Thoughts on Trading

I think I can understand what Bill Hwang is passing through these days. I went through a similar scene way back in 2007. One day I was on a high after hitting a jackpot and realizing that if I played it right, I could make a good living out of it and the next day (2 months later, but you know, time flies), I was literally bankrupt. 

Like Bill, the cause of my own troubles were leverage though the strategy was different from what caused his doom. My leverage while high was supposedly safe since I was trading a safe option strategy that I thought I had perfected. Markets though seemed to believe otherwise.

As a broker, I have seen hundreds of investors like me coming to the market with great hopes only to be crushed mercilessly by the markets. I remember some study that claimed that most traders go bankrupt (or rather lose the entirety of their capital invested) in the first 6 months since they start trading. Of course, its one thing to go bankrupt and quite another to quit the markets – many keep coming back with new capital and new ideas hoping to strike it lucky. 

As I write this, I was reminded of an old interview of Nithin Kamath (the only broker who is willing to showcase the dismal risk reward relationship for traders despite traders being his bread and butter)

Zerodha makes stock broking pay at Rs 20 – The Hindu BusinessLine

When I lay out the risks of trading, I am told that such risks exist everywhere and hence should not be overemphasized. But wrong are they. Entrepreneurship for example is hard and most parts frustrating but a lot of entrepreneurs are about to live an okay life without ever becoming the next Zuckerberg. Markets on the other hand rarely provide opportunities where you can live a good life by being a small trader and yet never encounter the bankruptcy kind of risks.

Between the time I entered the Stock Exchange Premises and today, I have heard numerous brokers biting the dust. Unlike clients whose death is fast and furious most of the time, the death of brokers (mostly small, rarely large) is more of death by a thousand cuts.  

What is surprising is that brokers aren’t outsiders who could be excused as being naive to the risks of trading. Most of them have seen the story with their own clients and yet, the urge to trade seems to overcome the pain of the stories they have heard or experienced first hand.

Is it false confidence or is it bravado or something else I always wonder. What makes people who are otherwise the smartest in the room choose the most riskiest way to make money. 

Trading is tough not because it’s one with 50-50 odds but one that has a negative sum game. Between the broker and the government, the winner makes less than the loser over and over and over again. This counts not to mention the fact that thanks to path dependency, the odds aren’t perfectly stacked in a straight line.

Sportsmen go into slumps. If one has not established himself by the time his slump comes in, he generally gets dropped from the national team and would have to work his way back (many just don’t get that second chances though regardless of how they perform). But at least they have the opportunity to play the game at a lower level, establish their form once again and keep knocking the doors for being allowed to play at the highest levels.

In trading, there are no local clubs where you can tune yourself up before competing with the big boys. Of course, there are courses you can take, books you can read among other things but finally, winning is more like getting into the IIT without actually having studied.

Then there are agent provocateurs. From the broker to the friendly twitter fellow who seems to keep winning everyday, one is always given the hope that successful trading is possible – you only need to keep trying. 

One of the biggest hurdles for most traders is lack of capital. Most including myself tried to trade with a capital that just wasn’t sustainable for trading full time (and trading is always a full time activity regardless of what anyone else says). 

When you find yourself in a hole, stop digging is a wonderful quote. Trading is addictive for after all there is no other business that can throw out cash like this does if you are on the right side. But recognizing when you are wrong is more important for that enables one to change the strategy or better off, quit trading before it damages one’s life.

Personally after more than 15 years of full time trading, I quit the exercise in 2017. Life has never been better. I recognized belatedly that right from my capital to my psyche, I wasn’t ready to be a trader regardless of how many systems I built or strategies I tested. I know of successful traders and this for me says that all is not lost. But I know way too many smart guys who have lost everything. I do know that I am not as smart as those guys and thank my stars for the change I could bring to myself.

I doubt writing about the risks of trading is going to change anyone’s mind for we all have strong opinions strongly held, but hey, if you are open to new thoughts, let this be one. As a stock broker, I haven’t seen a Rich Trader. Not that they won’t exist, even 1% of traders if successful can be a few thousand fellows if not more but they are as rare as they come.