How Long does it take to become Profitable?
Perhaps the most common question asked, and yet one of the most difficult questions to answer. Let us start by considering some of the following points.
- How much time can you invest into learning and practicing material
Many professionals, both within the financial markets and outside the markets have tried to quantify this down to c. 10,000 hours. It might be worth mentioning that this agrees with my own learning curve which has taken place of the many years.
- Do you have a background in finance, risk management, statistics or general trading
Although not necessary, it would provide an immediate advantage that could be used directly towards your own learning curve. It's sometimes difficult to not only learn a new topic, but to also get into the correct mindset. Having a background in a related education can help you tune into the the right mindset and thus absorb the new material in a more efficient manner.
- What is your own risk appetite and are you emotionally reluctant to accepting losses
On reflection I suppose ones risk appetite wont effect how quickly you become profitable; however not being in touch with your emotions and chasing losses certainly will end in tears. I wrote a separate blog entry on the importance of back-testing a trading theory - the benefit of doing this is to directly influence your emotions when live trading as you will have a realistic expectation. Most new traders are not realistic and have little idea towards self-control.
- Can you deal with self motivation, and accept that you are wrong on occasions
Similar to above but with one key difference. Are you self-motivated? There will be times when you just want to give up. You will have spent years of your life working towards a goal that is taken from under your feet by the market. The market really can seem like an emotionless figure who is there to get you at all times. We've all had this feeling from time to time. Being able to motivate yourself when times are tough is a key characteristic that all traders need to acquire.
- How do you value money, and how much capital do you have to invest into learning
How much can you invest into trading. The majority of traders are very much under-capitalised. We've all seen the traders in forums opening accounts up with $100 with the ambition to make $5,000 a month in income. Yes, I know this website is attempting demonstrate how I can turn $1,000 in over $100,000 - but lets have some credit where it is due, please!
- Do you have objectives from the get-go so you can analyse your potential progress
This is a topic in its own right and deserves a real high level of thought. You need to measure your success in any career, and trading is no different. We can come back to this point another time - however, never underestimate the benefit of measuring your performance over time.
Perhaps the most important point of all
Are you willing to treat trading as a business in all aspects, and not just that of money management, but also by objectifying your own personal needs as an active source of measuring your success and ability to progress.
Trading is a unique business, and this needs to be considered:
Can you name any other business where there are almost no barriers to entry for everyone? The cost of capital is also almost zero, you only need a PC and an internet connection, and that's it, you're good to go. So what does this really mean, it means that the competition is fierce between turning a profit as anyone can freely enter into this industry, an industry where the cards are already heavily stacked against each and every one of us from the starting line.
Trading is sometimes considered as a zero sum game, (before transaction costs), meaning for every profitable participant there is an equal losing participant. However this is not equally distributed between retail traders - don't think for one moment that 50% of retail traders make money and the other 50% lose - it certainly doesn't work like that. But we already know this, don't we. We've all seen the 95% failure rate figure in almost every trading conversation in almost every online trading forum. I have also seen the 90/90/90 rule come up from time to time (although this is more popular with employees who work at retail brokers - it simply means that 90% of retail traders will lose 90% of their account in 90 days)... A rather bleak picture is starting to appear, don't you think?
Lets not get to down beat about this though, conversely this also suggests that there are huge opportunities for successful retail traders to exploit. Have a think about where the 90% of losing traders money is actually going (take the retail broker out of the equation for one moment, if we please can!). This money, on the whole, is being transferred to the traders who are making the correct decisions. For the experienced traders reading this comment, I know that it's a rather grey comment and not completely true. We can get into the black market ins-and-outs of how retail brokers operate in another blog entry (it's bound to be a big one).
Most other businesses require some kind of property to trade goods and/or services from. Then you have to pay for rent and electricity, water and gas. You may need transport to visit clients which comes with insurance and tax costs. Perhaps you need to pay an advertising firm to promote your business to gain leads and increase profits. Do you need to pay for professional qualifications in order to legally trade in the named industry...the list goes on and on, and the costs can add up. But these costs are acceptable as they are seen as start up costs (and perhaps running costs in some situations), which are required to open and maintain the business in question.
Retail Trading from home requires non of the above, therefore in order to succeed you have to be at the best of your ability and realise that education is the real cost in this business. I'm not talking about the cost of education in perhaps monetary terms, but more so as the time that you invest into learning. This is the only variable you can control which can effect how successful you actually are.
For example, buying a $10,000 top spec PC to trade from makes no difference. Moving to Barbados to trade from a penthouse will make no difference (I don't mid trying this though). Paying for the fastest internet connection in town will make no difference. I'm hoping you can see my point by now? - investing in tangible assets above and beyond the required basics is pointless and just serves as a 'feel good' factor.
So lets bring this back to the opening question - How long does it take to be profitable? The most significant variable to this question is "how much time can you invest into learning", this is the real holy grail, not finding some trading system that will make you money 100% of the time...they simply don't exist.
How long did it take for me to be profitable? It took much much longer than I originally anticipated, over 4 years. I spent hours and hours each week getting to grips with creating a fully quantified system that remained profitable for over 10 years of data. It had to stay above water during recession crashes, flash crashes, boom and bust periods and all other market cycles. Learning statistics was also another hurdle to overcome, even though I've always been great with numbers; applying it to trading risk took some time to get my head around. This was all done from knowing nothing. I can say with confidence that it's taken over 1,000 hours of screen time to get to where I am now - so perhaps use that as a good estimate.
Get Profitable Quicker?
Is there a way to speed up the process from a complete newbie to a successful novice trader, well in my view, yes. The fundamental problem with trading, specifically FX trading due to its popularity, is that there is a lot of free education online. This may be seen as a great resource, however most of the time this material is rather unstructured, and not arranged in a logical fashion. Rather than building an education from the ground up starting with the basic foundations, new traders tend to ignore this (because they don't know about it) and start to try and learn more complex material that further confuses them. For example, why would you build the walls of a house before digging out the required concrete foundations.
To further add to this problem, a fairly large amount of this free online material is posted by other traders, or by people who just have an interest in trading yet don't trade themselves. We already know that the vast majority of retail traders are unprofitable, and yet we like to use their knowledge via online material as a source of education, it's counterproductive and a waste of time. In my view, online free education is only a good resource if you have a structured syllabus directing you to the correct order in which this material should be delivered.
"Getting a mentor who is a proven to be profitable trader is a cost well worth spending"
Private mentorship is the real only way to speed up the learning process, whether this is paid for or for free from a proven to be profitable trader. They can direct you onto the correct path so that you learn in a logical fashion which in turn makes the education process far more efficient. However, make sure the mentor on offer is legitimate and supplies you with a verified statement showing proof of his profits. Unfortunately there are lots of scams in this area of business, so carrying out your own due diligence will pay off big time.