips

Good Trading Goals: Focus on what you can control

Alex at My Trader’s Journal got me thinking about objectives with his 2009 Goals blog post. In it he discusses the goals he is thinking about setting for his trading this year. He’s got one or two things he talks about fixing in his trading moving ahead, but a big part of his thinking seems to be on performance.

Performance based trading goals
I am not personally a big fan of traders making goals to achieve some given % return for the year (or any given timeframe). The simple reason for this is that whether you achieve your objective or not tends to be based on things out of your control. By that I mean for most traders the market is the biggest deciding factor in whether a given performance objective can be reached (or exceeded) than anything else. If the market just doesn’t provide the good opportunities you need, there really isn’t anything that can be done. In that case, missing the performance objective doesn’t come down to anything you could do or have done.

The exception to that general rule is traders who have short-term strategies which produce a high trade frequency. That high trade volume tends to produce a higher level of performance consistency and predictability.

Execution based trading goals
What I do like to see traders have is objectives based on execution of desired actions – things they can control. For most traders this often boils down to not doing something which has consistently proven detrimental to performance. Trading against the longer-term trend is an example of that. Not trading in the US afternoon might be another some forex traders would have. Or, to put them more positively, trading with the trend and trading in the more active times of the forex trading day.

The idea here is to develop consistency of trading effort and execution. If you consistently do the things you should and avoid the things you shouldn’t, then the performance will tend to follow.

It’s like I used to tell my players when I was coaching: You cannot control what other people do or what external events may impact you along the way. You can only control your own mindset and efforts, and how you react to things. Focus on that and good things will happen.

Deep Posts Trading Tips

Keeping Perspective – You’re Not “A Trader”

One of the things everyone who trades needs to do is to keep things in perspective. Trading is something we do, but it’s not the only thing we do. There are a great many other parts of our life and what makes us who we are. Trading needs to account for that and be incorporated into your life in a compatible, supportive fashion.

Be cautious about identifying yourself as “a trader”. I say that because when you label yourself in that way you automatically create an association in your mind based on what you have come to think of as a trader. That association will have been built up from all the things you have seen, read, heard about, and experienced in that regard – much of which probably has absolutely nothing to do with you specifically.

That last part is the key. Trading is a very personal thing. No two people are going to trade exactly the same way. When you think of yourself as “a trader”, though, you associate yourself with actions and perceptions and images which come at least in part from other traders. That image in your mind may create internal conflict which hampers your performance.

So thing of yourself as “someone who trades” rather than as “a trader”. It could help to release you to trade the way you are capable.

News & Updates

Catching up after a bad long weekend

I’ve been a bit under the weather of late, so I’m in catch-up mode when it comes to answering questions which have been submitted to me. There have been a couple of very good ones, which I will definitely be getting to shortly. In the meantime, I’ve seen some interesting stuff from my fellow bloggers I thought were worth sharing.

One interesting bit comes from Brett Steenbarger. He periodically takes a look at his blog‘s readership with the view of it being a contrary indicator. The idea is that when readership spikes it indicates traders’ feeling the strain and looking for answers. Brett isn’t the only one to have made that observation. His latest observation is “The pattern of readership of late has been consistent with tops, not bottoms, in the market.” This fits in well with what I’ve seen in terms of the Commitment of Traders data and the VIX.

Brett also posted The Psychology of Mechanical Trading Systems. As much as I am primarily a discretionary trader, I’ve long had an interest in the mechanical side of things. The common reason many folks speak in favor of trading mechanically is taking the emotion out. There are some good arguments that one can never really do that completely.

The theme of my Those Who Can’t Trade Teach post from a couple weeks back has been picked up by Ray Barros. He’s posted a two partner on his blog: Can Teachers Trade – l? and Can Teachers Trade – II?. I’m going to get back to that subject before too long here as there have been a number of good comments to my initial post worth addressing. Ray makes very good points as well.

Trading Tips

When the market rallies that fast, beware

Yesterday was a classic stock bear market rally of the sort which happens when the market reaches extreme sentiment situations. Obviously, things had gotten extremely negative. The VIX crossing the 30 line was a major warning signal. The good news is that it tends to mean that some of the tone has moderated and things are likely to be a bit more rational in the near term. The bad news is that once the reverse froth has come out and traders realize that all these financials beating expectations doesn’t actually mean they are doing well, there’s a very real risk that things turn lower again.

Barry Ritholtz wrote a very good piece on his blog on why these sorts of things happen – what he calls the psychology of selling. Definitely worth a quick read.

Trading Tips

Why New Traders Fail

There is a discussion on the Trade2Win forum regarding the reason why new traders so often fail. Here is a set of very, very good reasons posted by a member who goes by BSD.

Most newbies fail because they are not in this to make money, they are in this to satisfy a primitive urge to be proven right.

Most newbies fail because they never learn to seperate their ego from their money making needs.

Most newbies fail in this because they never manage to identify what is success relevant; or if they do, they never manage to develop the discipline to actually do it.

Most newbies fail because they never learn to rid themselves of the no-fail identification mark of the eternal net loser: pointless obsession with win rate.

From my experience, these answers to the question cover a very large portion of the new trader population. They reflect the fact that most new traders don’t come into the markets with the right mindset. The ones who eventually succeed correct that. Those that don’t mostly end up quitting out of frustration or blowing themselves up.

BSD also makes a great many other very good comments on the subject. I encourage you to give them a read here.