Against the Odds - The Process of Becoming a Professional Trader

So you want to be a trader? Let’s take a look at what succeeding at this endeavor will entail and maybe I can convince you to save yourself the grief and just go get a job, keep your current job, or choose another occupation.

Of all the people who ask me about trading for a living my estimate would be that a full 100% of them are completely disillusioned about it. Fifty percent of them think that it is just easy money and that anybody can do it and the other fifty percent think that it is nothing but gambling. I can assure you that no newbie wanabee trader has any idea or appreciation of how much time, money, pain, perseverance, and work is involved in trading for a living successfully. This article is going to look at what it takes to achieve the designation of professional trader.

It is a common used statistic that 85-90% of traders lose money. This means that only 10-15% of traders are making money on a consistent basis. (First of all the percentage is not exact so to simplify in this article we will use the 90/10 ratio) So what does it take for a losing trader to move in to the category of winner?

Well for one thing think about it like this: Say there are only 100 traders in any market. That means that there are 10 traders consistently making money and 90 traders consistently losing money. In order for a trader in the 90% losing category to move into the 10% winning category and to keep the 90/10 ratio in existence one of two things needs to happen. A trader in the winning category has to drop out and there has to be a new losing trader that comes into the market to take the place of the loser that just advanced to winner OR no winning traders drop out but the loser who advanced is replaced by a proportionate ratio of new losers to keep the 90/10 ratio intact. For example starting with 100 traders, 90 being losers and 10 being winners, if 10 moved into the winning category that would mean there would now be 20 winning traders and only 80 losing traders. This would mean 20% of the traders would be consistently winning traders and 80% of the traders would be consistently losing traders. We know that this ratio is not correct so what has to happen for the 10 losing traders to move into the winning group is that an additional 100 NEW traders would have to start trading and fall into the loser category. This would give us 20 consistently winning traders and 180 consistently losing traders – the perfect 10%/90% ratio. Now suppose again that 10 of the 180 move into the winning category leaving only 170 in the losing category with 30 now in the winning category. The losing category of traders would again need an additional 100 NEW traders to start trading and be losers for the 10%/90% ratio to be intact. See where I am going with this?

The point is that for a loser to become a winner a LOT more new losers need to enter the market to keep the 90/10 ratio intact. You also have to think of it like this. If you are a winning trader, you either continue to be a winning trader, retire, or blow up and stop trading. If you are a losing trader you either advance to being a winner, continue being a loser indefinitely which requires an endless supply of capital, or blow up and stop trading. The percentages are such that losing traders are more apt to leave the markets and stop trading then winning traders are. If you are consistently winning you have no monetary reason to stop trading and every monetary reason to keep trading. Losing traders are either forced to advance to winner or stop trading when their money runs out.

So far we have focused on people that are currently trading the markets or attempting to trade the markets. Every day there are hundreds of new brokerage accounts opened by people who ASPIRE to trade the markets. We know that for every 100 new traders that come into the markets about 10 will succeed and 90 will ultimately fail. That is just the way it is.

So how hard is it to go from newbie trader to consistently profitable trader? We have all heard the analogy of how hard it is to make money trading. The great trader Jesse Livermore used to say that when people asked him how to make some quick money in the market it was akin to someone asking a doctor or lawyer how to make some quick money in surgery or the law. For anybody who has ever traded this makes perfect sense. You wouldn’t read a book on surgery over the weekend and expect to go into the operating room and perform even a simple operation on Monday morning. Yet people routinely go to a weekend seminar or read a book and expect to start extracting money from the markets on a consistent basis. This is just not realistic. The same commitment and study that it takes to become a doctor is what it will take to become a consistently profitable trader. Some would argue the same amount of money as well. Instead of paying for college and medical school we will call it market education and tuition.

Now let us take it a step further. If one sets out to become a doctor they go to college, then medical school, then graduate and either go into private practice or get a job somewhere as a doctor. That is it – mission accomplished! If ten people set out to become doctors as long as they graduate from medical school they become doctors. Becoming a doctor is based entirely on your own effort and ability. You don’t have to put other doctors out of business to become a doctor. However if ten people set out to become traders and put in the same work and study and money in the effort as the aspiring doctors do, nine have to FAIL for one to become a trader. Imagine if after completing medical school 90% of the graduating class had to FAIL at becoming doctors for you to become a doctor. Not realistic right? If that was the case I imagine nobody would ever go to medical school. Yet that is EXACTLY what has to happen for you to become a consistently profitable trader. This is because trading is a ZERO SUM GAME. Being a doctor is not. The ONLY WAY to make money trading is by taking money from other traders. You don’t make money as a doctor by taking money from other doctors. Your pay as a doctor comes from your employer, the hospital, insurance companies, and ultimately patients.

When people trade the common misconception is that they are trading the market or taking money out of the market. They are not. They are trading OTHER TRADERS and taking money from OTHER TRADERS. In order for one trader to make money another trader or group of traders needs to lose money. This is how the market works and that is why it is a zero sum game. If you are losing money in the market the market is not taking your money, other traders are taking your money.

So thinking along the lines of traders trading other traders and knowing that only ten traders succeed for every ninety that fail let us take it yet another step further and talk about position size. If ten percent of traders are consistently successful traders then that means that those ten percent of traders are controlling ninety percent of the size. The ninety percent that are losing are handing their money over to the ten percent that are winning. Obviously not on every single trade, the losers do win sometimes, just not enough to be consistently profitable. The losers have to win enough to make them think that they can cross over into the category of winner so that the winners can keep taking their money before they eventually go broke and are replaced with other losers. And the ten percent lose sometimes too, just not enough to drop them into the ninety percent that lose consistently. One of the old adages on Wall Street is follow the smart money. It would seem to me that it would be more important, and easier, to make sure you know what the dumb money is doing so you can do the opposite. On any given move ninety percent of the traders are on the wrong side of the market while ten percent of the traders are on the right side controlling ninety percent of the size. This brings us to the conclusion that there must be a LOT of 1 lot losers in the futures market and a LOT of 100 share losers in equities. Of course the percentages may not be 90/10 on any given move but over time they equal out this way to keep the 90/10 ratio intact

So what have we learned? We know that most traders fail while a few succeed. We know that the barrier to trading entry is easy. Open a brokerage account, make a deposit, and that’s it - you too can have your money taken by professional traders. Compare that to becoming a doctor where the barrier to entry is a much longer and arduous process. Realize we are talking about the barrier to ENTRY in the profession. For entry is it much easier to become a trader than a doctor. For SUSTAINED SUCCESS over long periods of time we have learned it is much easier to be a doctor. That being said trading is a great profession if you are successful and it is obvious why everyday so many new people set out to make trading their career.

The freedom trading for a living provides is unattainable in almost any other profession. You can work from home in your pajamas or anywhere in the world that has an internet connection. You can take time off whenever you want and never have to worry about a boss telling you what to do or where to be. Not to mention the money that you can make is great if you are in the ten percent of consistently profitable traders. However before you decide to embark on the journey to professional trader be sure to first weigh the costs for they are not just monetary. The damage that consistent losing and ultimately failing can do to your pocket book, your soul, your psyche, your relationships, your marriage and your family is very real and sometimes irreparable. Be sure that you can handle it. In closing, if you should decide to attempt this journey, I wish you the best of luck and good fortune along the way, and in the meantime, I will look forward to taking your money.