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Kane Trading
on:
'Trading as a business is
not like people think it is'
The following is excerpted
from my monthly
commentary of November 1, 2009:
"The idea for this topic came about from the
comments and questions I get from mentor students and via e-mail communications
with those I work with and from people just asking me questions or sending me
comments. I started to hear a lot of the same things, and I found myself saying
to people, over and over, "Trading is not like what people think it is." By
this I mean trading as a profession, as a small, home-office based trader, is a
lot different than most people's perception of what it is like. Given this, I
thought I might throw out some of the things I believe, as compared to what I
frequently hear.
 Keep in mind this is all just one man's opinion. Do your own due
diligence, and draw your own conclusions. I also want to mention, I started to
write this article many times and stopped every time. Why would that be? Like a
lot of what I have said in my quest to try to show this business in as
realistic of a light as I can, as far from what the 'dream merchants' will tell
you as possible, I also realize that I may be scaring people away. I have
discussed this in the past at times. Just like on a first date most people
don't tell the other person their deepest secrets and biggest flaws, as they
know this will scare them away. They hope to let them get to know them slowly,
over time, such that perhaps they can see the good qualities, and then as the
'lesser qualities' come out over time, they can weigh them up all together, and
still be interested.
Hence, if I 'tell it like it is', with all the warts and
all, and paint it up really scary, some that perhaps would have been suited to
this business will never get a chance to give it their all, if that is what
they want to do. I don't hold back on both sides of trading, but I am reluctant
to put all the more challenging aspects in one article and put all the emphasis
on that one side. I could try to balance it all in the same article, but that
would be quite long and too far off topic for me to do right now.
So, I will
just preface it with the above, and explain why I haven't written this up until
now and why I am not so sure it will achieve the desired goals. It's not that
my sole desire is to sell as many books as possible, but it also serves no
purpose to have this website if I scare everyone away and no one studies my
work at all. I do think, though, that not everyone wants to be a full-time
home-based trader, so those that fall outside this category won't necessarily
be less inclined to purchase the books after reading this.
Okay, with
all that overly long prefacing and scaring everyone to death, let's get
started. You'll probably find it isn't near as bad as what I led you to think.
As we do this together, what I plan to do is a mish-mash of ideas and thoughts
that I have heard over time. They all fit the theme of 'It's just not like you
think it is…' I'll start with one of the most common things I hear, and
that's how much money people attempt to start with. I get asked all the time
how much money is needed to be a 'full-time' trader. That's not a question I
can answer. But the issue isn't that I can't answer that, it's the thinking
behind the question up to that point that concerns me.
Let me point
something out here before we move on. A lot of what I am going to discuss has
to do with running a small business, and isn't specific to a trading business.
It's just general business sense, business 'smarts'. And most people come to
the home-based trading business idea with little or no business knowledge. And
they don't spend any time studying up on it, as they study their charts. Like
I've said in other writings, it's one thing to have a great pizza recipe, and
entirely another thing to run a successful pizza place on a day to day basis.
Now things come into play like employees and employee relations, supply chains,
building maintenance, insurance, bookkeeping, delivery vehicles, and on and on.
And this all takes skills totally different than having a great recipe.
So it is with
trading, too. Having trading skills is one thing, running a successful trading
business is yet another. Here's how many approach me. They say they want to
quit their job and replace a certain income with trading income. They want to
know how much capital they need to do that. Now, of course, you all can see
that I can't answer that because I have no idea what kind of rate of return
that person can generate, I don't even know them, I just got an e-mail, or I am
talking to them on the phone for the first time. Sometimes these levels of
income are moderate, like $40K, $60K, or the like, but sometimes they are in
the six figure area, sometimes well into six figures, and I've heard a few that
are into seven figures.
Now, how much income a person wants to generate from a
given business is one issue, but generating it from a given amount of startup
capital is another. If I told you I wanted to find a way to generate $50K per
year in income, can I do it? The answer is yes, no problem. It reminds me of an
old Steve Martin shtick where he says you can be a millionaire and never pay
taxes. Okay, Steve, how do I do that? First, get a million dollars… (the
funny part is skipping over how you get the million dollars, of course). So, I
get a million dollars and put it in a treasury at 5% (let's assume we are in a
time when you could still get 5% on a long-dated treasury, for the sake of the
easy math here), and there's my $50K a year. Works pretty much every
time.
