AT THE CLOSE
Starting To Trade For A Living
Ever thought of trading for a living and didn’t know where to start?
I
receive dozens of phone calls and hundreds of emails each month from those who think they want to get involved in trading for a living. So much of our industry is simply misunderstood that I thought it was time for an analysis, hoping to help those in their quest.
Retail account trading
Not much has changed over the years in the retail world. Basically, investors/traders can open up an account with any of the multitude of retail brokers available. The services vary widely, and each person should first determine what they are going to be doing with this retail account.
The days of broker assistance is pretty much over, morphing into individual online access. The investor will likely look more to financial advisors for advice rather than a stockbroker. For active trading, the novice may want to look for something like the ability to short stocks easily. The world of buy & hold has pretty much gone the way of telephone service from a broker. You’ll want to be able to receive interest on your short stock sale monies. You’ll also need to qualify as a pattern daytrader (Pdt) if you plan on making a few trades in the same stocks each week. This requires a minimum balance of $25,000, and allows for 4:1 margin vs. the standard 2:1.
Be sure you’re using capital, not just overleveraging yourself with additional shares and additional risk. It’s hard to make an actual living with accounts like these. What kinds of groups are out there for traders?
Retail type trading groups
Some groups will bring on traders with less than the required $25,000 Pdt requirement. These shops come in various incarnations, ranging from “OK” to “very suspect.” If a firm allows you 10:1 leverage with no licensing, and it is not a broker-dealer, I again suggest extreme caution. The regulators have been very diligent in tracking down and closing many of these firms. Traders have had their money simply locked up, with little or nothing returned. You can search www.sec.gov for more information.
Other methods abound of circumventing Pdt rules. Some groups claim that you will be trading with “the firm’s money,” thus placing you into a quasi-employee status. Their deal is to charge you $5,000 to $15,000 or more as a training fee. Then they’ll let you trade in very small increments until you lose a bit and then they’ll let you go, thus keeping most of that fee. Caveat emptor, indeed.
“True prop” trading firms
“True prop” refers to firms that either hire traders or allow traders to come in with no capital. There are excellent firms that will hire graduates from top schools, train them, and pay them a salary, but such firms are getting fewer and fewer in number. There are, however, several excellent firms in Chicago and New York. To join them, you’ll go through a screening process, and you’ll be expected to work your way up. Hedge funds also fall into this category. It’s a stringent application process, but well worth it if you can align yourself with a solid firm. The same caveats apply, however, so be sure the firm is registered.
Zero capital–required firms
Zero capital–required firms come in various flavors. A decision to trade with one of these firms requires some thought. Since all firms are “for profit” — meaning that they are not going to simply allow someone to lose money for them — you need to check the agreements carefully. One of the standard practices is to let someone come in with zero or low capital and give the trader only a percentage of any trading profits. The firm will always charge varying rates of commissions to the traders’ account. So even if the trader breaks even, the firm is not out any money.
If the trader does make money, then the money will accumulate in his or her trading account, with only minimal withdrawals available. So in effect, the trader has capital at risk after a couple of months.
A good way to analyze the deal is to assume you are making money right away. Say you’re making $12,000 per month, with $2,000 going to the firm for commissions. That leaves $10,000 to divide 50/50. So you make $5,000, while the firm makes another $5,000. If this were to go on for a few months, you would have given away a great portion of your earnings. But if you don’t make money, you’ll soon be let go. There is nothing inherently wrong in this model as long as the trader goes in with his eyes wide open.
Professional trading firms
Disclosure: Bright Trading falls into this category (there are other such firms, of course). Professional trading firms follow what is often called the “stock exchange floor trader” business model. These firms are designed for those who want to get into the business of trading for a living. These firms are broker–dealer exchange members that require basic licensing of their traders.
Back when my brother Bob and I started trading in the 1970s, we had to buy seats on the various exchanges (which was, yes, costly), but after doing so, we found out something unique about this business. After putting up $25,000 or so with our clearing firm, we were able to use their money for executing our trading strategies, while keeping 100% of our trading profits. All the clearing firm asked was that we pay for execution and clearing of our trades, as opposed to leverage — we were able to use capital to engage in solid, working strategies. We traded stocks, options, and futures back in those days. Over the last decade or so, we have found that our focus has shifted to equities.
This business arrangement — because we can never forget that trading is a business — worked so well that in 1992 we duplicated the model off the trading floor. Our traders don’t need to buy exchange seats. They put up around $20,000 or so and use $1 million or more of our capital (under tight risk controls), and keep 100% of their trading profits. We offer low-cost training for new people and have continued interaction with various mentoring, teams, and subgroups so that even our most remote trader feels part of the team, day in and day out.
Do your homework
I hope this helps clear up some of the misconceptions about serious trading. Keep in mind that trading is not for everyone. Treat your venture in trading as you would any other business endeavor. Due diligence is paramount. Check balance sheets, check broker-dealer exchange memberships, check the Sec, and so on. Good luck!
Suggested reading
Bright, Don [2008]. “Transitioning To Trading For A Living,” At the Close, Technical Analysis of Stocks & Commodities, Volume 26: December.
_____ [2008]. “The Business Of Trading,” Technical Analysis of Stocks & Commodities, Volume 26: August.