LONG ANSWER
No certainties. No guarantees. Only probabilities
Trading is unlike almost all other human endeavors. Suppose that you’re tone deaf and have no natural musical ability. In spite of these shortcomings, you’re determined to learn to play the guitar. You practice many hours each day, take lessons, immerse yourself in the work of Hendrix, Page and Clapton etc., and go to as many live gigs as possible. You may never be good enough to play in a band but, eventually, almost certainly you will reach a level of proficiency that enables you to bash out a recognisable tune. Unfortunately, if we equate ‘a recognisable tune’ with consistent profitability as a trader, the same level of dedication and practice are not guaranteed to produce the same results. As a trader, you must embrace the fact that there are no certainties, only probabilities.
From six months to eternity
As a rule of thumb, if you can survive the first few years, you will probably be able to keep going for a long time without losing a lot of money. Traders refer to this as a ‘slow bleed’. Your actual trading stats may hover around breakeven, but the commissions, fees, software and data feed subscriptions all mount up over time. In this situation, either you can quit trading altogether; go back to paper trading until the trend reverses and try again, or top up your account as required and carry on in the hope that your fortunes improve. The hard fact of the matter is that regardless of the amount that you study and practice, you may never experience consistent profitability. In reality, the first real goal for most new traders is to reach a point whereby they can decide whether or not trading is ever likely to work for them. And if the likelihood is that it isn't, then the faster they can move on to pastures new, the better.
How big is the mountain?
To help you determine whether or not trading is ever likely to work for you, the first obvious step is to gauge the size of the task ahead of you. Trading, like learning to play the guitar, is a performance activity. You can’t expect to learn to trade, let alone be good at it and make consistent profits, quickly. This flies in the face of zillions of ad’s littered like confetti all over the internet, telling you that you can go from a standing start to pulling in consistent profits in a matter of weeks, sometimes days. Get real, it ain’t gonna happen! Why not? For the same reasons as you’re not going to play footy for your country at the Brazil 2014 World Cup, or star in the next Spielberg blockbuster, or perform at the Albert Hall with the Royal Philharmonic Orchestra. Some members will argue that trading isn’t anything like as difficult as learning to play an instrument or becoming a top sports star. And they’re right, in as much as the basic mechanics of putting on and taking off a trade aren’t difficult. But, the people on the other side of your trades are professionals who have, in many cases, put in years of study.
Know who’s on the other side of your trades
According to research undertaken by the renowned psychologist and author Bret N. Steenbarger, professionals execute around 75% of all equity and futures contracts volume. Many of these professionals are highly qualified people. Gone are the days when the city trading floors were filled with street smart barrow boys from the East End. Take a look at this book – better still, buy it:
Options, Futures, and Other Derivatives by John C. Hull. At the very least, read the introduction and scroll through the 20 page Glossary of Terms and see how many you understand. You can do it for free and it should bring home the point that this isn't a 'get rich quick' business in which you can make easy money with minimal effort. The chances are, the person on the other side of your trade read this book as just one of many standard reference texts in their first year at university – at least two years before they went anywhere near a trading desk. This is who you’re up against. This is the trader selling to you or buying from you. What makes you think you’re as good – let alone better than him / her? Make no mistake, to become a successful retail trader trading your own money from home is a very tough gig. And it’s going to take time, probably years rather than months. Run a mile from anyone who tells you otherwise. Oh, one more thing: if you read this book and understand it, you’ll be a lot further down to road towards trading success than most other retail traders!
Track record
The flip side to this is the rare breed of trader who is profitable pretty much from the get go. However, if you’re in this enviable position, before you can claim to be consistently profitable and confident that your success isn’t merely good luck, a 6 month track record as a bare minimum is necessary. That’s for a day trader, if you’re a swing trader, think in terms of a year or more.
'Stable' and trading: uneasy bedfellows
In the context of trading, the word ‘stable’ isn’t one you’ll come across very often. During the back end of the 1990s, lots of traders thought they’d discovered a stable income through trading. Then, in the Spring of 2000, the dot com bubble burst and many of them lost (all) their gains and had no idea what to do next. The lesson to be learnt from this is that even if your strategy has worked well for the last six months or maybe even a year, there’s no guarantee that it will work next year or the year after that. Only when you’ve traded the full kaleidoscope of market conditions and know how well your methodologies perform in all of them – will you be able to answer this question with any real confidence. Depending upon your style of trading, realistically, this will require making consistent profits for three years or more.
For faster results . . .
Paying a coach or mentor could speed up the process. However, a word of caution here . . .
A) Good traders who are also good coaches are as rare as hen’s teeth. Teaching others how to trade is much easier than doing it oneself. So, beware of those who can talk the talk but are unable to walk the walk.