You see the point? If I have enough startup capital and my
expectations are reasonable enough, my chances of success go way up. What if I
want to replace that big seven figure income? Same process, just start with $20
million. What does that make the process? Well capitalized. Here's what I hear
instead, though. I want to replace that $100K income, and I have $20K to start
with (I won't even discuss how many people tell me they have $2K, $5K, or $10K
to start with). If I can just get 500% return per year I can do it. And I ask
them 'So, what kind of savings do you have behind you?' And they say either
that $20K, or none, because they borrowed some or all of that $20K. Now, don't
think trading here, think 'small business'. This is the classic 'starting on a
shoestring'.
There are endless books and websites about starting a small
business on a shoestring. People do it all the time. And they fail all the
time, too. From everything I have read, the number one reason small businesses
fail is undercapitalization. Yet when I try to explain this to people I almost
always get the same response back: 'Well, this is all I have and I'm taking my
shot.' Now, if that person fails, is that the fault of trading being such a
'tough business, with a high failure rate'? I always read about how 90% of
traders fail. I have also read that in the first five years of operation 90% of
businesses fail, and of the 10% that survive that first five years, 90% of
those fail in the next five years. That means 99% of small businesses fail in
the first ten years. Sounds even worse than traders.
So, perhaps a
lot of what is attributed to trading as a business is really just general
business related aspects, and not specific to trading at all. They say, for
example, most businesses that fail don't have a written business plan. We will
discuss this a bit more shortly, but when I ask these traders if they have a
written 'Trading Plan' they all say no. Trading issue, or business issue? Let's
get back to capitalization. How much capital do you need? Well, what is a
realistic rate of return for you and your 'Trading Plan', and how much income
are you trying to replace? Only you know that amount. I can't tell you
that.
Now, what if you can't come up with that amount? Then you are
undercapitalized, and the odds for failure, as a business, go way up. It
doesn't say you can't do it, it just says you've started with two strikes
against you already. I know it seems to be human nature to just ignore risk and
somehow assume it won't tag you because you are ignoring it, but trust me, that
makes no sense. Saying 'This is all I have, so I'm taking my shot' is just
nonsensical. Maybe you should look at trading part time, and trying to build up
more capital. Like the pizza recipe analogy, it's one thing to trade
successfully, and totally another to run a successful trading business that
replaces all income, and to do it consistently over your working
career.
And let's dig into the 'average' traders who are asking me such
questions. They want to replace that income, but mostly to quit that job
they dislike so much. It's not so much getting into trading as getting out
of that 9 to 5 routine. So, here's their situation, on average. They are
married, have kids and dependents, have very little savings, hate the grind,
and want out. They see trading as 'their shot'. Take what little savings they
have, and perhaps even had to borrow for their 'grubstake', and try to 'make
it' as a trader. And you know what that is? A recipe for disaster. Not for a
trading business, for any business. And it happens every day in America. In
fact, we look up to such people, the backbone of America, the courageous,
struggling, small business man or woman. And when we look at the handful
after-the-fact, they are awe-inspiring stories. Just like looking at a few
trade winners after-the-fact and seeing how pretty they look. But is this a
good approach?
Here's where everyone is waiting with bated breath for Jim to tell
you what to do instead. But, I have no answer to that. I can only say that if
you tie a hand and a half behind your back when starting any business, you have
a tough row to hoe in front of you, and I don't recommend it. All I want to
point out is how this has nothing to do with trading and trader failure rates,
and everything to do with business failure rates. And let's keep digging. This
trader now has a decision to make, quit the job and 'go for it', or try to
trade part time and phase the trading in. And what do I see over and
over?
A small percentage of these aspiring traders quit their job and
take a shot at it. They maybe give themselves six months tops to 'make it'.
