Monthly Archives: November 2006

Sacrifices of a full-time trader

Many individuals who hold down a full-time job and trade the markets in their spare time, harbour the desire to trade on full-time basis. It is a very enticing proposition. Over and above your trading record and the reliability of your trading approach, I think it is important to consider the significant sacrifices involved in making the transition:

  • Security of full-time employment: Perhaps even more important than the absolute level of income is the fact that an income stream from an employer is usually stable. This regular paycheck stream can be matched up against routine expenses like food, rent, etc and in most cases, will leave you with a little spare change for your long-term savings account. A full-time trader either needs to have an asset that generates enough cash to make these routine payments – bear in mind that a £100,000 asset will be lucky to generate to 5% pa (£5000) after tax – or they are in a forced position of having to try to generate the cash from the their trading accounts (welcome to my world). 
  • Income growth: Most people’s pay-packets will grow by an amount that beats inflation, and will often be supplemented with end of year bonuses.
  • Realistic expectations and your bank roll: The very best hedge funds (eg: Quantum, SAC, Citadel) consistently make or have made around 20-30% pa. They have the very best minds working for them, will often throw money at technology, and usually have decades of experience. If you set your aims in this context (ie at a more modest level), it becomes obvious that a substantial bank roll to required to make a decent living from your trading activities. A reasonable minimum level for a rational investor would probably be around £100,000 (plus the asset required to generate a regular income stream). This is what I think is required to stand a reasonable chance of success. It may also explain help to explain why so many traders fail at the retail level; they just don’t have the resources to take a measured approach.
  • Acknowledgement and interaction with peers: We are social animals and unless you are operating from a trading arcade, trading can be a very isolated activity. This is not natural and can be get quite depressing over time. In the workplace you can bounce ideas of other people and you get feedback on your efforts. In most cases, your presence is appreciated. In trading, however, your sense of self-worth has to come from within.
  • Other perks of the pay-check: These include things like health cover, insurances, and pension contributions from your employer and paid holidays.

I hope these points underscore the idea that making the decision to become a full-time trader is not a decision to be taken lightly.

As a trader, I believe my objectives are noble, but I’ll confess that I glossed over these sacrifices when I made the decision to start trading on a full-time basis. That was my first bad trade.

the3500 roadmap

I have decided to follow the advice in one of Rocko’s comments, and have created a road map. It is not necessarily a road map to success, nor does it outline my trading strategy in any detail. What it provides is a compilation of all the useful advice that has been generously contributed by readers over the past week. It is a road map of trading behaviour, an explicit reminder of what to do and what not to do.

By keeping this advice close at hand – it is posted just above my computer – the aim is to use it as a daily reminder to help promote my strengths and keep my destructive behaviours at bay. The positive points that I need to focus on are highlighted in yellow, and the negative points are highlighted in green.

Over the past week, with the help of others, I have better recognised and identified my weaknesses (although I am sure there are some still lurking under my introspective radar), and it has culminated in this road map. The next step is to take action. This is harder, although I am already taking gradual steps in the right direction.

Special thanks to the following readers for putting in the effort to helping a struggling trader: Brett Steenbarger, Michelle B, Rocko, LP, nonadams, femi, Paul, Don C, adalfu, and indirectly: Victor Niederhoffer, Fyodor Dostoevsky, and Miyamato Musashi (The Book of Five Rings). If you look carefully, you may be able to spot your names on the trading plan.

When I report my trading results at the end of each weak I will also provide a brief comment on how well I have followed this behavioural road map of trading.

The Gambler and other gambling quotes

fyodor1.jpg

In an effort to overcome my weaknesses, I started investigating the subject of gambling and came across a quotation that strongly resonates with my experience. It is from ‘The Gambler’ (by Fyodor Dostoevsky), a book I read a while ago but didn’t learn from.  

‘At that point I ought to have gone away, but a strange sensation rose up in me, a sort of defiance of fate, a desire to challenge it, to put out my tongue at it. I laid down the largest stake allowed – four thousand gulden – and lost it. Then, getting hot, I pulled out all I had left, staked it on the same number, and lost again, after which I walked away from the table as though I were stunned. I could not even grasp what had happened to me.’   

Some more insightful and entertaining quotes on gambling: 

If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time – Chinese Proverb 

A gambler with a system must be, to a greater or lesser extent, insane – George Augustus Sala (1828-95)  

Depend on the rabbit’s foot if you will, but remember it didn’t work for the rabbit – R.E. Shay 

It is the mark of an inexperienced man not to believe in luck – Joseph Conrad  

Luck never gives; it only lends – Swedish Proverb 

When we put 50 machines in, I consider them 50 more mousetraps. You have to have a mousetrap to catch a mouse – Bob Stupak, former Las Vegas casino owner  

If you ain’t just a little scared when you enter a casino, you are either very rich or you haven’t studied the games enough – VP Pappy 