B) Although there are a few good coaches, they may not teach an approach which suits your trading style and personality.
Finding the right coach / mentor is a tricky task in itself. The obvious fast track route is to get a trading job at an investment bank or ‘prop’ firm, where they will train you and expect you to be earning money for them in a matter of months. However, this is not an option for most ‘retail’ traders working from home in their spare time. Often, they have other work and family commitments and so, for them, the journey will be somewhat slower.
What does 'stable income' mean to you?
In the context of conventional employment, it means being paid at the end of the week or month. However, there are some extremely successful traders who have weathered unprofitable months and, even, unprofitable years. Would this be acceptable to you? If you’re someone who wants to be profitable on a monthly basis as an absolute minimum and, ideally, on a weekly basis, then this will almost certainly involve becoming a day trader. Producing consistent profits on such short time frames will be difficult to achieve for swing traders and virtually impossible for position traders, taking perhaps only one trade per week. The size of your account is also important. If ‘a stable income’ means £2,500 per month, (£30k per annum) then this will be easier to achieve if you have a £100,000 account than it will if you only have a £2,500 account. Self evidently, a 2.5% monthly target is an easier and more achievable target than one of 100%.
For the purposes of this FAQ, it’s reasonable to assume that you want to go from where you’re at now to consistent profitability in the shortest time possible. Here are some ideas to ensure that the bridge to this happy state of affairs is as small as possible and traversed as easily and quickly as possible.
1. Stop trading
If you’re losing heavily, stop trading. If you’re losing consistently – albeit small amounts – stop trading. There’s no point bleeding your account dry, hoping and praying that your luck will change. Almost certainly, it won’t. Remember, to professional traders, ‘hope’ and ‘pray’ are the dirtiest of dirty four letter words!
2. Paper trading
Does your trading strategy work when trading paper money on a simulated trading platform? If it doesn’t work in this environment, it almost certainly won’t work trading with real money. When you can make money here, then upgrade to live trading using real money. Keep the amounts involved as small as you can and only increase them gradually as and when the profits allow.
3. Minimise your losses
It’s imperative that you stay in the game long enough to figure out how to achieve consistent profits and a stable income. If you’re losing a lot then, self evidently, you’ll fall by the wayside relatively quickly. It would be a shame to ‘blow up’ (i.e. lose all your money) just at the point that you figure out how the market works and a way to trade it! Learn about risk management to ensure that your losses are kept to an absolute minimum.
4. Learn how to lose!
If you can’t accept losses, trading will always be a tough gig to master. The greatest salesmen learn to accept the word ‘no’ and to overcome rejection before they become masters of their art. Similarly, all great traders have to accept some losing trades from time to time. Some of the biggest names in the business have a success ratio of only 40% or less! If you’re chasing the Holy Grail of a 100% success rate, then you’re wasting your time and will be very disappointed. That’s guaranteed!
5. Use common sense
Obviously, if trading was easy, then everyone would do it. It’s as tough as starting any other business and should be viewed just as seriously. If you wanted to become a dentist or an architect – how long would it take? Unlike these professions, there is no formal education or qualifications required to become a trader. However, don’t let that fool you into thinking that trading is a shortcut to the sorts of incomes enjoyed by these professions (and more besides) without having to put in the same amount of hard work that they have.
6. Treat it as a business
If you play at trading and don’t give it the serious attention and respect that it deserves, the impact on your finances is likely to be as unpleasant as the impact on your health if you drive at high speed with a blindfold. You’ve got to take it seriously if you’re to be successful at it. If you treat it as a hobby – or just a bit of fun – you’re unlikely to be very successful at it.
7. Have a plan
This means knowing exactly what you’re going to do and when you’re going to do it. Regardless of whether the market is trending (up or down) or chopping about in a sideways range, you need to know how to respond at all times; none more so than when you are in a trade. And, as the cliché goes; it’s better to be out of a trade wishing you were in it, than to be in it and wishing you were out of it. Cliché number two: plan the trade and trade the plan!
8. The X factor
As important as a good plan is, it’s not the ‘be all and end all’. Plans are inert and emotionless things. You need the ability to follow the plan and, on occasions, know when to deviate from it. As human beings, we have emotions which tend to dictate our actions. As we all know, the markets are driven by fear and greed. Those that profit the most are those who are in control of their emotions, usually at the expense of those who are not. Being cool, calm and collected is essential, especially for day traders who tend to have to make snap decisions based on sound judgement.
To conclude, no one can tell you how long it will take you to become consistently profitable and make a stable income from trading. All anyone can do is to relate their own personal experiences. How long this journey lasts for you is governed by your ability, determination, account size, goals, temperament and personal circumstances.