Most try part-time first. Let's start with the first case. They are under
big-time pressure, because now they have to replace all their income and they
have serious bills to pay. Maybe the wife is complaining about all the savings
being in the trading account, and lots of bills are piling up. Talk about
pressure. But what about their comprehensive 'Trading Plan'? All written up,
right? Nope, no written 'Trading Plan'. 'Hey, I know in my mind what I need to
do and that's enough for me' is what I hear all the time. Again, a trading
issue or a business issue?
Now, we all know the old saying that 'scared money never
wins'. Here's a guy who is under the gun big-time, doesn't have a comprehensive
plan drawn up in writing, and is grossly undercapitalized. But it gets worse. A
lot worse. Does this trader even have an edge? Does he actually have a
net positive outcome 'Trading Plan' to start with? Probably not. How much work
has he done to verify his methodology and his skills? Has he done the
prerequisite work to feel he has something workable? (See my article on simulation trading for part of
that process.) Again, think about the pizza shop owner who may not even have a
decent pizza recipe, to go along with all the typical small business mistakes
he is making while opening up the store.
Let me do a little aside here
before we move on. I always tell people that they should have multiple steams
of income (think about this as yet one more reason when we get to my discussion
on teaching later on), such that when one stream slackens off a bit, others
fill in the gaps. On top of all the pressure this new trader is feeling after
quitting his job and being under the gun to make it right now, he also has no
other steams of income. If he were more diversified he may be under less
pressure, and be better able to withstand drawdowns. And speaking of drawdowns
and undercapitalization, do you think trading is 'steady' income? Think again.
It can be very 'streaky', and if the initial capitalization is tight, and no
other steams of income are coming in, one can draw down and out very easily. In
other words, the risk of ruin is very high when undercapitalized.
So, what is
the next major issue this trader runs up against? His head. Psychology. Not
being able to get his game face on, or keep it on. Trading is a bit different
in that if one has psychological issues the capital can start draining away
very fast. In a sense this can happen in other businesses, but in my opinion
not like trading in most cases. In a pizza place if you make mistakes you lose
customers, and that can wipe out a business. But it's hard to wake up the next
day, or an hour later, and all of your investment, and maybe more, is gone. In
trading, anyone can blow themselves up in five minutes is they want to. And
nothing will bring out any issues you have like trading, especially trading
under pressure.
I tell people all the time that trading is the most fascinating
journey one could ever take, if one's goal is self-discovery. To reach the
average goal in trading one will have pretty much every psychological issue
they have buried deep down inside exposed and brought to the surface. You will
come to know yourself intimately. And you will find ways to deal with those
issues, or you won't succeed. This is why so many are drawn to 'system
trading'. It 'takes the emotion' out of the trading. (I also believe it takes
essentially all the potential 'edge' out of trading, too, but that's another
topic.) If you can't, or don't want to deal with your own head then simply
eliminate it from the picture, right?
I have heard many, many times from various
traders that 'I have no psychological issues'. And every last person that told
me that turned out to have tons of issues, and either went through the above
process, or quit and didn't face their issues. You want to know who you are,
who you really are, take on trading. I'm of the opinion that most people don't
want to know, especially in our culture of bury your head in the sand and get
me another beer. Is this a trading issue? Not really, it's a personal growth
issue. Trading just brings it out, like nothing I have ever seen. But then
again, I have heard this same exact thing about golf, so I think there are
other professions where the experience is the same.
I won't run
though the various psychological issues, a few of which are fear of failure,
fear of success, impulsiveness, timidity (tentativeness), indecisiveness, lack
of discipline, self-esteem issues, lack of self-confidence, and on and on. I
would refer the reader to places like Dr. Brett Steenbarger's blog for a start,
as well as some books on self-help. But rest assured this will be the main
focus of your efforts once you master the basic mechanical aspects of your
trading. It is a very unique journey for each trader, but a long arduous one
for every trader I have ever known. It is also an incredible bonus if
you see it that way.
