AT THE CLOSE
Is Trading Right For You?
If you are interested in becoming a trader, this is a very important question to ask yourself.
Most traders new to the business don’t ask themselves if trading is right for them. They may assume that trading is the thing for them because they have the desire to trade. Anyone who wants to trade should consider whether it is a good fit for them personally. Every profession has its rewards and challenges, including the requirements of hard work and years of practice. However, trading in its specifics is unique.
Misconceptions about trading
Misconceptions about trading abound because it is a profession foreign to most people. Trading is not gambling, but that is a common impression. Some think that making money trading is easy and doesn’t take much effort, while others believe it is impossible to beat the markets, or that being in the markets has no redeeming social value. How many traders have had the experience of having another professional comment that trading can’t be as demanding as practicing medicine or law? It isn’t easy to acquire an accurate concept of what trading is like and its daily emotional demands unless you actually do it.
Historically, traders were a small group who had little interaction with the outside world. Since the advent of the Internet, however, ordinary people living anywhere in the world with Internet access can trade. In the 1970s, you needed the services of a stockbroker if you wanted to buy and sell on Wall Street. A transaction could cost more than 5% of the value of the security and take days to complete. Ordinary people had to have a long holding period just to overcome transaction costs. Futures and option markets were as exotic as aardvarks.
Today, trading for a living is an occupation with low barriers to entry for anyone with ambition and a few dollars, but its lure is deceptive. Available to the would-be trader are seminars and trading books that purport to explain how to do it. You may think once you read a few books and understand some mechanical basics, you’ll be able to. Beware! Most of these books and seminars are run by people who do not trade for a living. Few other professions have so many nonperformers passing themselves off as experts, preying on the unsophisticated.
Trading done correctly can be lucrative, much more so than giving seminars or writing books. This is particularly true if you have the ability to leverage your trading into the real business of running a successful trading firm, which is no mean feat. It is a lot more difficult to run a trading firm than many other types of businesses because of the risk controls necessary and the difficulty of finding, training, and keeping good traders.
Not many people who know how to trade well teach or write about it. There are some excellent books on trading and some excellent teachers of trading, but the number is small considering what is available, and you have to be selective. Good traders trade, and they aren’t any more likely to be good teachers or writers than anyone else. Trading as a basic skill can be taught to anyone with the minimum talents necessary for it. To become an outstanding trader requires a lot more.
Is trading right for you?
Consider your goals. Do you intend to trade to make a living as a professional or as an amateur who has a full-time occupation other than trading? If you’re trading full-time, you should consider yourself a professional and treat it as a profession. This may sound obvious, but there are those who try trading full-time because they have the money and nothing else to do. If you are one of those, and you understand what it means to make a professional commitment to what you’re doing, that’s fine. But you have to understand the necessary commitment. Short of that, you’re inviting failure.
Trading seriously requires serious effort, and it’s not an occupation to be taken up as a retirement activity, unless you’re ready to commit yourself to it as a new, full-time, rigorous occupation. Many people have the mistaken idea that because they have bought and sold a few stocks and made a little money that they can go into trading. They think that trading should be easy, won’t take much time, and can be a good diversion. Or they think that trading is good for someone who wants to keep busy with a light workday. Stories in the popular media promote such ideas. Try trading for yourself with these thoughts in mind and unless you are a rare, natural trader, you may be in for an expensive awakening.
What makes trading as a profession different from other occupations?
- Its emotional satisfactions are harder to come by.
- It is lonely because it is an individual performance, even if you’re working with a group.
- It is typically time-demanding — much more demanding than most new traders expect.
- It is highly repetitive in its daily rhythm, so if you don’t enjoy the repetitive activity, you’ll likely fail.
Let’s examine these topics.
Emotional satisfaction
People trade for the money. But if you’re in it just for the money, you may have difficulty succeeding. True success in any profession, including trading, requires that the professional enjoy what he or she is doing and derive emotional satisfaction from it independent of the money. The money may be important, but in the final analysis, it doesn’t drive success. The emotional rewards drive the success, and money is relevant only to the extent it helps with emotional satisfaction. Rich people may like their money, but they typically have their emotional needs met from enjoying positions of prestige or from other personal accomplishment. Their money may be necessary for these things, but usually it is not the end-all and be-all.
Most people are social animals, but the emotional satisfactions of trading largely have to be self-generated since you’re interacting with a computer screen or paper research, inanimate objects without a satisfying personal touch. Charts and numbers on computer screens are not an adequate substitute for the back-and-forth interplay with peers and associates. Lawyers deal with clients and other lawyers. Doctors advise an endless stream of patients who reinforce the doctors’ self-esteem, in addition to making them think they’re serving the good of society. Teachers and professors have students. Traders typically do not have a professional relationship that gives them emotional comfort. The normal working relationships that generate emotional connection are absent for them.
As any experienced trader knows, without the proper emotional attitude toward your trading, you’re likely to lose money, and it’s not easy for most people to get emotional support from their trading, especially if they’re losing money.
Trading can be a lonely occupation
You don’t have to be a loner to be a good trader, but it helps. Trading is commonly a solitary occupation, even if you’re part of a trading group. It takes a special person to do it on a daily basis. Most people are not that psychologically independent. Know your needs and, if necessary, find someone else to trade with or find a group that will support you. Internet trading rooms have lots of participants not only because there are inexperienced people looking to learn how to trade, but also because there are lonely traders looking for others. If you’re not a loner, you still need to get emotional fulfillment from contact with others. Perhaps this will be by participating in nontrading activities, like community volunteerism. Remember, if your need for supportive human contact isn’t being met from your trading, the problem can contribute toward incurring losses. Trading, it seems, favors introverts over extroverts. The more you crave contact with others, the less likely trading is for you.
