Good discussion, and an important one - whether your aspirations are to become a fulltime trader/investor or whether you want to trade/invest part-time only - in either case the key objective must obviously be to become both successful (relative to expectations and objectives) and consistently/sustainably so over a long period of time.
Using a sporting analogy trading/investing is a marathon, not a sprint. Too many come into it with unrealistic expectations, not fully prepared, but with just enough knowledge to think they can start strong out of the starting blocks and make a lot of money (and quickly). Most of those will not last long and fall by the wayside. Some of those (like me I confess) if they start out that way and are lucky enough to survive a very expensive learning curve, and actually learn enough lessons through that critical early period, become well enough equipped to survive and even thrive over the long term. But they represent only a small percentage of all those that give it a go.
The best and most appropriate analogy I can think of is starting out in any other business, even a conventional one such as running a cafe or similar small business. Anyone going down this path probably (I don't know I haven't done it) need to commit something in the range of $250-500K of capital to get started, plus work 24/7 to keep costs low until the business starts making a profit. Most small businesses (and also large ones - look at the many listed small caps that keep raising capital for years and years) dont turn a profit in the 1st year so their starting capital needs to cover cashflow until they do become profitable, which might be 1-2 years or more.
And the statistics for small businesses surviving most people would know is 90-95% fail and only 5-10% survive and grow.
The statistics often quoted about the survival of traders is actually similar - only 5-10% survive and grow.
Imo that's because there are commonalities among the reasons for those 90-95% of failures. Not well enough prepared/researched/relevant experience/capitalisation, etc, and either a good business plan and poor execution or both poor business plan (or none at all) and poor execution.
Another reason is also expectations. People deciding to run cafes because they like drinking coffee and socialising at them, but no idea how much hard work there is to actually run one. Or traders thinking they can make big money quick and possibly after a few lucky wins early on, come to learn being consistently winning is actually not that easy, and they are not achieving those big bucks, and they lose heart and quit.
The markets (whether local or global) are literally a place where only the fittest survive, because we must also remember we are at the bottom of the food chain when we start out (and might always be) - and the markets are literally shark infested waters (sorry about the pun, couldn't resist) all too willing and able (better equipped, better financed and better informed) to strip money from us little fish.
So anyone who wants to start out down this path needs to have the right expectations (so the dont get disheartened and give up later - better to succeed against a realistic business plan than fail to meet an unrealistic one), and prepare themselves for the long road ahead, have a good well-researched and tested business plan, and then be able to execute.
In terms of the above, I have a couple of things to share that might help:
Firstly, a recent post by a poster called RickM on the forex thread who I respect and knows his stuff, has several years more experience than me:
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Another perspective is how the pros do it. Earlier this year I came into contact with some guys from a prop trading firm and I learnt about their prop traders program (basically an apprenticeship program for traders to learn to trade professionally with investment fund money rather than their own). It is a tough program which again many traders try and only few get through (which is not uncommon for this type of program). But their approach is this:
Traders joining the program have to go through the following 5 stages over a 15 month period:
1. Traders must develop their own trading strategy, and backtest it, and subject it to company auditing to validate the results to ensure it meets certain required performance criteria (rate of return, maximum drawdown, etcc)
2. Then they trade the strategy - and only that strategy, subject to strict compliance/auditing - for 3 months trading only a demo account
Then they get to trade that strategy with funded accounts for 3 month blocks as follows:
4. 3 months with a $10K account
5. 3 months with a $25K account
6. 3 months with a $50K account
7. 3 months with a $100K account
If they meet the performance criteria for each stage, they get to move on to the next stage, and only then. If they get through the whole program they move on to manage bigger accounts.
This process imo is entirely a reasonable approach from a risk management perspective - the more experience and historical results a trader can build up, the more $$$'s at risk is worth investing in that trader.
What should amaze all of us is that most of us don't approach trading at the outset with the same risk/experience approach (again, confession I didn't do this either so I got my early lessons very expensively). But it makes total sense, and unfortunately even though many brokers and internet sources will preach risk management and all the above princicples, many of us dont listen and learn the hard way.
I have a video and a podcast that I think are worth watching/listening to because they cover the above ground from a couple of different perspectives:
The first is a short 8 minute video from a UK fund manager talking about why most traders fail. His focus is on forex markets but imo the same lesson applies to trading equities as well:
Why you'll never make money trading forex
The podcast is an interview with a veteran US trader called Peter Brandt who shares his experience of learning his trade but spends some time commenting about those who have ambitions to become fulltime traders/investors (along the lines of RickM's post above). This one goes for over an hour and Peter rambles on a bit, but his advice about going fulltime and how to go about it I think are very interesting (actually, I think it might have been Jako who originally shared this podcast):
Peter Brandt podcast - becoming a fulltime trader
Hopefully some of the above is useful.
Cheers, Sharks
PS:
@HowieG I live in Melbourne so if you want to catch up for a coffee I'm more than happy to do that. My email address is:
[email protected]
