Friday, June 13, 2008

What Does it Take to Be A Successful Trader?


I can't tell you how many times beginning (or even intermediate) traders asked me how I learned to trade. I wish I could give them a simple answer - but frankly there isn't one.

What I can tell them (and you) is a little bit about my trading journey. Perhaps this may be useful to your own trading journey...

So to sum things up here is how it went:

1) Started talking to a friend who happened to be a Futures Trader. He had some interest in learning Forex.

2) Went to a Forex Trading Seminar in Los Angeles with said trader - cost $1k.

3) Got 2 useful things from the seminar. 1) Learned how to "test" a trading concept
"candle-by-candle", 2) Met Phil McGrew (who helped mentor me) .

4) Spent 6 months (20-30 hours per week) testing different systems from the seminar including some of Phil's old systems. Got TradeStation - cost $200 per month.

5) Wasn't happy with results of testing (my expectations were too high - wanted to make 1000% per year with like no drawdown lol) .

6) Spent another 1 year(20-30 hours per week) testing many different indicators and setups. Basically on the Holy Grail Hunt. Bought probably $500 worth of books, read every forum, website I could etc. etc. Setup account with TradeStation ($5k). Made $20k in 3 months and gave it all back in 3 days. Learned about the toilet stoploss.

7) Decided that automated trading was the way to go and began learning TradeStation Easy Language. Spent 6 months doing that. Bought an automated trading system (grey box) for $3k.

8) Discovered curve fit strategies don't really make money ;) Spent another 6 months learning about The Grail (a genetic algorithm and walk forward testing package) and spending another $1.5K. Finally got some decent results with that.

9) Discovered two important things that forever changed my trading life 1) Money management could make a decent strategy great, 2) I was a crummy programmer and that the main problem I had was that my automated strategies were never as good as my candle-by-candle tested strategies. Spent another 6 months discovering this fact.

10) After 2 1/2 years finally came up with 2 simple non-curve fit swing trading strategies that made money and which I continue to trade today with strict money management.

11) However, I still was not satisifed as I wanted to learn the day trading strategies that allow some traders to make money every day (more like every month). Spent another 1 year(40-50 hours per week) with NeoTicker ($1.5k) and NinjaTrader ($60/mo and $200/mo for eSignal data) discretionarily testing in tick by tick simulation several simple methodologies that I continue to use today. Spent another $5k in market hazing fees to determine what works and what doesn't.

12) Finally came up with a couple of simple methodologies that I continue to use. Finally after 3 1/2 years I had come up with several methods that work, are robust (only require occasional tweaks) and make money.

13) Today (about 5 years after I started) I am still making money and am working on converting my discretionary day trading concepts into automated strategy (no easy feat but one I am confident I will eventually complete. My swing trading strategies average about 80% ROI per annum with no more than a 10% max intraday drawdown. My day trading strategies average about 10% ROI per month with no more than a 10% max intraday drawdown.

Total Time to
Break-even: 2400 hours
Profitability: 3000 hours
Profitable Day Trading: 5160 hours

Total Dollar cost to
Break-even: $15,000
Profitability: $17,000
Profitable Day Trading: $26,000

So there you have it. Adding it all up seems pretty extraordinary. I guess they aren't joking that trading is a lot of hard work and that a good way to end up with a small fortune trading is to start with a large one ;0

Of course those of you just beginning will probably ask was it all worth it? To me it was. I enjoy trading so the hours spent do not seem wasted. Additionally, although the initial cost seems somewhat steep, when you compare this cost to opening a Subway shop (about $300,000) it seems pretty cheap. And my returns have already exceeded my initial investment with a satisfactory ROI beyond that.

The key that a lot of beginning traders forget is that Trading is a business. You don't become proficient at your profession without time and money invested. Hopefully this will help some of you who are still beginning your journey.


18 comments:

HPT said...

Great post LT.

Gabe said...

Hello
Great post.
"Total Dollar cost to
Break-even: $15,000
Profitability: $17,000
Profitable Day Trading: $26,000"
what do you mean by the last line?
BTW last I calculated, I have spent close to 10,000 (not a typo) on learning to trade Forex which is the same time it took me to get a degree in engineering (electrical) but recently I switched to futures (E-mini).

Anonymous said...

Excellent post. It took me about 5 years before I became a consistently profitable day trader. My journey was much the same as yours. I became profitable when I went back to the basics and threw the "holy grails + books + black boxes + subscription services" out the window. Now, I have two or three strategies that are very simple, yet work consistently in either up, down or sidways markets.

Lord Tedders said...

Gabe,

A lot of folks start off wanting to daytrade which can be very profitable. However, it's also much more competitive. What I meant was that it takes a lot more hours and $ to become a successful daytrader than it does a swing trader.

Lord Tedders

Gabe said...

Hello
I just noticed that I wrote "I have spent close to 10,000" but did not specify what. I meant hours.

Gabe

Anonymous said...

nice post- generous of you.

i struggled longer and vaporized alot more capital.

Chris said...

Wow, this really hit home for me.

Reads almost exactly like a script of my experience so far, but I'm only about two years in and half way down your list!

Encouraging and comically apropos.

thelonelytrader said...

why do i get the impression that the $1K seminar with McGrew was set up by Booker?

