Why most self funded Prop traders fail

Discussion in 'Professional Trading' started by garfangle, Sep 22, 2006.

  1. I imagine most prop traders think of themselves as mini hedge fund managers, just with a small nut (asset base). Yet most fail and fail spectacularly, driving themselves to the brink of bankruptcy if they cannot find another line of work when the money runs out. Moreover, they rarely can transition into real trader jobs in investment banks and hedge funds. I believe the reason for this is twofold.

    First, most self funded prop traders don't have a lot of money to begin with (<$100K). That means if they have no other income coming in to support them, they must make money immediately. This leads to high risk behavior even if they are normally risk averse. When their stock trades don't work out or make them fast money they move on to options and futures trading. This added leverage is often what wipes them out. Yet they have no choice because even the best traders can rarely earn enough to both support themselves and also increase their initial investment.

    To illustrate: If one starts with $100K and needs $30K a year to live on should trading be a full time job, one would need to earn above 30% returns (ex trading costs/fees) to increase their pot at all. While an exceptional individual may be able to do this, not every trader can earn these WAY above returns. Indeed, most novices lose money initially because they aren't accustomed to the market. So, they panic and leverage up, just to get back to even.

    Second, most prop traders don't run other people's money. Since novices have no track record, most people are reluctant to hand over their savings to someone to learn on the job. Investment bank and hedge fund traders do have access to OPM. Moreover, they have sophisticated tools, technologies, and access to information that most prop traders don't have. Therefore, professional traders can place large diverse bets and ride out early losses and wait to capitalize on future wins.

    Even if their returns are just mediocre, professional traders' immediate salaries are not dependent upon what kinds of returns they make for their investors. They often get a fee just for managing investors' assets. A prop trader doesn't have that kind of opportunity. Therefore, the professional trader can be more conservative and place long-term bets.

    Does this mean prop trading is a fool's game? Statistically, speaking it does. But if there are talented prop traders out there, I'd suggest you do everything you can to become a professional in order to have the opportunity to run other people's money. It's your best bet.

  2. i actually think traders who choose the prop route have a much better shot at.
    chances are failure rate is much much higher for retail traders desperados.
  3. elit


    I must say that is rather generalized. All traders do not move on to futures and options if they fail in stock. Do everybody leverage up, just to get back to even? No, but that are some of the reasons traders might fail.

    I think the biggest mistake is to start trading without knowing what to expect of the markets. To dive in heads first, without a system or plan that is proved through backtests and forward testing and paper trading to be profitable. And then not sticking to the plan when going live.

    I'm a newbie, haven't traded that much. But I'm putting some or little money at stake just to get the feeling of winning and losing money, and how it affects my trading. I won't go broke even if I lose all money in my account but I'd rather not lose the money anyway. If I lose the money this is a sign that I don't know the markets well enough and that my system is crap and needs to be improved before I risk any more money.

    Everybody knows there is a lot of money to be made in stocks (and other instruments as well). Ask your buddy, ask your kids, ask your grandmother, ask your doctor. Everybody will say that there is money to be made. A lot of money. Maybe even easy money. Stocks are the rich peoples game. This mens that everybody who wants to be rich also reason that the need to invest/trade.

    People think you need a lot of money to get a piece of the action, to be able to participate. You do need some starting capital. People than save, or maybe inherit or something and start trading/investing.

    Some might think this is easy. It's not. They're in for a rude awakening.
  4. For so many reasons this is the dumbest post I have ever read.
  5. ozzie123


    Well that is not quite true. I made 20%+ last year and I just started to get the hang on the market. And as for this year, the return is still on 10% of my equity, but I still have the crowding market by the end of the year.

    But I do agree that retail traders have a better shot at things. Simply because they can learn from the very best in private (not just in books). And since the analysis and tools are there for them to use (for free!), they can learn and mingle in it to find the best indicator for their trading purposes.
  6. Self-funded traders fail for a great many more reasons than those covered here, but good points nevertheless.

    Running other peoples money is so far superior to trading solely one's own it's a wonder it needs to be stated.
  7. Leverage.
  8. Prop traders fail no more then any other business venture. It's not because of a lack of capital, or because they aren't on the inside track, or because they don't have good training. They fail because they don't put in the time and effort it takes to master the business of trading. If you have the desire and do what it takes, you can succeed. Applied effort is the real key to success in any venture, prop trading included.
  9. I don't get your point garfangle. The majority of traders fail period. Regardless of whether you are trading prop, retail, direct, most fail. Statistically, trading is a fool's game and honestly I think the best way to start is to fund an account at a reputable prop company that will provide you with excellent analitycal tools and training to take you to a new level. If you don't know a prop shop like this, pm me and I'll tell you where I work and perhaps you will have a 180 degree view of the biz.
  10. Analytical tools are not the answer. A bloomberg may be an edge, but other than that every trader has access to analytical tools.

    Bp is an edge. Allows a user to go after ST opportunities and capitalize on them.

    Execution tools are another key. Automated execution tools are the edge of the future, and not many retail traders nor prop traders have access to this technology.
    #10     Oct 1, 2006