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If you are smart enough to be in the psychology section you know that the cardinal sins of trading are:
1) Cutting your winners short, letting your losers run;
2) Overtrading; and
3) Undercapitalization.
Notice that the first two sins are largely influenced by the third. You cut your winners short because booking a profit feels good when you can't afford to lose. You overtrade by scalping the market with no edge because it feels "safe" to be and out of the market quickly.
You are undercapitalized: What it really means
What you need to understand about undercapitalization is that while there are few barriers to entry in this business the less capital you have the harder it is going to be and the longer it will take you to get where you want to go.
You can visualize it like being a race car driver. You capital is like your car. If you are driving a pinto you would have to be Mario Andretti to just place 10th. If you are driving a Bugatti veyron it is a lot easier to place 10th and with skill you can place first.
My own story of undercapitalization
Two years ago I was playing around (I can't really say I was trading since what pro trades this small) with a small account (less than $25k). I had been practicing for over 6 years at that point. Getting better and finally going from losing trader to slightly making money. But it was like trying to win the Grand Prix in a pinto.
I met a couple other traders during that time who all had six figure and seven figure accounts. And when they showed me what they were doing I was blown away that I was by far a more knowledgeable trader, but they were making a lot more money. And it didn't take me long to realize that the reason that they were making more money was because they had more money. They didn't freak out because a trade was going against them (still within their loss rules) because it was 0.005% of their account. If they made 2% on their account that was huge $. They had no pressure to perform because making money was relatively easy. And because it was easy they learned faster and better.
Ok great. But what if I wasn't born a millionaire?
I made a decision after talking to these two guys. I would do whatever it takes to replicate how they got there. So I asked one of the guys how he started getting his funds together. He said he took an extra job. He said he also lived like a college student (reducing expenses) and he saved every bit extra to fund his account.
So I took an extra job working some weekends. And my account started to grow.
And then I cut out every bit of discretionary spending that I originate. No more eating out, no more drinking, no more online shopping, all of it. And that helped a lot.
And then I talked to my wife about what we could do collectively to take it even further. I showed her where we could be in 2 years and in 5 years if we could make some sacrifices today. That meant no vacations for the next two years, cutting out discretionary spending, and having hard conversations with friends and family about what things we won't be doing with them for the next 2 years so that we can retire in 5 years (if we want to).
Today we're saving 50% of our collective paycheck and all of the trading profits and growing the trading account exponentially. What has started out small is getting bigger and bigger.
The take away
When I talk with other traders who are struggling they tell me about all the hours they put in to their trading. Staring at indicators, putting together spreadsheets, and charting support and resistance. And then I find out they are trading a $1k account.
I want you to be honest with yourself - if success in trading meant taking a second (or third) job, not eating out, and skipping vacation - would you still be up for it?
Are you willing to do whatever it takes to be successful? Or are you just playing a video game and fantasizing about success?
This Thanksgiving I am grateful of the decision I made about a year ago. I want to give my future self the gift of success - that means today I am willing to make a sacrifice. As Dave Ramsey puts it, "will you live like no one else will, so that you can live like no one else can?"
What kills me is that it is relatively easy to find good robust trading methods that make 25% a year with modest drawdowns if you are well capitalized ($100k plus). I found these systems within the first 2 years of trading but rejected them because of lack of capitalization.
If I had started saving in day 1 (been working on or trading for 10 years) I would have had $100k by year 4 and with a "good enough" trading system would now have a seven figure account (assuming 25% a year compounding). Think about that.
Everyone is shooting to make 100% or 1000% a year but who cares if you are trading a $10k account? Shoot to save up a 6 or 7 figure account and then "only" make 15-25% on it. Most of us are just ignoring how long it takes to be successful in this game and the power of compound interest.
I also just want to mention that you can trade CME micro futures for like $1.25 a tick, or spot forex for even less. For someone that is trading "on the side" (has a full-time job otherwise), or for someone who is trading when they shouldn't be (ie recently laid off), then this makes far more sense than trading full sized futures.
The other option is to swing trade equities. It doesn't require much and the risk per trade is relatively low.
According to Dierk Droth, the VP of Engineering for NinjaTrader, the upcoming NT7 beta will include a Monte Carlo simulator.
Monte Carlo sims are a way to produce random data to simulate different types of market scenarios and events, so that your strategy …
What you absolutely don't want to do is trade money you cannot afford to lose, or trade too large a position where you can't make good judgments. If you are trading a size where you would fret if you lost the ability to manage that position for a day or two, then likely it is too big.
Those are great points Mike. I totally agree that swing trading forex, micros, or equities is much much better than attempting to scalp or daytrade.
I think it is also important to make sure that our hours are spent wisely. I personally know 2 traders that are willing to get up at 3am and trade until they go to work. Yes, they are scalping forex However, even if they switched to swing trading forex (or something else), they are trading a $1k and $5k account respectively. Assuming they can get to the point that they are making 25% per annum on their account in a year or two that means they are making $1/hr (assuming 1 hr per day trading) and $5/hr respectively. And that doesn't include the year or two they spend to get to that point.
However, since they are severely undercapitalized I would argue it is unlikely that they will heed your sage advice of swing trading because they would rather chase a fantasy that they can turn their $1,000 into $100,000 in a couple years.
I wouldn't worry about the $$ being made. It's all about percentages. And the most important factor is that most traders make the mistake of thinking in dollars, and therefore the take unacceptable risks in order to "make" good money.
What they should be doing is focusing on not losing money. Once you have demonstrated to yourself that you are consistently profitable, you can start to scale up your position sizing. It is still not an easy thing to do, as each scale up requires more concentration, more discipline due to the size on the line. Frankly, it just requires more experience with being comfortable in your trades. And the best way to get comfortable in your trades is to trade the "I don't care" size until you are consistently profitable doing so.
Those guys that turned a $1,000 account into $1,250 at the end of the year are doing better than most other traders who are either breakeven, or usually in the hole, after a year of trading.
Wow nice guys. I trade only ES and some equity..ETFs. This is off topic.
thanks Mike. I googled micro futures. Nifty is something which came up. I always wanted to be in Indian markets. Now to figure out how to get the symbol onto my platforms
Thnx Mike. I want only insight into India via nifty. I wish we could have seen the full nifty from here. My main stay will only be ES.
yes you are correct Volume is a big issue. Will explore how to get view on full nifty.
However, even if they switched to swing trading forex (or something else), they are trading a $1k and $5k account respectively. Assuming they can get to the point that they are making 25% per annum on their account in a year or two that means they are making $1/hr (assuming 1 hr per day trading) and $5/hr respectively. And that doesn't include the year or two they spend to get to that point.
