You’ve been trading for a few years with positive results and want to step up your game, improving your bottom line while accumulating the knowledge, strategies and wisdom required for a long-term career in market speculation. How you start this push toward professionalism and what core issues do you need to focus on to make that jump? (See: What It Takes To Become An Elite Trader).

Let’s start with a reality check: while it’s great that you’ve survived long enough to get to this point, your experience has been limited to the secular nature of the current market environment. That probably means you’ve never traded in a bear market or a performance-crushing period like the 1960s to 1980s when the Dow Jones Industrial Average went nowhere for 17 years. (Read more in: 5 Rules Of Engagement For Trading In Tough Markets).  

This is a major issue if your current success relies on long-side trend following strategies that chase markets higher with the crowd. Your survival as a skilled trader depends on a well-executed plan that adjusts rapidly to changes in market conditions. (To learn more, see: 4 Key Elements To Create A Successful Trading Plan). This means you need to play the long and short side, or shift into alternative instruments that align more closely with your one-sided strategies.

Working Capital

Under-capitalization increases the odds for failure because it encourages traders to over-leverage and take unnecessary risk. At this point, you should have accumulated a decent sized account that can be put to work in bigger positions and more diverse strategies across multiple holding periods. If the dues you’ve paid as a novice trader have been so steep you don’t have a nest egg ready to go, stop here because it’s impossible to make the leap to expert with an undersized account.

You’ll need at least $35,000 to $40,000 in free capital to take the next step in your market career. That stake avoids the SEC’s $25,000 "pattern day trading" rule while allowing multiple positions and strategies. It also enables you to focus on making intelligent decisions at each point in position management, instead of feeling pressured to over trade with outsized positions, in an attempt to play catch-up with larger competitors. (For related reading, see Top 10 Trading Mistakes You Should Always Avoid).

It also lessens the need to use margin. This is a confusing point for traders at any level of experience because there’s a misguided belief that leveraged capital is there to assume greater risk on all positions. In truth, margin is a tool best applied in highly favorable market environments, in which smaller-sized positions lower obvious profit potential. It’s nice to have as an option the rest of the time, but shouldn’t be touched without a good reason.

Many traders compute a flat percentage of their accounts, like 2%, 5% or 10%, and use those numbers to determine position size and to compute stop levels. Neither technique makes sense for the seasoned trader who understands that each opportunity has a unique profile that favors an ideal size. You can find this this magic number by computing reward and risk targets in advance. (Outlined further in: Must-Know Simple & Effective Exit Trading Strategies and Effective Risk Control With Scaling Trading Strategies).

Profitability

Profitability eludes new traders because they fail to recognize the intense competition and throw money at the same basket of overworked strategies used by everyone else. A minority survives this culling process because the pain of losses encourages them to find their trading edges. (See: The Vital Importance Of Defining Your Trading Edge). Seeking crackerjack status assumes you’ve already found your edge and are now using it to build profitability.

Many traders seek profitability on a daily basis, but too much attention to a single session can lead to poor decision-making because it short-circuits time frame management - a major component of long term success. Look at it this way: do you plant seeds and rip them out of the ground after a few days because nothing has grown yet? In the same way, crackerjack traders give new positions sufficient time to elicit the price movement visualized in their analysis.

Measure profits weekly, monthly and annually and put the data into spreadsheets that track your progress over time. These numbers don’t need to line up perfectly, but they should track in the same general direction. Once you’ve accumulated enough data, compare your performance against major indices or underlying instruments over the same time periods.

Watch for signs of yo-yo behavior - in which gains and losses move in lockstep with underlying markets - because it indicates your strategies depend on one side of a trend following tape in the same way that index fund performance always matches the underlying instrument, less fees.  It’s a poor profile for long term success because those strategies will blow up in your face when the initial trend turns against you.

Realistic Expectations

New traders have unrealistic profit expectations, believing they can easily double or triple funds in a short period of time. Beginner’s luck makes things worse, giving them a few big wins that seduce them into believing they’re well on the way to a sizable fortune. Experienced traders understand that modern markets give out few gifts, requiring them to earn every dollar of profit. (On a related note, see: When Fear And Greed Take Over).

So how much profit should you be earning as a seasoned trader? That number should naturally track the amount of time you have to devote to trade planning, execution and management. Given these criteria, part-timers who make up the majority of the non-algorithmic trading population should be happy with slow and steady growth that may not exceed 15% to 20% in annual returns.

Full-time traders need to show stronger performance, aiming for annual returns in excess of 20% to 25%, or the effort just isn’t worth the time. This number highlights the importance of account size because 25% of a $75,000 trading account ($18750) just isn’t going to pay the bills after capital gains taxes, especially when you need to plow a share of those profits back into trades. 

Career vs No Career

You have to be very talented and motivated to succeed as a full-time trader. You also need adequate capitalization (as illustrated in the $75,000 account example) or you’ll spend years chasing your tail, trying to build resources to a level where you can quit your day job. Given these obstacles, as well as the need for robust trading strategies, most traders should enjoy speculation as a hobby and supplement to other income, rather than as a career choice.

You still have options to trade full time if undercapitalized but you’ll need to find a respectable trading firm that provides a working stake as well as training on the job. This also means your initial take will be small unless you’re an outstanding performer, which is the exception to the rule. You’ll also need to find another way to pay your bills, at least through the long internship.

Bottom Line

Making the jump from novice to a crackerjack trader requires sound foundational skills, adequate capitalization and a realistic appraisal of your long term market goals.

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