Common perception is that trading takes a long time to learn.
For me it took seven years.
But I know this is not always the case; indeed many bank traders are profitable from year one.
Why is this, wonders the intrepid trader?
To find out, I thought I would ask one such trader, who was successful from the beginning of his career.
The trader, who goes by the pseudonym “888”, was a senior trader at a major bank and a portfolio manager at an award winning hedge fund. He has been profitable for all of his 20+ years in the market; both as a market maker, and prop trading his own & other people’s money.
What can we learn from him?
Learned from experienced traders
Q. You have had twenty years in the market without a losing year. How do you think you were able to be profitable from year one, when many traders take much longer?
A. I was sitting on a desk with 15 other traders with a lot of experience for starters, and we had a franchise behind us.
Limiting your focus
Q. Did it help that you only had a limited number of currencies to focus on?
A. The first few months as a trainee, it was a portfolio of the minor currencies … but after that yes it was focused on just one currency and its crosses…. [there] is a lot to be said for having that focus, rather than jumping around all over the place I think.
Q. Did it help that you had strict risk guidelines in place?
A. We had budget targets – daily/monthly/yearly P&L that was passed around the desk for all to see… and each trader had strict position and loss limits – depending on their experience and which currencies they were trading.
Within those position/loss limits were ‘escalation points’ where you had to inform your manager of the situation – breaking those limits without very good reason or failing to escalate was a sackable offense.
You were a part of a team… so you had extra incentive to do well, and [you] were not just answerable to yourself.
Trading someone else’s money
Q. Do you think it made a difference that the money you were trading was not your own?
A. Your salary cheque always arrived on time, and the money wasn’t your own, but the flipside was if you blew out then you lost your job, and there are plenty of scenarios within that where a blowout may not necessarily be your fault. It was judged on a case by case basis…. but you could easily lose 25% of your yearly profit on a dodgy client trade. One year I was 140% of budget with 2 weeks to go – then was lumped with a bunch of impossible client orders and pretty much finished just on budget…no fault of my own – but I wore the financial implications.
Why others failed
Q. What about those around you that failed. What did they do wrong?
A. Generally either too much risk appetite or not enough. Or they were just operationally not up to it.
Q, Did a lot fall into that category? I.e. was the failure rate high?
A. No not really. It was very low turnover of traders – probably because the bar to entry was very high.
Q. Did you have any challenges when you shifted to prop trading? *
A. Going from market maker to prop trading means that you have no one to blame but yourself if you don’t make money. You are initiating positions on your own terms 100% of the time.
Whereas, as a market maker, the positions you have are given to you maybe 70% of the time by customers, and 30% of the time it’s on your own terms.
Q. Did that take much adjusting to?
A. [Moving to prop trading] was okay for me, as the books I quoted as a market maker were quite toxic – i.e. they cost more to run than they made – so the deficit had to be filled with prop trading to make budget.
So the bank might say that, for instance, quoting the yen book is worth 5 million USD from the franchise flow. In reality, it probably cost 2-3 million to run. So to just get to budget, you had to make 7-8 million prop trading.
So to leave that behind and just prop trade was actually a good move – for me at least.
*Prop or proprietary trading is where the trader is given funds to trade in order to make a profit (like we do), as opposed to market making, where the trader’s responsibility is primarily to execute client orders (like our broker does for us).
The natural selection process
Q. Do you think one of the reasons bank traders are successful is the bar to entry is high?
A. If you are not profitable from the outset, you are no longer a bank trader pretty quickly! They aren’t there to finance losing traders and bring them up to speed – they’re there to make money – and if you don’t you’re gone.
This explains why most bank guys with reasonable experience are profitable, as they would have been cast aside before they got that experience.
Six key points (that we may or may not like to hear)
There are six reasons, identified above, why 888 was successful from year one:
- He learned from experienced veterans
- He (the bank) was well capitalized
- He kept his focus limited to his area of expertise
- He had strict risk management rules that he had to follow (or else!)
- He was part of a team that held him accountable for his performance
- There was a strict selection process, which weeded out those unsuitable to trade from the get-go.
Points number #1 to #5 are more of less within our control.
- We can learn from experienced traders
- We can make sure we maintain adequate cash flow and trading capital
- We can focus on our best ideas
- We can develop a comprehensive risk management plan
- We can find others to hold us accountable to our performance.
For point #6, there is no selection process for us, but we can become what would be a desirable candidate.
Becoming a “desirable candidate”
For retail traders, it is about adapting or changing ourselves so we fit the model of a top trader. This is probably the thing that takes people the most time.
The banks have a method for getting the right people on-board, who already fit the trader mold. For the rest of us, it is about transformation.
Trading psychologist and coach Van Tharp suggests that for some people – those with stuck beliefs, or traits that are undesirable for traders, this process can take several years.
To find out how suited you are to being a trader, and how to change for the better, you may benefit from conducting the Tharp Trader Test. The test will tell you which of the 15 potential trader types you are, and provide guidance on what you can do to improve.
Even though developing the psychological skills of a top trader might take several years, don’t shirk this process. There is nothing right or wrong with the length of time the journey takes. In fact the greater the transformation it takes to become a trader, the greater the ultimate benefit will be, and not just to your account, but to your life as a whole.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.