Letters to a Young Trader

Since I started this blog I’ve had a number of aspiring traders send me messages about getting started in the trading world. This post is inspired by a series of letters between myself these gentlemen.

This post in no way implies that I have all the answers.  I consider myself new to this game every single day.  I’m always fascinated by the reactions I get when I write people back (I answer every email).  Most don’t like the answers I give.  Trust me when I tell you that every lesson I share has paid for in blood by way of excruciating capital losses.

On seed capital:

…I just got $25k from my Aunt and I’ve always wanted to be a trader.  Do you think this is enough for me to go at it full time?

Capital is the lifeblood of this business.  The short answer is emphatically: NO, $25k is not enough to make it as a full-time trader.  I know a few people who have done it, but I know a magnitude more who have failed.  Small accounts are usually hungry for leverage or concentrated bets.  Concentrated bets and/or leverage exponentially increase the number of variables that can take your account to zero in a day.  Take this seriously.  I didn’t say lose a little.  I said ZERO.

As a side note, never put all your money into your trading account.  Maybe that sounds obvious, but there are plenty of people who get to their perceived capital start line (25K, 100k, whatever) and just go all in.  Never do this.

On proprietary trading:

It doesn’t seem like many proprietary trading firms are hiring these days and large financial firms are basically on lock down since 2008.  I received an offer from a firm called [insert firm name] but turned it down.  I got a bad gut feeling about it and they wanted me to pay them initially, then get firm capital.

Prop shops are dying.  Only one in a hundred are worth your time and they’re not hiring because the business model is dead.  It’s the end of an era.  The truth is that prop trading hasn’t been that great since the the days of decimalization.

Keep in mind that not every place that requires you to put up capital is a scam but they do deserve extra scrutiny and due diligence.  The previous notes on seed capital apply.

On Losses:

…I wish I was emailing you to let you know that I was still crushing the market.  Things started out so great but unfortunately I’ve suffered some pretty huge losses and I don’t know if…

The only thing that matters is that you live to fight another day.  I’m not being flippant about money lost because the money is important.  It represents time and opportunity.  Take some comfort in the fact that almost every successful trader I know blew up a small account at some point in their career.  It’s so common it should be considered more of a twisted hazing ritual than failure.  Yes, it sucks.  But don’t let that experience define you.  Take some time to discover the real reason you lost the money.  Be brutally honest with yourself.  Once you figure it out — learn the lesson and never repeat it.  You paid for it.  How you emerge from this is what defines you.

On education:

I go to school at [insert university] and I’m really interested in becoming a trader when I get out.  I’m mostly taking business courses…

Stop right there.  If you’re still at school and you want to be a trader it means you should be taking as much math and computer oriented stuff as you can.  Either that or you better introduce a star programmer to his or her future spouse and become best friends and business partners.  You need programmers as allies or you need to be a programmer yourself.  Trading is a quant game now.  You can bitch and moan about it or you can do something about it.

On mentors:

I’ve been following [insert mentor name] trading for months and for a while things were great.  It turns out that [insert betrayal]…

In the finance world you will experience many false mentors.  I have wholeheartedly placed my trust in people who turned out to be complete frauds.  Besides outright fraud, there are also a lot of people who have made their career from sucking ideas out of bright young people.  There are a lot of brokers who have made their careers sucking the capital inflows out of hardworking young people with no plan to help them grow.  Don’t worry too much about this, just know that it happens a lot and it will probably happen to you.  It’s a great feeling when you finally find a true ally and mentor and it’s usually accompanied by huge breakthroughs in your career.  The real breakthrough occurs when you learn that there’s no one else in the world that you can rely on but yourself and you trust yourself to deliver.

On “systems”

I read your blog and I really like you ideas on [insert any topic I've written about].  It’s very similar to something I’ve been working on.  Before we go any further I want to know if you are comfortable signing the attached non-disclosure agreement…

I have a mental exercise that I go through when I feel like I’ve “cracked the code.”  I visualize three other people in the world having the exact same idea as me at the exact same second as I did.  There is nothing new under the sun. Ideas are cheap. The only thing that matters is execution and process.  How you react to draw downs and the realities of having money on the line are much more important than any “system.”  I don’t want to discourage innovation, just know that the ideas aren’t what make you the money, it’s the execution.

On chasing the rainbow

…I’ve been having some success with [insert indicator] but I think I really need to incorporate [insert needlessly complicated financial theory].  I heard that all the guys at [insert TBTF bank prop desk] use it.  Do you have any code for this…

The big “secret” of financial markets is that nobody knows what they’re doing.  They only want you to think they do.  No one can pull back the kimono and show you how the world works.  There is no “god particle” of trading.  It’s all testing, applying, and iterating processes.  Think about this point for a good long minute.  It means that while you are essentially hopeless and no one has the answers in this world you also have more power and possibility in your life than you previously thought.

Don’t endlessly toy around with indicator settings.  This is a colossal waste of time and energy.  There is no more salvation in a 6-period moving average any more than there is a 7-period.  The trade that one kept you in the other got you out of.  Stop.

 On “making it”

…I don’t feel like I’m a greedy person.  I’m just looking for a way to consistently make $400-$500 per day to cover expenses and build my account slowly.  When do you think I will get to that level?

Never.  When trading is good, there nothing better in the world.  When it’s bad, it’s the worst.  The concept of “lunch bucket” trading is not realistic.  Trading is all about nirvana followed by crushing agony.  I wish I was joking.  You avoid more disastrous situations and you feel it less as time goes on but it’s always there.  Most money is made during a couple of good months of the year and the rest of the time is spent avoiding murderholes.

As a universal rule, the process will take roughly three times longer than you budget for.  For most people it takes a good 5 years to even be considered competent at managing money.  Getting objectively good at it?  Lifelong journey.

Conclusion

There’s nothing in this world that anyone can do or say to a stop a man in their 20s with a bankroll and a desire to trade.  Hopefully there are some lessons in here that make your journey smoother than mine.

Team up with people you trust and have complimentary skills.  Find an edge you have confidence in.  Reach out to people online.  Micheal Bigger is setting a great example of this.

Never take your foot off the gas of forward momentum.  Do whatever it takes.  Everyone that has done a few things that they were a little bit embarrassed of at the time, but they look back on with pride.


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