Not what you signed for, though? Gee, Jim I thought
trading was about having fun banging out those winners day after day, not
spending endless hours like I'm on the couch in therapy, working on my head. I
don't want to deal with all that kind of nonsense. Then I only have one thing
to say to you: Next! Sorry if that sounds flippant or cruel, but it's the way
it is, as I see it. Like I said, this business isn't anything like people think
it is. And let's get back to the other trader (the one who tries this part
time), and then we'll take a look at the more mechanical aspects of the
'Trading Plan' that come before the average trader usually discovers he has
some 'head' issues.
The other approach I see a lot is to retain the job and
dabble at the trading part time. The main issue with this I think is that most
work during the day, so the 'part time' is usually off market hours. If not,
they can trade maybe the first hour or two in the morning, which is a lot
better than only after market. I find most, if not just about all of the people
in this group generally give up after a time. I just think this profession
takes way more time and energy than most understand, and if you go to half or
less time, then you can expect it to take two or three times as long to reach
some minimal level of competency, and very few can keep focused that long
before wanting to move on. And how long are you looking at?
This is
another one of those questions that I can't answer for you. I can only give
some guidelines that I believe are useful. I have written elsewhere that I find
it amusing how people understand and grasp the amount of time, energy, and
resources it takes to become a doctor, commercial airline pilot, architect,
professional athlete, and so on, yet they will argue that it won't take them
that long to be able to go up against the best equipped, most highly
capitalized people in the world and take their money away from them working at
home on their PC. This situation is worsened further by the endless posts in
forums by traders who appear to be successful, saying they did it in six
months, two years, or a bit more.
Look, I can't say these people aren't making
money right now, and that they may not continue to make money consistently from
this point forward, but even if they are, you can't look at a small handful of
potential exceptions and expect that you will also be an exception. That's not
a very good approach, in my opinion. I tell people that if they work full time
at their studies then they may be able to reach a minimum level of competency
in five years. To be a beginning level 'master' at your craft, I'd say ten
years. And will all those that do that much work succeed? Nope, not even close.
Same as trying to be a doctor. Many try, many work hard, and many fail. Wow, is
anyone still reading this? Or are you all gone?
I'm not saying that there is no way
you can make any money before this period of time, only that to start getting
some consistency, and to have a good feel for your skills, think five years.
Some may be pretty good after three years, but most won't be. And what does all
this information do? It creates 'dream merchants'. See, you read this, and you
want to go elsewhere. Jim is saying that if I bust my hump, maybe five years
full time, and maybe I might be able to start making some money. Maybe.
Then I see endless ads for places that promise to teach me to successfully
trade in a weekend, and have a 100% money-back guarantee if I don't. And I can
follow the guy live in real-time as he trades every day in his chat
room.
Well, sign me up. That's a lot better approach than what Jim is
saying. And Jim isn't saying this with regards to his own methodology or
training for people. He's saying this for any working methodology. One that
will adapt to varying trading conditions over time because it is based on
hard-earned skills based on price action, not some gimmicky setup that works in
the ES today under these market conditions. A skill set that is fractal across
all timeframes and all issues, as long as there is liquidity. And that takes
time and lots and lots of hard work, and screen time. I recently heard about an
airline pilot and they were bragging on how much history he had, and he had
like 12,000 air hours. I have about 33,000 screen hours at this point, give or
take. There is a lot to be said for putting those hours in, and what it allows
me to see and decipher from price action.
You have to put in the time, and
most won't. And very few understand that. And even less understand that
imperfect practice doesn't move one forward. I'm forever surprised at how
people read the books and take from them what they can, as best as one can
learn from a book. But as I see them post in the forum, they get stuck, and
even after a year goes by I see little improvement. If I work with them
one-on-one, I show them things they simply can't see, I direct their thinking
and learning, and they make quick improvement. So, point is, an hour of screen
time isn't just an hour of screen time. It's not just the hours; it's how they
get spent. I'm not trying to get more students when I say this (I'm maxed out
now anyway), but to make a point.
If one is just spinning their wheels it's not
an efficient use of time. Imagine trying to become a doctor and doing it with
no schooling, just from books and forums. This is getting a bit too far off
topic, so I will finish up with this thought and move on. Because there are so
many charlatans out there, it is very difficult, almost impossible, to find
good training. I dislike being associated with any 'business' with so many
shysters that a day doesn't go by that I don't want to fold the entire website
just to distance myself from these hucksters. And given how it is out there,
when you go to a forum all you see are posts saying no training is worthwhile,
and everything you need is free on forums. And to me, that does an aspiring
trader a huge disservice. But, there is little I can do or say that will change
that attitude.