Part of the emotional support a trader needs can come from his family, if he has one. You can’t trade well if your spouse thinks trading is just gambling. That spouse just won’t be understanding enough to help you through losing streaks, largely because he or she doesn’t comprehend that if you trade correctly, things will be fine in the long run. Further, if your spouse is afraid of losing money and your trading goes into a losing streak, you’re more apt to try to make back losses to avoid conflict. Many people will continue to trade and lose anyway to avoid a spousal confrontation because they get hijacked by their emotions.
Do you have enough self-awareness to recognize when your emotions have taken over your trading and to force yourself intellectually to override your counterproductive emotions? If not, perhaps trading isn’t for you. How much do you want to lose to answer this question?
Trading is a performance occupation
Trading, especially discretionary trading, requires a high level of successful personal performance, much like a courtroom lawyer, a skilled artisan, or a surgeon. Trading doesn’t require a high IQ, but it does require a certain above-average IQ, and it requires a fairly high emotional quotient or, alternatively, the right emotional composition to start with. If you have been unsuccessful at other activities in life, you may need to examine why you had problems and ascertain that the reasons for your lack of success will not carry over into your attempt to trade.
Conversely, many successful people who acquire large amounts of money to trade the markets often assume that because they perform well in one occupation they should be able to do well if they decide to trade. You should think about why trading is different from other professions and why, even if you are successful elsewhere, you may not like, or be suited to, trading.
Trading is time-demanding
Trading is time-intensive. Understand this before you get involved. People who believe that trading means easy money are the same unfortunates who don’t understand that being a successful doctor or other such professional also takes time. Trading does have the redeeming aspect that, once you master it successfully, you can pick different ways to trade that may involve a more or less demanding schedule, but this is true of most occupations.
Many professionals only work part-time. But these part-timers are typically making lifestyle choices that cost them income and professional advancement, and they are able to do so only after they have already become productive members of their chosen profession.
The daily rhythm of trading
Trading is highly repetitive in its daily rhythm, so if you don’t enjoy its recurring activity, you’re likely to fail at it over time, even if you can do it right for the short term. While many occupations are repetitive in what they do, they also have enough situational variation to keep things interesting. Practicing law, for example, has repetitive tasks, but dealing with new situations or clients can be never-endingly fascinating.
Trading, however, is much more constricted. Not that some traders aren’t challenged by new situations. A foreign currency trader can make a game out of second-guessing what government politicos will do. But for the most part, trading has a daily rhythm of analyzing, position sizing, entry, and exit.
The demands of risk control and consistency limit innovation or boldness. If you have a need for novelty or excitement, trading might bore you and lead you to overtrade, either in size or frequency. The rhythm to trading on a day-in, day-out basis is unsatisfying to many. These are people who could trade but would be better off in other careers. If you need thrills and excitement, you probably will not tolerate trading for long, as going for excitement in trading can be self-destructive.
Another quirky aspect of trading is the need to take time out if things aren’t going well. As youngsters, we’re taught that if we’re not getting the grades we should, we need to study harder. This attitude toward working harder carries over into adult life; if you’re not doing well at your job, the usual remedy is to try to work harder.
In trading, the opposite is true. If things aren’t going well, it’s a signal that something is wrong and you need to slow down or quit to figure out what it is.
The daily rhythm of trading requires a light touch, not forcing matters. Can you take a vacation coming off losses or do you need to fight back?
People are drawn to trading not only because they see the chance to make big money, but also because they believe trading could bring them a certain freedom and life satisfaction. For most of them, however, this freedom does not exist because trading requires certain attitudes and commitments. So even though you may have the native ability, time, and money to trade, trading may still not be right for you. You typically won’t hear such a thing from people holding seminars.
There is an old saying that a profession is 90% perspiration and 10% inspiration, and this also applies to trading. If you don’t comprehend the nature of the 90% hard work, you may not like it once you get to it. Most traders have to do a lot of analysis, often going one step backward for every step forward. If you can’t handle that, don’t trade. Trading isn’t a steady monetary progression forward, like getting a regular paycheck. You can have long drawdowns or dry spells.
It is important to internalize the daily rhythm of trading. Many would-be traders fail to understand this and thus fail. Taking positions out of boredom or greed becomes something that strikes professional traders as viscerally wrong. Those professionals know that you can’t trade harder to make up for past losses. They know that even large losers are part of the process and will be paid for by winners over time. How common is it for traders to overtrade because of this? You can trade aggressively, but that is different from overtrading to make up for past losses, which can be a self-reinforcing cycle of destruction.
In business, you know you can manage revenues and expenses (the process), but you can’t manage the bottom line (the result). In any profession, you have to focus on the process. This is true for trading. Do the process correctly and let the results fall where they may, confident that over time the results will be good. If you don’t like the process, you won’t perform well over time, and that means you’ll lose money in trading, which in turn may lead you to make more mistakes.
Do the right thing
Is trading for you? It can be rewarding and fulfilling. Truly successful people draw a positive emotional charge from their work, even if at times they find it draining. The luckiest people find their work to be fun, even if there are moments of drudgery. What’s your choice? Trading is an unusual way to make a living. If you feel it is right for you, go for it. Your life is not about money. It’s not about success versus failure, but about doing the right thing for you.