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Trading as a Business
Written by: Joe Ross
What can I expect to make my first year of trading?
We get questions like this one quite often. We find that most
aspiring traders don’t have a clue as to what to expect from the
market. Yet here they are, putting up their money. Most are going to
learn the hard way.
We have no idea in the world what you can expect to make in your
first year of trading, or any other year, for that matter. What we
can tell you is that without proper guidance and help, you are
probably going to have some very bitter experiences. Why? Because
your anticipations are almost completely wrong.
Futures traders, especially beginning traders, often open an account
with unrealistic expectations of trading performance. These
expectations could be formed by the sales literature for a trading
program that emphasizes its profitability, by reports of success
stories by top traders or by some brokers within the industry. In
all cases, you are rarely made aware of the many other times when
performances were considerably worse. In other words, you are a
victim of selection bias.
Most advertisers of courses, systems, books, etc., will mislead you
into thinking that you just can’t lose if you buy what they are
selling. We are talking here about hype, major hype – as much as the
authorities will allow them to get away with.
Selection bias is a term well known within the social sciences and
occurs whenever some undesired screening factor leads to a
misrepresentation of a population sample. For example, traders
seldom express their losing trades with as much enthusiasm as their
winning trades. Consequently, a random selection of letters or phone
calls received by a company that sells a trading program often will
overstate the proportion of traders who are doing well.
Sometimes the cause of the selection bias is not obvious. For
instance, let's say that a trader who purchases a very expensive
price and charting package is more profitable than another trader
without it. The merits of the package seem obvious. Maybe not. It
could be that the individual who can afford to purchase the package
is better capitalized than the other trader and this is the reason
for the better performance.
Starting off your futures and options trading experience with
unrealistic expectations inevitably will lead to frustration and
disappointment. It's better to face reality now. It will make life
as a trader easier down the road. Here are just a few facts to
dispel those unrealistic expectations.
1. More traders lose money than make money. The figures are fuzzy,
but it is 80% to 90% (maybe more) who end up losers and leave.
2. Within the industry, only a small percentage of retail traders
are profitable on a consistent basis. Moreover, if you are just
starting out, you should expect to incur some loss strictly due to
error on your part as you climb up the learning curve. Increased
trading knowledge and experience combined with trading strategies
that have superior risk/return characteristics can help put the odds
of success in your favor. So, it is important to study the markets
and educate yourself before trading or, alternatively, you can rely
on the support of your broker professional. Another option you may
also want to consider is paper trading. It's a viable option because
it's a lot cheaper to make a mistake in a fictitious account than a
real one.
3. You will have losing trades. In fact, most of your trades will be
losing trades. It is impossible to predict price movements every
time. Even when the technical and fundamental factors are in
agreement, the market often moves in an unexpected way. This can
even happen several times in a row. For this reason, it is always
important to make sure that loss is limited on every trade and that
you have sufficient trading capital to withstand several losing
trades without being taken out of the game.
4. Don't expect to become financially independent. It's unrealistic
to expect a small-sized account, especially one under $5,000, to
generate consistent income to replace regular employment. While this
may be possible for a very low percentage of traders, it does often
require high-risk trading. High-risk trading means that if you are
one of the many who lost money, then you probably lost your money
very quickly and you may end up owing even more money to the
clearing firm. High-risk trading should be avoided, especially by
the beginner. Rather, concentrate on low-risk, low-frequency trading
and devote appropriate effort to increasing your knowledge and
understanding of futures trading.
Keep in mind that, as a beginner the emphasis should be on learning
and proceeding slowly. By that, I mean practicing in a paper trading
account and confining your trades to those that have low risk. The
expectations of huge profit that many beginners start out with may
be realized, but only after you invest the requisite time and energy
and only after a slow and realistic start.
About the Author
Joe Ross,
trader, author, and educator, has been an active trader
since 1957, when he began his trading career in the
commodity futures markets. In 1982, when it became possible
to day trade the S&P 500 stock index futures via a live data
feed, he successfully made the transition from full-time
position trader to full-time day trader. In 1988 he formed
Trading Educators for the purpose of training aspiring
traders in the futures, bonds, and currency markets.
Visit Joe's
website at
http://www.tradingeducators.com. |
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