You see, you should be starting to get the idea that being a
professional stay at home trader is a lot, lot more than having a good entry
setup. And that's just about all forums talk about. When I work one-on-one with
someone I am devoting my personal attention to showing him or her every aspect
I think is important for a 'Trading Plan' from start to finish. As I have said
many times, the PTA (potential trade area i.e. 'the setup') is only 10%-20% of
my 'Trading Plan', whereas for most it is 90%, 95%, even 99%. I cover all these
other aspects in detail. I have the student do work while I watch, and we
discuss it. I have them trade, in simulation mode, and do an extensive journal
about each trade, including screen captures, and we review those. I bring my
entire 33,000 screen hours to bear in this process, in a one-on-one
interaction.
Now, you truly think that you can do this as efficiently on your
own, or by reading forum posts about setups? Again, I am not trying to talk
anyone into working with me here. My point is, think about what I am saying. I
don't see how anyone can expect to progress at a reasonable rate without some
one-on-one training from someone. Sure, some can figure out their own
path given enough time, but how much is your time worth? How much is it worth
to shorten the learning curve up significantly? I only harp on this because on
a percentage basis very, very few that buy my books ever follow up for
one-on-one work with me. This is good in a sense that I can only work with a
few people per year, so if it were any other way I couldn't help them anyway,
but it isn't any other way. Even the webinar approach, which would be very cost
effective, and wouldn't require any traveling, fell flat on its face.
People don't
do what it takes to succeed. In this regard, I hope it's clear now, 'trading is
not like you think it is'. The process, what it takes to achieve success, it's
not at all like the forums and the 'dream merchants' make you think. It's hard
work, and how much time you waste and how long it takes you depends a great
deal on the efficiency of your training. Most won't put in the hours, so they
will endlessly chase the next hot setup and the next forum or chat room guru
whose only desire in life is to help you make money, for free, of course. They
just don't want to do what it takes, for as long as it takes.
Now, let's
get to what it's like day to day, because here is where I got the idea for this
article. People have one impression of what it's like to sit in front of a
screen all day, and in reality, it's quite different. Many think of this as
'exciting', and lots of fun. Imagine, not dealing with a boss, banging out
winning trades all day, cah-ching, cah-ching, ringing that register. Then, if
you are a west-coaster for example, done by 1 PM, and off for the day, kickin'
back and living the good life. If that's what you think, you couldn't be more
off the mark if you tried.
First off, trading is boring. A real grind. And it
should be boring. If you are getting excited when you catch a 'winner', then
you'll likely be getting down when you hit a 'loser'. What an emotional roller
coaster that is. Try that long-term and you'll burn out, or trash your health.
This is a probability game (another aspect most don't grasp), and there are no
'winning' and 'losing' trades (see my article Kane
Trading on: The Myth of 'Right' or 'Wrong' on a Trade), only net
overall positive or negative 'Trading Plans'. Over time you do or do not have a
net positive outcome. What happens on each individual trade matters not. To get
excited or depressed on a per trade basis shows a complete lack of
understanding of the concept of a probability game.
So, most of
the time you sit around, waiting, putting areas together, seeing price action
not reach an area, then more waiting, more work, then an area is hit, but no
entry trigger happens, more waiting, then you get a setup, you're in, then you
get stopped out, more waiting, some more work, then maybe it's over for the
day. The next day, more of the same. You catch one, you wait some more, and so
on. Just like my many poker analogies, check, fold, fold, check, take down a
pot, check, fold, all night long. Grinding it out on your backside. That's
professional stay at home trading, in my opinion. Very boring, and rightly so.
If it's not, you better check yourself.
