Trading as a Business

 

What can I expect to make my first year of trading?

We get questions like this one quite often. We find that most aspiring traders don’t have a clue as to what to expect from the market. Yet here they are, putting up their money. Most are going to learn the hard way.

We have no idea in the world what you can expect to make in your first year of trading, or any other year, for that matter. What we can tell you is that without proper guidance and help, you are probably going to have some very bitter experiences. Why? Because your anticipations are almost completely wrong.

Futures traders, especially beginning traders, often open an account with unrealistic expectations of trading performance. These expectations could be formed by the sales literature for a trading program that emphasizes its profitability, by reports of success stories by top traders or by some brokers within the industry. In all cases, you are rarely made aware of the many other times when performances were considerably worse. In other words, you are a victim of selection bias.

Most advertisers of courses, systems, books, etc., will mislead you into thinking that you just can’t lose if you buy what they are selling. We are talking here about hype, major hype – as much as the authorities will allow them to get away with.

Selection bias is a term well known within the social sciences and occurs whenever some undesired screening factor leads to a misrepresentation of a population sample. For example, traders seldom express their losing trades with as much enthusiasm as their winning trades. Consequently, a random selection of letters or phone calls received by a company that sells a trading program often will overstate the proportion of traders who are doing well.

Sometimes the cause of the selection bias is not obvious. For instance, let’s say that a trader who purchases a very expensive price and charting package is more profitable than another trader without it. The merits of the package seem obvious. Maybe not. It could be that the individual who can afford to purchase the package is better capitalized than the other trader and this is the reason for the better performance.

Starting off your futures and options trading experience with unrealistic expectations inevitably will lead to frustration and disappointment. It’s better to face reality now. It will make life as a trader easier down the road. Here are just a few facts to dispel those unrealistic expectations.

1. More traders lose money than make money. The figures are fuzzy, but it is 80% to 90% (maybe more) who end up losers and leave.

2. Within the industry, only a small percentage of retail traders are profitable on a consistent basis. Moreover, if you are just starting out, you should expect to incur some loss strictly due to error on your part as you climb up the learning curve. Increased trading knowledge and experience combined with trading strategies that have superior risk/return characteristics can help put the odds of success in your favor. So, it is important to study the markets and educate yourself before trading or, alternatively, you can rely on the support of your broker professional. Another option you may also want to consider is paper trading. It’s a viable option because it’s a lot cheaper to make a mistake in a fictitious account than a real one.

3. You will have losing trades. In fact, most of your trades will be losing trades. It is impossible to predict price movements every time. Even when the technical and fundamental factors are in agreement, the market often moves in an unexpected way. This can even happen several times in a row. For this reason, it is always important to make sure that loss is limited on every trade and that you have sufficient trading capital to withstand several losing trades without being taken out of the game.

4. Don’t expect to become financially independent. It’s unrealistic to expect a small-sized account, especially one under $5,000, to generate consistent income to replace regular employment. While this may be possible for a very low percentage of traders, it does often require high-risk trading. High-risk trading means that if you are one of the many who lost money, then you probably lost your money very quickly and you may end up owing even more money to the clearing firm. High-risk trading should be avoided, especially by the beginner. Rather, concentrate on low-risk, low-frequency trading and devote appropriate effort to increasing your knowledge and understanding of futures trading.

Keep in mind that, as a beginner the emphasis should be on learning and proceeding slowly. By that, I mean practicing in a paper trading account and confining your trades to those that have low risk. The expectations of huge profit that many beginners start out with may be realized, but only after you invest the requisite time and energy and only after a slow and realistic start.

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