LOL. i spent some money and time on Booker and his antics-filled seminars, among other foolish ideas. i had respect for McGrew and wondered what he was doing with Booker's outfit.

at least you got mentored by McGrew out of the deal. i hope that was worth it. i personally found Booker's material facile and unhelpful. and his 1-on-1 mentoring was a farce.

i can only speculate on the reasons for McGrew's departure, but i see now that he is hawking a few systems himself. i'm sure he's more than breaking even on all the new guys...like us...like we were...ahem....

Lord Tedders said...

lonelytrader,

Yes the original seminar was a Booker seminar. I agree with most of your conclusions. The only things I got out of the seminar that were useful was learning about candle-by-candle testing and meeting other participants.

Yes Phil is selling a couple of his indicators. The difference is that Phil trades for a living and Booker doesn't (he does seminars as far as I can tell). Who would you rather learn from?

Personally, I feel that no one can sell systems/indicators and have their buyers replicate their success (even if it is legit)100%. Why? One word - psychology. I could hand 100 beginning (ie losing) traders a successful bullet proof, robust, automated trading system. 99 of them would fail to use the system correctly or at all. And while some automated traders maintain that automation takes out the emotion - that is pure nonsense. You still have to turn the machine on (and can still turn it off).

That being said, I applaud Phil for selling his systems with much more detailed instructions (including extensive instruction on money management) than the average systems vendor. He also spends a great deal of time teaching you the how's and why's of his system.

Of course most beginners don't know how to test a system, they don't know about the toilet stop loss and they will likely still struggle to trade well even after buying a good system like Phil's. Why?

There aren't any short cuts in this game. People need to stop blaming the systems vendors/brokers/fill-in-the-blank and take accountability for their own success/failure. But that's just my opinion.

LT

Anonymous said...

LT, thanks for the post. I was wondering though, what strategies do you use now? Thanks

Lord Tedders said...

I could tell you but then I'd have to kill you. Just kidding.

Actually there is nothing particularly special about the strategies I use now except for two things: 1) I came up with them, 2) I know their abilities and limitations.

All of my current strategies consist of indicator driven pattern recognition. Mostly they revolve around MACD and divergence. Two things Phil (and many others) have been using for years. So why have I made my own system out of it? Because by doing this I have tested and filtered it in a way that suits my trading goals both financially and psychologically.

This may sound unexciting but I assure you it has made all the difference...

LT

thelonelytrader said...

LT, I wasn't faulting Phil. In fact, I respect him, as I said. And I'm glad he provides more in the way of instruction than the average. I only wondered what he was doing with Booker, who is more of a marketing machine than a trader. And, as I said, I'm not surprised that eventually Phil went his own way. He's just much more grounded and authentic than Booker -- at least from my very brief experience with him.

And I was one of those systems junkies for awhile -- I must have gone through three or four, although I never took a look at any of the systems on the Currensys website. (I did get a prototype copy of McGrew's dots, when Booker was talking them up.)

I apologize if my comments offended.

Lord Tedders said...

Lonely,

No worries, I wasn't offended. And I agree Phil isn't anything like Booker which is why I suspect they parted ways rather quickly. Booker is quite a salesman though and fooled a few people into believing he was a successful trader. I suspect that might be why Phil went his own way.

LT

Anonymous said...

LT,

First of all, thanks for sharing your quantified trading experience.

Now that you feel your custom trading systems are profitable, do you believe that they will be profitable enough to earn a living to your standard?

Thanks,
Still a newbie

stuart said...

Nice post, interesting blog. I am self taught also; started from scratch and my trading is 100% my own methodology.

I give a lot of my methodology thinking out on my blog.

Sacramento is pretty hot in the summer, huh? I was in San Ramon for 3 years.

Regards,

Stuart
mechanicaltrader.com

Lord Tedders said...

Stuart,

Thanks for the comments. I'll be sure to check out your blog

LT

Lord Tedders said...

Still a newbie,

Sorry I missed your earlier comment.

To answer your question - yes. Although I have had to modify my expectations along the way and I will have to continue to "reinvent" my trading continually to stay ahead of the game.

As I mentioned in the post when I first started trading I had some very unrealistic expectations. I've been disabused of most of them ;)

What many beginners fail to realize is that they are undercapitalized and their expectations are too high. When I tell people that a good robust swing system might make 75% a year with 25% drawdowns - they yawn. What they fail to realize is the compounding power of money.

With this type of annual return you could take a small $10k account and in five years be making $70k per year - wouldn't that really be "enough" considering that this exceeds the average American income?

The problem is that we all read posts on elitetrader talking about guys making $70k per day - but no talk of risk or account size or skill.

As you can see by the intent of my post I don't believe there are any short cuts to experience - either in time or cost. However, I am very confident from my results and from results of other experienced traders I've met that one can definately make an acceptable to comfy living trading - but it is never easy.

LT

Market Monkey said...

Hey LT,

Very nice post. I like your business-minded approach towards trading. It'd be a good thing for most wide-eyed beginning traders to read in order to help them focus on the business of building consistency rather than the get-rich-quick idea that is so often irresponsibly advertised.

Great stuff!

MM