Trading and Living

In recent weeks / months, quite of my friends have left trading to either start a new business or go back to college or taken up a job or changed their business. Its not that they were ill equipped to handle the markets, on the other hand, their education and experience would match the best of the best which set me thinking on why trading is such a tough business.

Trading is a challenge like no other with everyday proving for most to be a battle between them, their weaknesses and the computer and most days, the majority fails to achieve the goals they set out to achieve when they woke up in the morning.

Being in the brokerage industry for nearly two decades now and witnessing either directly or in-directly hundreds of traders, the one staggering fact of the business is the rate of failure is something that you will not see even in the Silicon Industry where companies churn over faster than you can imagine.

Most business have a known upside and a well known down-side on which things could be planned. For example if you were to open up a shop, you know that the down-side is equivalent to making no sales and yet needing to pay the rent, pay your workers among other fixed costs.

Trading is bit similar to trading in perishable items where on good days you end up selling everything you have and on bad days end up losing the whole capital deployed. But if you have ever been to the vegetable market, you don’t see a churn in the vendors like the way traders get churned over time.

There are a million things that  are reasons behind failures in trading, but to me, the following are the major criteria

1. Regular Income: Most people are used to regular income – Salary for example and anticipate something similar in nature from trading. When trading on the other hand, there is no guarantees. You may actually taking losses for months together before you find the edge and start gaining back your losses. Some one I know had a draw-down of 3 years before he was able to synthesize his strategy and was able to gain his losses back. Sustaining such a long period of time without a secondary source of Income is impossible for most which mean that they end up leaving the field rather than stay and fight it out.
2. Under Capitalization: Most businesses provide you with a fair idea on what is the minimum capital you need to start off with. You know that you cannot possibly take on rent a showroom with just 10K in the pocket. But when it comes to trading, some think that even 5K would do it (Nifty options anyone?). While no amount of capital can help someone on the wrong track, if you start off with too little, its equivalent to buying lottery and hoping you will win.
3. Short Cuts: I see a lot of traders believe in using short cuts in the hope of succeeding. While few spend thousands (and these days many charge in Lakhs) on so called education, others spend a few thousand per month to get  access to trading / investment ideas from guys who they hope are knowledgeable and will enable you to achieve your goals with the least effort. Great traders don’t have the time to spoon feed you their trading ideas for a small fee. They will rather clean you up in the markets than bother with passing the SEBI exams that are now required to be passed before you can sell advisory services.
4. Lack of efforts: Most traders are prompt when it comes to screen time, but can the same be said when it comes to reading books / testing strategies. Trading requires (not compulsory but preferably) expertise in markets, statistics and programming. While not everyone can be a expert in all three, you need to be able to tick mark two out of three to be able to risk money that YOU CANNOT AFFORD TO LOSE. Unless you are here for time pass, risking money you can afford to lose shall get you nowhere in the long run since as percentage of your net-worth, the addition will be too small (kind of rounding off error).
5. LUCK: Luck plays a large role – and I am not even talking about Individual trades. Regardless of your beliefs about Luck, it could be a major factor that determines whether you are a successful trader or a ordinary one and the worst thing is that there is little we can really do about it.

Its all nice to dream about trading for a living but if you are the sole breadwinner for your family, I seriously believe that the odds of your success is pretty poor to start with and will erode faster than the option premium over time. Most successful traders I have encountered had a secondary income that supported them as they learnt more about markets and trading more often than not by burning their fingers / hands or even entire bodies.

Jesse Livermore who is looked up by many who have read Reminiscences of a Stock Operator by Edwin Lefèvre will know that he went totally bankrupt twice in his career. Not every one can come back from one bankruptcy, let alone twice.