When To Quit Your Day Job

I have had many readers through the years--most of whom were less-experienced traders--tell me that at some point in the future they planned to quit their day jobs and trade futures full-time. While their optimism was certainly positive from the standpoint of eagerness to learn about a truly fascinating business, it is also probably unrealistic that they will ever make a good living as a full-time futures trader. At the end of this feature I have a few questions that may help determine if you are ready to attempt to join the elusive rank of "full-time" trader. But first, I want to present you with some straight facts.

I have been in this business nearly 20 years. I have read stacks of trading books and have voraciously studied markets and market behavior. I have worked right on the trading floors of all the major futures exchanges. As a journalist, I have conducted countless interviews with the very best traders and analysts in the world. But I still cannot specifically predict what a given market will do in the future.

Now, at this point a few of you may be thinking, "This is not very encouraging news. Maybe I should listen to some of those other guys that say I can have immediate trading success by learning their 'secrets' or adopting their 'proven' system or strategies?" While I hope this is not the case with you, I am very proud of the fact that I have made my reputation in this industry by refusing to be marketed and promoted (hyped) as something I am not, nor can ever be.

It's very important to realize the fact that neither I nor anyone else--not even the most powerful computer trading systems--can predict what the markets will do in the future. Markets will never be tamed. I've said many times that my profession is not a business of market predictions, but one of exploring market probabilities, based upon fundamental and technical analysis--and human behavior. By exploring and understanding market probabilities, and human nature, one can achieve trading success.

Many traders are lured by fast-talkers or fancy wording into thinking that someone or some firm has a sure-fire trading "secret" or system that beats the markets on a consistent basis--and racks up big trading profits in the process. But the truth is, most of these claims are half-truths at best and downright lies at worst--and come from people who are out to take your money. I tell my readers right up front that I have no "trading secrets" and that achieving futures trading success is not easy and takes hard work. And even hard work does not guarantee futures trading success. Unfortunately for many traders, it takes the pain of losing substantial amounts of money early on before they finally realize what I stress to my readers right away.

Okay, enough preaching from me.

What are some clues that you could be one of the fortunate few that actually could succeed at being a full-time trader? I'll get some questions for you shortly, but first I want to address an issue about which you may be pondering right now. That is: Jim, why don't you only trade futures full-time if you are so knowledgeable?

I have never attempted to be a full-time futures trader. By "full-time" I mean focusing only on trading futures and using the realized profits for my living expenses. In my case, that would mean no analytical service, no custom consulting, no educational writing--all of which I'm doing now. Since I have never tried to make a living only by trading futures, I cannot tell you whether I would be successful or not. The reason I have never attempted to trade futures full-time is because I truly enjoy the communications aspect of being a market analyst and a trading educator and mentor. I hope that those of you who have talked with me or emailed me would agree that I do really enjoy discussing markets with other traders. I do know that if I were to attempt to be a "full-time" futures trader, the task would not be easy, even though I do have much experience and knowledge.

Now, on to a few questions to ask yourself if you think you might be ready to trade futures full-time:

Are you a successful part-time trader? You'll need to be successful at trading futures on a part-time basis before you think about moving into the full-time trader ranks. Don't be fooled into thinking that trading futures on a full-time basis will allow you to spend more time to cure your part-time trading ailments. In other words, don't say to yourself: "If only I could spend more time trading markets, I could have more success than I've had just trading 'one-lots' here and there."

Do you have enough money available to live on when (yes when, not if) you hit a streak of losing trades? A losing streak will inevitably occur--and probably sooner rather than later. And I don't mean a losing streak of two weeks, but more like a stretch of poor performance of up to six months, or longer.

Do you have the psychological stamina to be a full-time futures trader? Quite frankly, most people do not. Can your psyche (not to mention your pocket book) handle six months of mostly losing trades?

Will your immediate family members support you--even during a prolonged rough stretch of trading? Believe it or not, this is a very, very important question. For example, if your spouse does not support your decision to trade full-time, then you are likely doomed to failure. The pressure of having to produce winning trades and knowing that your spouse is skeptical of your efforts is almost insurmountable.

And on your part, will you be able to uphold your family or other important responsibilities even during a rough trading stretch? Or, will you brood and kick the dog when he happens to cross your path?

I think you'll agree with me that those are tough questions to answer.

One more thing: I do have many readers that are "full-time traders" but who do fall into a different category than what I described above. These are people who do have enough money to trade futures on a full-time basis--even if their trading profits alone will not support their lifestyles. These are individuals who already have significant amounts of money derived from means other than trading futures. Also, I have many readers who are now full-time traders, and that have retired from another profession and want to spend the "autumn of their lives" not in a rocking chair, but in a field that is challenging to them.

