The Career Risk Traders Are Unaware Of.

[almostthere]

https://medium.com/@chicagosean/the-car ... 12eaa38ccb

As I try to make the move from asset allocation investor who sometimes goes back to work for a month or two a year to automated algorithmic trader who wants to spend the rest of his life on his passion (the markets), I found the article above frightening at first and then later instructive.

I think some of the key sentences were these:

"Undercapitalization — my chronic disease — may be foremost the hardest challenge (amongst a jungle of hard challenges) to surmount. If you were to average 25% annual returns over a career, that would put you in the upper pantheon of trading legends. But to earn a respectable $100K per year to live on with that performance, you’d have to have at least $400K in your account and hope you don’t draw down your first couple years. For most independents getting started in this business, this is a very high hurdle."

In other words, he needed 100K a year to live on. Ouch.

"Much to my detriment, I’ve had several brief episodes of fantastic successes which have proven to be just enough to keep this addict coming back for more market crack. The most recent high being just a few short weeks ago."

Keeping gains is hard. Large gains can induce a gambler's high or euphoria.

Anyone note other lessons?

[Dragline]

The lesson is that if you are going to take a lot of risks with one portion of your assets and could lose them, you need to have another storehouse of assets that you are very conservative with. This is also known as a so-called "bar-bell" strategy.

If you do not have any other source of income, only take big risks from a "position of fuck you": https://www.youtube.com/watch?v=xdfeXqHFmPI

This is why most successful poker players keep a very large stash of cash that they purposely do not invest elsewhere -- because their gambling activities, even when profitable, are still highly volatile and subject to large short-term downturns. Trading markets is a similar endeavor.

[jennypenny]

One of the biggest problems isn't losing money and then having to win it back at twice the price. The problem is dry spells. You don't ever want to feel compelled to trade. That means you'll have dry spells. Sometimes loooooong dry spells. Sitting those out can be harder than avoiding panic selling.

Think of trading like surfing. You can wait for days or even months for a good set. You can sit on the board for hours waiting for a good wave. When the set is supposed to be good, the line up will be crowded. When you finally see a great wave, you should still pull back if you think you missed it or it suddenly looks riskier than you anticipated. Even if you catch the wave, you should bail if it's too crowded or you see signs of trouble.

Surfers spend a lot of time waiting for good sets and looking for good surf spots that suit their talents. They also spend a lot of time sitting on their board. You have to be willing to do that. You never want to convince yourself to take off into a potentially dangerous wave just because you've been sitting there all day.

edit: Here's the Buffett quote sclass mentioned. His analogy is probably better than mine since, well, he's the billionaire ... "The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot."

[Tyler9000]

Great metaphor! Thinking of trading like surfing explains a lot of the behavior I see in a family member who currently gets 100% of his income from options trading. The dry spells are really tough on him precisely because he's smart enough to remained disciplined. Feeling forced to trade in a poor market situation to support your family is not sustainable either financially or emotionally, and I can see it wearing on him.

[subgard]

The very drive that makes traders trade is the very thing that makes them bad traders.

A person who had no interest in making money, but just an interest in figuring out why markets move would make a fortune. But those people aren't traders.

[Sclass]

Good advice here. I like the surfing analogy. Buffet has one like this called waiting for the perfect pitch like Ted Williams.

The lesson I'd like to share is Taleb's "would you rather make $1 million or make $2 million and then lose a million." I'm not sure if the former exists for good traders. Sometimes I wonder if the former is an ideal that draws most contestants further from winnings. I reflect on this when I attempt to justify all the money I've lost over the years. Rather than regret the losses I try to think of them as an entry fee that got me to where I am now.

Thankfully I've won more than I've lost. It's almost like there is a stochastic sweet spot that I bumbled into.

[almostthere]

@ Dragline thanks for the video. I always appreciated another take on FU money. As to the barbell strategy, I look forward to the day when there is some income from the low risk side and when I have the wisdom to figure out the long volality side.
@JennyPenny ahh so true. The rules in the trader universe are certainly different, and I think your analogy is very abt to what I have experienced so far.
@Sclass After a year or so of immersing myself in the trader literature and starting to run backtests (after twenty years of Benjamin Graham and William Bernstein style reading and investing), the trader world is like a parallel universe where all the items seem the same but the rules that govern them are slightly different. One of the those rules is the ability to cut losses short immediately. I think at least some of those that succeed are those that can gamify the wins and losses and only consider the money points, not money. The others that can do it are probably just wired differently.

[eudaimonia]

Interesting article. Most of the successful independent traders I know (a small handful of the thousands of retail traders I've met) have a few things in common: 1) a former career that paid well, 2) a big bank roll, 3) patience to deal with the dry spells. Also day trading has been dead for nearly the last decade. Algos have eaten the world and are now eating themselves. This guy is way behind the times.

The best way to trade is to swing trade with a well paying career as your bill paying mechanism and trading and savings to grow your wealth. Build up your account to retirement account levels, and use about 1/3 of your total capital to actively trade during your "retirement". It also helps to deleverage the rest of your life as much as possible since trading is volatile. Pay off your house, have zero other debt, and have a 3-5 years extra savings that you can live on to ride out market lulls.

Of course by the time you do all this you will already be ERE so you can just fish all day. Or trade for fun

[BlueNote]

I'm pretty sure a guy I used to work with just quit to become a 'trader'. I talked to him about his trading and his technique sounds like a pure Jesse Livermore type of thing (taking in a lot of input from various sources and investing on the feeling/instinct/hunch/trend you get). He says he's putting his daughter through some ivy league (Columbia I think) full tuition program in the USA doing this stuff. Pretty crazy stuff if you ask me but maybe he's got some sort of special sense I don't. Hopefully he doesn't flame out like the guy in the article referenced by the OP.

[Sclass]

Jesse Livermore flamed out multiple times.