In a bet there is a fool and a thief – Proverb  The house doesn’t beat the player. It just gives him the opportunity to beat himself – Nick Dandalos 

By gaming we lose both our time and treasure – two things most precious to the life of man – Owen Felltham 

Lottery: A tax on people who are bad at math – Author Unknown 

There is but one good throw upon the dice, which is, to throw them away – Author Unknown 

When I played pool I was like a good psychiatrist. I cured ‘em of all their daydreams and delusions – Minnesota Fats  

Thank you for the comments

Genuine thanks to everyone for their helpful comments and to Brett Steenbarger for linking to my blog from Trader Performance. Brett  speaks with many years of direct experience in the industry:

‘I would estimate that, since moving to Chicago in 2004, 80-90% of traders I’ve known at various firms are no longer in the trading business. Think about what that means in terms of lost money, accumulated debt, dashed dreams, and disappointed family members.  Why do no trading coaches talk about those personal tragedies and losses?  Why don’t the stories of the vast majority of traders ever grace the pages of trading magazines and trading books?’

There must be so many people like me out there but they are not proportionally represented on the net or in any other media. Our voice is not loud (most people sing when they are winning), many of us don’t want to be heard as we are in the midst of failure, and I imagine many of us just want to leave this chapter behind and get on with our lives. And then there is the question of whether an audience will want to listen to a story of complete failure without a turnaround. Yet we are the majority. Perhaps, after many traders blow up their accounts, they don’t want to go anywhere near trading again, much in the same way that a recovering alcoholic may not want to step back in to a pub. It must trigger feelings of depression and anxiety for many traders. Also, a blog about a trader that blows up isn’t going to update all that often. My position is that I am near failure, and if I do blow up completely, there will be nothing left to post.

On his site, Brett provides a link to a song titled ‘Needle and the Damage Done’. I listened to it for the first time. It is an excellent but very sad, haunting song about addiction.

I have mice!

mouse1.jpg

In an earlier post, I commented that I didn’t miss the items I had auctioned off to raise cash for trading. This is true for all items apart from my mouse – after using my computer’s touchpad day-in-day-out, my thumb and index finger have started hurting. In the end I splashed out £10 for two mice and three mouse mats. The mice are super cheap opticals from China, but they are doing the job … so far.

An insufficient bank-roll

The problem with a small equity stake is that even if you manage to make a decent return in the month, the profit can so easily get consumed by other day-to-day expenses. This month we have the following:

- My dentist has written to me, kindly reminding me that it’s time for a check-up (£15). My teeth can wait.

- My gym accidentally cancelled my account and is charging me for last month’s missed payment. It’s perfectly fair, but it stings because I didn’t go to the gym during that month and it’s an extra charge of £30 that I hadn’t accounted for.

- I have been driving my car untaxed, hoping to save a few pounds. I’ll have to stump up the £96 sooner or later, but in the meanwhile it’s a little like writing naked put options: I earn a theoretical premium every week that I don’t pay for the tax, but the longer I leave it the greater is the probability that I will get stung by a hefty fine from the authorities.  

And the month has just started! I have nothing left to spare, yet they keep knocking at my door. I have cancelled my magazine subscriptions, even my monthly charity payments, but the leakages are too many in number. Costs, costs, around every corner I turn.

Fire sale at last chance saloon

It was during the Asian crisis of 1997 that hedge fund poster-boy, Victor Niederhoffer, blew up in spectacular fashion. Niederhoffer’s losses were so large that he literally had to sell the family silver, staring ruin in the face. It must have been very disheartening. I never climbed the dizzy heights of a Niederhoffer. No, I started at the bottom (in terms of performance) and worked my way lower. A few months ago, after a series of considerable losses, I had my own fire-sale auction on E-bay, selling the following items: a wireless modem, a wireless mouse, my prized Rocky and Godfather box-sets, my vintage fountain pens, a new mobile phone, an alarm clock, a digital camera, my financial calculators, my sporting equipment, and a great many books.

I mention Niederhoffer’s experience because he learned from his mistakes. After falling from such great heights, Niederhoffer was humbled but he was not finished. The Matador fund, which he advises, has posted average gains of 50% a year since its inception in 2001 (according to Wikipedia). It is a great story. One of my favourite quotes from Niederhoffer is “I don’t know how to make money without taking the kind of risk that would be disastrous for many people to consider” because I share  same view and appreciate there is no escape from risk, especially from my current vantage point (near ruin).

I mustn’t be deluded with false hope, however. While I believe I have a profitable approach to trading, surely all traders think the very same thing. My past performance and behavioural deficiencies also suggest the odds of surviving the months ahead are low; I am already several thousand pounds below the level at which I had my auction (still, I don’t miss the items I sold and have come to view ‘ownership’ as highly over rated.) I know I cannot achieve the consistent performance of the Matador fund but it remains beacon of hope, a shining example of a humble come back in the face of adversity.

Niederhoffer and his collaborators post many useful insights at Daily Speculations.