Finding the Best Traders In The World

I was recently approached by a top hedge fund about profiling the best traders in the world. Profiling really refers to finding those psychological characteristics that will best predict success. And I believe that I'm one of the world's experts in that area since we have a huge database of psychological profiles of traders. I've been testing traders since 1982 to help them discover their strengths and weaknesses. The instrument that I've developed, The Investment Psychology Inventory, does an excellent job of that.

However, if you were to numerically rank the best traders in the world, they are probably people who can take $100 million dollars or more and make 20% per year on that money consistently. There are probably only about 20-30 such traders in the world, so how do you profile those traders? And even if you could get a thorough profile of all such traders, their numbers are so small that your data might not be that meaningful. Such are the issues of profiling.

After spending some time thinking about the whole issue, I now believe that my company has developed everything possible to do the task. However, it involves a lot more than just a psychological profile. In fact, it involves a number of assessments.

First, you need their psychological profile. I would expect traders who can make 20% per year or more on large amounts of money to generally fall in the top 10% of our database on all the skills we measure.

Second, I would look for their trader type. We now believe that there are approximately 15 trader types, but that most top traders would fall into only five or six specific categories. As a result, I'd want to look at their trader type.

Third, I'd want to look at accountability. All top traders must believe that they are personally responsible for the results that they get. This leads to certainly qualities. Either 1) they have tremendous discipline to do what needs to be done to be a top trader or 2) they have a strong desire to constantly work on themselves to improve. They are constantly working to maintain an optimal mental state for top performance and they are constantly looking at their beliefs to see if they are useful.

Fourth, we can now quantitatively measure systems and determine how good they are, regardless of the type of trading that people do. I call this the System Quality Number or SQN ™ for short. For example, someone who has a system with an SQN of 5 definitely has a much better trading system than someone who has a SQN of 3. I would expect most of the world's top traders to have systems with SQNs of 5 or better. And the exciting thing about the SQN, is that we can measure it for various market types.

Fifth, one of the big secrets (that most people don't understand) is that position sizing (the variable that controls how much throughout the course of a trade) is the key to meeting your objectives. I expect that most top traders understand this concept at some level. However, this can be taught and can be used to improve performance dramatically. And the higher the SQN, the easier it will be to use position sizing to meet your objectives. Thus, if your SQN was only 3.5, you still could be one of the best traders in the world if 1) you had thorough control over your personal psychology; 2) totally understood how to use position sizing to meet your objectives; and 3) have mastered the sixth quality which is the ability to minimize the impact of mistakes upon your trading.

Sixth, the next secret of the top traders is that they know how to minimize the impact of mistakes. I've talked about this in prior tips, but let's say that the expectancy of your system is 1.2R. You make 100 trades per year, so you should be able to make about 120R per year. However, let's say that every month you make one mistake. That mistake costs you 5R. So in one year, you'll make about 60R worth of mistakes, and your total return is now only 60R. Your mistakes will have cost you half of your potential returns. Top performing traders know how to negate the impact of mistakes.

Lastly, there are certain fundamental skills that all top traders will have such as 1) how to get the information you need; 2) how to execute orders; 3) how to organize yourself; etc. I'd expect all top traders to have these specific qualities.

Using the "ADM" Method to Deal with Losing Trades

A main tenet of success in futures trading is the ability to accept losing trades as part of the overall trading process. This is not an easy undertaking--especially since many futures traders tend to be of a more competitive nature in the first place. Traders certainly don't have to enjoy losing trades, but they must accept the fact and move on. Those who can't accept the fact that losing trades are a part of futures trading usually don't stay in the business very long.

My wife is a school teacher, and one of her favorite acronyms--ADM--can be applied to losing futures trades. "Accept" it. "Deal" with it. "Move" on. (This is a part of the important psychological aspect of trading, and deserves much more discussion than I can provide in this feature.)

I had lunch with one of my trading mentors a while back. We discussed losing trades. I asked my mentor how many losing trades in a row he has had to endure during his long and successful trading career. His reply was 13 in a row. I asked him how he coped with that. He said that while it was certainly not easy, he knew that losing trades are a part of the business and that he was in the business "for the long haul," and that his trading methodology was sound. He added, "Ninety-percent of futures trading profits are made on 10% of the trades, which means most of the other trades are either small losers or break-even-type trades." This is an important fact for all traders to keep in mind.

My lunch meeting with my mentor was good for me because, even though we made no "break­through" discoveries on the path to increased futures trading success, we did reaffirm our own philosophies on trading and markets. My passion for trading and market analysis is fed immensely every time I talk with people in my profession, or attend the quality trading seminars.

For many of you, the futures trading arena can be more fulfilling (and more fun) if you have someone, or some support group, with which to share your thoughts and strategies. If you are passionate about futures trading and markets, finding someone who shares that passion is a great trading tool within itself!