Now, let's talk about some excitement. You
get the grand pleasure of doing this all by yourself. Day in and day
out, all alone. Sure, maybe some alone time sounds fun, but every day? Day
after day, year after year? I've been alone in my home trading office for
almost twelve years now. That 33,000 hours? All alone, every last hour of it. I
used to be out interacting with people, like when I was a teacher or worked in
industry. Now I live in a very rural area, and sometime realize I haven't
stepped out of the house, even on the front porch, for an entire week. Sound
fun? Let me tell you, it's a very exciting lifestyle.
Now, isn't
the idea of trading from home supposed to be to open up free time to do other
things? Yes, but here's the dilemma. I like talking about trading, I like
sharing with other traders, and getting something back, so I can learn from
others, too. How can I do that? First off, essentially no one understands what
I am doing at all. I created most of what I know, and trust me, no one knows a
lot of this stuff. I have no colleagues. So, back to no human interaction.
Hence, I decided to create some colleagues. We may spin a little off topic here
for a minute, but bear with me.
I have many times seen people saying if
someone can trade why would they teach? And they follow up with they never
would. This frustrates me to no end. How about teaching so you can actually
interact with a human being in regards to the thing you enjoy most? How about
getting some people up to a speed such that you can show them something and
they have the background skills to grasp it (and maybe contribute back to you,
too)? How about to get out of the home office and to get together with a live
human being instead of spending one's entire life looking at squiggly lines on
a flat panel? Anyone who thinks there is no valid reason why some who can trade
would teach, too, just hasn't been there.
So, back to the point. It takes
time to train people to reach a high level of skill, it takes time to keep a
website running so I can find people (or so they can find me), time to post in
the forum and make that worthwhile to the people in there, and so on. Add on
all the chartwork after the market is closed, and there isn't much time left.
All that free time I was looking for, it's not there. I love doing what I do,
but it takes just about every waking moment. Sometimes burnout can be quite an
issue. Many advocate taking time off, but it's hard to do. It's hard to walk
away. But what's the point of spending the night working with a student and
doing chartwork while your family spends the night alone, again. See, trading
as a business is not what people think. It's not just banging out fun setups,
one after another.
The other thing that can really wear on you is the lack
of activity. I've been in this chair now as I write this after the market about
twelve hours straight, and I'm far from done. I have students lined up all
weekend, and I'm turning people away and putting some regulars off. I don't go
to the gym anymore, I use a home gym, to save the travel time, which I simply
don't have. And except for the occasion summer walks, that's all the activity I
have. My hands and joints are so stiff right now I can barely move them. It's a
lot of fun, this trading thing. I used to be extremely active, a real outdoor
person. Now taking the garbage out to the end of the driveway every other week
is a big outing for me.
Now, who is going to tell you all this? You don't see
this in forums, you don't see this in books, I've never seen this anywhere. I'm
not saying trading isn't fun, a real blast. Trading is fun, in my opinion. But
a 'trading business' is a business, and it's work, just like any other job.
Most self-employed people work long hours. None of this dream merchant 'work an
hour a day and be a zillionaire in no time' nonsense in the real world. It's a
grind. It takes a lot of work to reach a level of success, and many can't or
won't do what it takes.
So, anyone left at all in here? Hello, is there anyone
there? See, I don't want you to click away, and perhaps not study my work.
Trading is as it always has been. It's just that taking what is perhaps a fun
thing that you like to do and turning it into a career that requires you to
replace your income, and doing that without thinking it through, as one should
in any business, well, that's an entirely different thing. Study this business
the same way you study the market, do the same amount of work in the business
aspects as you do the trading aspects, and see where that has you coming out.
At least you'll have done your due diligence.
So, how do I think I did with this
article, as far as covering what I wanted to get out? Well, I'm at about twelve
pages in my word processor, so it's going to be a lot longer than I thought.
And I really only covered a fraction of what I wanted to cover (perhaps a 'Part
II' some day?). I have just learned so much since I started this journey almost
twelve years ago, and I want to get a lot of it out there. I hope I didn't
scare too many people away. Hopefully, the effect will be the opposite, in that
many who are struggling will come to see a lot of what they are experiencing as
more normal, and that they aren't alone in this respect. If that's the case
then all this work on this article will have been worth it for me."
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