[Nick Radge]

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#3

‘Situational Irony – Making More Money’

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Today I’d like to discuss a classic example of situational irony, specifically whereby people tend to think there is more money to be made by electing to trade for a living.

But what do the numbers say?

To explore this we’ll run a basic experiment, however, in order to illustrate my point I have exaggerated the outcomes – so please don’t bombard me with emails pointing out the obvious.

Let’s look at the outcomes of three traders over a 10-year period. As you’ll see all three started with $100,000 in capital and have made excellent returns. I think it’s fair to say that any trader going +143%, +91%, +81%, +46%, +159% and +109% in their first 6-years has probably got ‘trading for a living’ tattooed across their forehead.

Trader 1
This trader typifies many I have come into contact with, specifically they remove all their profits for a year (or a month) and start again with the same balance. Unfortunately some of these also have a tendency to splurge during big winning years and fail to squirrel away funds for lean years. There is an argument for removing profits – so that losing years, or major drawdown periods, will be relatively congruent to winning years. For example, if I start with a capital base of $100,000 and make 50% in a year, keep profits as trading capital, and then have a 50% losing year, I’ll finish my second year of trading with $75,000, that is a negative year of 25%. Here’s how Trader 1 fares…

You can see in this example exactly why Aliom Trading Academy suggests having some savings in place for those lean years that come along – and they do come along for everyone at some stage. Even though this trader has had outstanding results, the annual salary is no better than the average wage. One wonders what the true hourly rate really is…

Trader 2
This trader takes a little bit more of a business approach deciding she can live on $80,000 but will also reinvest her excess profits back into the account to compound. Certainly sounds like a smart move. This has allowed some of the lower profit years to not be as lean as Trader 1 and over time she will certainly benefit from the ongoing compounding. Even so, for this 10-year period the annual salary is still just a little above the national average.

Trader 3
This trader is not caught up in the hype of trading for a living. Whilst he’s been able to generate solid returns using an end-of-day strategy he has been able to maintain his day job that he not only enjoys, but also offers a great social life as well. As he doesn’t need to live from his profits he duly reinvests them knowing that the compounding effect will be significant over time (and yes, liquidity/scale will limit the outcome).

Trader 3 has been able to create the same profit, yet in half the time – simply from the power of compounding. After an extended period, assuming one can scale to some degree – which we will cover later, Trader 3 has put himself not only into a very strong financial position, but has also done so with significantly less stress and worry. He hasn’t needed to dip into saving during lean years – his normal day job is his hedge.

The situational irony is that most people wanting to trade full time and for a living, tend to work long hours, potentially as long as a small business owner. And secondly, the need to withdraw profits, even after very successful periods of time, will dilute their absolute earning abilities. This example clearly shows that profits must not only cover expenses but also grow the account. Even Trader 2 operating under that principle, was still not making great leaps and bounds in financial gain.

In summary most aspiring to trade for a living do not have a capital base to be self-sustaining.

[Nick Radge]

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#2

‘Situational Irony – Working Less’

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Above I stated that trading for a living is full of ironies, specifically one type known as situational irony.

To recap, situational irony is when actions have an effect that is opposite from what was intended, that is, the outcome is contrary to what was expected.

Today we’re going to talk about work ethic and the expectation that trading for a living will allow you to spend minimal time each day on the markets and spend the rest of your time swanning around on a beach or the golf course.

I have plenty of contacts that trade for a living, but many of these guys sprouted from the trading floor of the Sydney Futures Exchange where I spent several years. Their experience is beyond anything the average person in the street will be exposed to, so I phoned my friends at Aliom Trading Academy. Aliom is a proprietary trading company that offers a free 6-week trading incubator course; 2-weeks in a classroom followed by 4-weeks on the simulator using real time data.

If you’re a successful candidate you get to trade their money with no downside risk to yourself. The perfect trade!

But before you submit your resignation letter, consider this…

Aliom receives up to 1000 applications from individuals wanting to be part of the course and to ultimately become “Prop Traders”. Just 20 people are accepted. Of the 20, only a handful will go on to complete 12-months trading with the company’s money.

About a 1% success rate. Like any high performance pursuit, many are called, yet few are chosen.

But for the sake of this exercise let’s say you make that 1%.

What kind of personal attributes do Aliom look for?

Interestingly they look for entrepreneurial traits – dedication, deliberate practice, focus and persistence.

So let’s assume you have those traits – just like other small business owners.

Indeed that’s what Aliom hammers home – it’s a business just like any other.

Trading is no different to running a local bakery, for example. You need to be open as long as you can to take advantage of people walking past. You need to be up at the crack of dawn to bake the bread so it’s ready when those customers come through the door at 7am. You keep the shop open until customers stop, then you clean up, do the books and reordering then start again the next day.

The traders at Aliom start at 6.30am in their Sydney office (no, not at home or from the beach). The dealing room is dead quiet. All eyes on the screens. Watching numbers tick over. Tick. Tick. Tick. It reminds me of my years on the trading floor – the most exciting place to work when it was running fast, but like watching paint dry the other 90% of the day.

The Aliom traders finish at 6.30pm unless they decide to trade into the European session – which many will do.

The name of the game is being involved when the market is busy (like the bakery being open at peak times). A trader needs price movement in order to make profits, and some of the busiest periods are when US economic data is released. And you guessed it – the busy times for US data releases are usually between 11pm and 1am.

So you’ve done a 12-hour day which, more often than not was quiet, and now you’ve got to skip the pub with your mates to come back to the office at midnight to trade US volatility.

No beach. No pub. It really is like running any other business!

For those that do make it through, turning an average $60,000 wage kicks in at about 14-months. The term ‘wage’ needs to be used loosely – you only get paid if you make money. They make an investment in you – of about 12-months, but after that you need to consistently make a profit because your wage is a slice of that profit.

If markets are quiet, if volatility subsides, or you lose your feel of the market, then you’re expected to support yourself. Remember, no profit – no slice of the pie. As a result many candidates have a lower living threshold, i.e. still living at home with parents, or no dependents, a solid saving base to turn to or in some cases the traders have second jobs to keep them going during lean times.

Interestingly, of my many contacts that trade for a living, almost all of them have some kind of secondary business interest. They don’t necessarily work for someone else, but they run a side business that in many instances is not related to trading.

[Nick Radge]

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FRIDAY

No US trades
Upload new ‘Debugging’ lesson to MC
Write and upload new ‘Correlation’ lesson to MC
Finish running MCS for mean reversion with new exit

[Nick Radge]

Here’s what I’ve been working on today. This is one of my mean reversion systems, which currently generates an exit based on a close price to be executed the next open. I wanted to see if there was any specific benefit by exiting at the end of the day instead and removing the additional o/night exposure.

Column 1 is the system in its current format and the way its currently traded.
Columns 2, 3 and 4 are variants of the exit on close, specifically no index filter, index filter at 100-days and index filter at 200-days.

What are your thoughts?

[Nick Radge]

What about where the position doesn’t exceed n% of the average daily volume, where n = 10?

[Author]

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