Trading is not like business!

Discussion in 'Professional Trading' started by Cache Landing, Feb 2, 2011.

  1. It seems that there are many potential traders here looking for encouragement. The most frequent advice is that "trading is a business". Also, "just like any other business", is an oft cited phrase.

    The idea that high frequency trading is a business just like any other, and will be successful if standard business acumen is applied, is a false notion.

    Trading is unlike any other type of startup venture. And to be completely realistic, the characteristics required to be a successful trader are quite different than those required to be a successful entrepreneur. Those tag lines are simply marketing material for those who wish to convince Joe Sixpack that he'll easily be able to parley his experience and skills in building a plumbing business, into a residual income generating machine. Of course, he must first purchase the material that explains how.

    Sure, there are certain common traits like tenacity and diligence. But those are merely generalities akin to telling someone that with hard work anything is possible.

    1---Conventional business provides either a service or a product that is of value to the consumer. The successful businessman creates value through his own actions. Conversely, there is nothing that a trader can do to create value in the end product. In fact, he is actually doing something that is unheard of in business. His actions are much like someone buying a product from a retailer, and then turning right back around and trying to sell that same product back to the wholesaler who originally sold it to the retailer he bought it from. Certainly, if the price of the product increases enough, this strategy would be viable for a normal business. But if you were to write a business plan on this premise, you would be mocked.

    2---A normal start-up venture benefits from marketing of various types. Admittedly, they will suffer from varying marginal return on marketing expenditures, but if the product/service is the least bit desirable, they will absolutely increase revenue through advertising. This is in sharp contrast to trading. No amount of marketing can increase revenues for a struggling trader.

    3---In normal entrepreneurship, the successful business owner creates an entity that operates within his current skill set. This skill set was developed prior to starting the new venture. Traders take the opposite approach. They begin trading and hope to develop the necessary skills before their lack of appropriate skill puts them out of business. Imagine the recent high school grad who decides that he'll immediately get into business consulting. Rather than go to school to learn business, he sticks an ad in the paper and says, "after enough companies have contracted my services, I'll figure out what works and what doesn't". This is obviously a recipe for failure.

    4---Related to #3 is the idea that a successful entrepreneur most often developed a skill set in the industry that plays to his natural talents. This is in sharp contrast to most prospective traders. The latter don't really have any idea what talents are required to be a successful trader, so again they find themselves in a backward process, hoping to first identify the necessary talents and then hoping that they currently possess the same.

    5---As a continuation of the above, many skills are easy to come by without much natural ability. These can be learned through some light practice and study. The result is often a business that returns $30-100K annual income. The training for these usually comes from vocational schools. They will often operate from home, much like the trader, but in comparison, a $15K investment will likely be recouped during the first several months, and they can expect annual income near the national median during the first couple years. Trading does not fall into this category. The trader who develops a "vocational school equivalent" trading skill set, might expect returns of 10-20% annual. With $15K seed capital it will take around 20 years to reach the median income, and that is assuming that there are no withdrawals. The conclusion here is that the required skill set to produce the results necessary to make a living, are the industry equivalent of top tier surgeons. I would say that the number of people at this level is probably similar to the number of those surgeons too.

    I guess what I'm getting at is the idea that becoming a successful trader is undoubtedly much harder than starting a successful business. To the extent that a little encouragement will not solve the problem of most struggling traders. The reality is that they are probably never going to become a trading success, regardless of how hard they work at it.
  2. BSAM


    Why did you feel so compelled to engage in such a tirade?
  3. to be a business

    the business needs 'customers'

    in trading you don't have customers and nobody needs your product or service..

    trader's don't have customers. who trade their own capital

    hedge funds who trade other people's money are 'businesses'

    all 'sucessful' traders eventually move up the food chain and manage or trade other people's money. that is the career path of this industry.

  4. the other side of your trade is the customer. you just hope you're buying or selling to him or her at a value that will benefit your business. you're just acquiring and selling inventory at what you hope are good prices for you.
  5. Not intended to be a tirade. Just as some feel compelled to offer unconditional encouragement, I feel compelled to offer a voice of reason from the viewpoint of one who has been through it.

    Those here seeking advice are at least under some assumption that those offering the advice are qualified to give it. If they actually tracked the source of this advice they would realize that there are actually very few who are successful enough to be giving advice. Not trying to be obnoxious, it is just the reality.

    To the young trader it is quite deflating to discover that a guru is actually struggling to simply make a living.
  6. I agree with your sentiment, but as you read through the boards, people aren't saying that hedge funds are a business. They are saying that trading is a business and should be treated as such. If your remarks are correct, and all truly successful traders become fund managers, then that simply speaks the truth of the idea that successful traders are very few and far between.
  7. If you are a profitable trader you are a business, not profitable you are probably a gambler.

    Profitable traders make efficient markets. That is part of the value we create.

    Our customers are the people on the other side of our trades who wish to transfer risk to us. We take on this risk and in return we expect to make a profit . Although we cant guarantee a profit for ourselves on every transaction (not unless we are arbitrageurs), in the long run we expect to make a profit (assuming our markets continue to work like they have in the past).

    If market conditions are not favourable for a long time we could make large losses and risk going out of business, just like any other business. However a good trader will reduce risk during unfavourable market conditions.
  8. Sure, to an extent that is correct. Now go to the gas station with a 1000 gallon barrel. Fill it with gas, and go to the empty lot next to the station and try to sell your gas for a profit.

    This is very similar to what you are doing when you trade.
  9. I don't understand why people would say that a trader has to learn to trade a certain method or market, even if he's untalented in that particular niche. That akin to saying a person is forced to run a restaurant and learn those skills even if he's not cut out for that industry. There are other industries than the food industry just like there are different trading and investing styles.

    Either you have an edge in your industry (brick and mortar) or trading approach (trading) or you don't.

    If you feel rapid day-trading is not your cup of tea then there are dozens of other trading/investing styles that offer another angle. Value investing, option trading, momentum trading, global macro trading, credit trading. I probably forgot a good number.

    Having been on both sides of the fence I find trading equally difficult (or easy) as running a brick and mortar business with say 10 employees. I work just as much now trading just when I ran my company with office, staff and daily meetings. It is not easier; the chances of success running a business are not higher than trading. Just my opinion and experience.

    Anyone who thinks raking in $500,000 a year is a piece of cake be it in trading or running a medium-sized company is deluding himself. It is hard work and you have to have capital at risk in order to have a chance at earning a profit. That includes the risk of a (part) loss.

    I said it in another thread: the top two reasons for failure both in start-up brick and mortar businesses and in trading IMO are

    a) lack of sufficient capital
    b) unrealistic profit/earnings expectations

    There was an excellent study done by Blackstar trading on Russell 3000 companies that were trading over the course of the last 20 years, including all delisted issues. The results were that approx. 70+% of all companies had negative (!) lifetime returns. Speaks volumes about how easy or rather hard it is to make money owning and running a real company.
  10. Well, in all likelihood, the "customer" on the other side of most of your trades is simply another trader. The efficient markets argument isn't incorrect, but it is certainly overstated. It would take far less activity to maintain efficient markets for the most part. And it doesn't matter how much efficiency is created, the traders aren't adding value to the product. There are many non-value added processes in business that are still deemed necessary.
    #10     Feb 2, 2011