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Can you answer these five critical questions that you should know before you start trading part-time or full-time? Trade like a business.
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00:00 Introduction
00:30 1. What’s Your Why?
01:20 2. You Need An Edge
03:21 3. What’s Your Risk Tolerance?
07:10 4. What are Your Return Assumptions?
07:15 4.1. Estimated Annual Return
09:00 4.2. Minimum Absolute Return
09:25 4.3. Estimated Absolute Return
09:45 4.4. Maximum Drawdown
10:30 4.5. How Much Capital Do You Need?
11:43 5. Do You Have The Time?
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0:00
everyone wants to make money and
0:02
everyone wants to be free and the great
0:03
thing is you can do both by becoming a
0:05
professional trader in fact i've created
0:07
a full-length guide here that'll teach
0:10
you how to start your own trading
0:11
business and whether you want to go full
0:13
time or this is a part-time gig for you
0:15
you should watch why because trading is
0:17
most successful when it's done most
0:19
business-like but before you watch that
0:21
video there are five show-stopping
0:24
questions that you need to ask yourself
0:26
before embarking on your trading journey
0:28
the first being what is your why
0:30
why do you want to be a trader many
0:32
traders start trading because they want
0:34
to get rich and now it's absolutely
0:36
possible to get rich trading however
0:38
understand that if you're not a
0:39
profitable trader already the chances of
0:42
success are slim in fact most studies
0:44
say that only five percent of traders
0:46
become profitable and according the sba
0:48
or small business administration a
0:50
survey done in 2019 this is in stark
0:52
contrast to starting a business where 33
0:55
percent are still around after year 10.
0:57
in other words if it's money you're
0:59
after it's much easier to create a
1:01
business than it is to become a
1:02
profitable trader and no matter how
1:04
smart you are
1:05
trading will slap you around until
1:07
you're begging to quit trust me i have
1:09
been there multiple times and you need
1:11
more than the pursuit of money to keep
1:13
you in this game you need an unwavering
1:15
passion to play you need an advantage
1:17
you need an edge
1:19
an edging trading is an observation or
1:22
an approach that creates an advantage
1:23
over the rest of the market players
1:25
anything that can add a few points to
1:27
the winning side of the equation builds
1:28
an edge in your favor and most traders
1:31
lose money in the financial markets
1:33
because they lack an edge i'm going to
1:35
say something controversial here
1:37
risk management is not an edge it's just
1:39
sound trading and i can prove it let's
1:41
play a coin toss game if you guess
1:43
correctly you get a dollar and if you
1:45
don't you lose a dollar you can play
1:47
this game all day long and cut your
1:48
losses short but you're never going to
1:50
make a million dollars why because you
1:52
have no edge the probabilities are not
1:54
stacked in your favor you need an edge
1:56
to make it full time and you need
1:58
multiple edges to make your career you
2:00
need to be the casino you need to have
2:03
multiple edges that compound over time
2:05
don't be a gambler and have the odds
2:07
stacked against you so that begs the
2:09
question how do you find an edge well
2:11
most edges come from a better
2:13
understanding of market structure faster
2:15
execution or better data and analysis
2:18
for example a market structure edge and
2:20
that simply means you just understand
2:21
how the market works better than other
2:23
participants may be the exceptional
2:25
ability to exploit the post earnings
2:27
announcement drift anomaly another may
2:29
be the early identification of trends
2:31
through sophisticated technical or data
2:33
analysis you want to ensure that you're
2:35
on the right side of the stock market or
2:37
whatever market you're trading as much
2:38
as you can and if you're struggling to
2:40
find an edge i've got you covered i back
2:42
tested scotland's slingshot trading
2:44
strategy at a high level to verify if it
2:46
had an edge which it does and if you're
2:48
not familiar with scotland he's a
2:50
professional trader he shares his trades
2:52
publicly on twitter and he has multiple
2:54
triple digit years under his belt with
2:55
his highest being 305 percent and last
2:58
year being 150
3:00
scotland wanted to find a way to get
3:01
into strong stocks before the run up and
3:04
invented this slingshot training setup
3:06
this is one of his many edges and this
3:08
setup can work for you too assuming it
3:10
meshes with your market philosophy and
3:12
psychological makeup but more on that
3:13
later once you've successfully
3:15
identified and defined your edge or
3:17
better yet edges is time to consider
3:19
your risk tolerance which is number
3:21
three
3:22
risk tolerance refers to the degree of
3:24
risk you're able and willing to take and
3:26
while there are multiple ways to define
3:28
risk we'll consider volatility and
3:30
drawdown for our purpose since your
3:32
comfort level with uncertainty
3:33
determines your risk tolerance it can be
3:35
challenging to be aware of your risk
3:37
appetite until faced with a potential
3:38
loss you should still strive to gain a
3:41
clear understanding of your risk
3:42
appetite though and your ability to
3:44
stomach large swings in the value of
3:45
your portfolio why well when traders
3:48
trade above their risk tolerance levels
3:50
at best they'll lose sleep and make sub
3:52
optimal decisions the next day and at
3:54
worst they'll sell out at exactly the
3:56
wrong time
3:57
risk tolerance is all about
3:58
understanding yourself a key
4:00
characteristic you should possess as a
4:02
flourishing trading business owner and
4:04
let me tell you when you start a trading
4:06
business and it becomes your primary
4:07
source of income your risk appetite will
4:09
change a lot this even applies to
4:11
algorithmic traders like myself most
4:13
traders greatest struggle when it comes
4:15
to establishing a profitable training
4:16
business revolves around trading
4:18
psychology in fact i don't think finding
4:20
edges in the market is the most
4:22
difficult task as a flourishing trader i
4:25
just showed you the slingshot strategy
4:26
which is a potential edge that you can
4:28
incorporate into your trading what's
4:30
hard isn't knowing what you should do
4:32
it's doing what you should do it's
4:34
trading like a business and risk
4:36
tolerance is just one aspect of trading
4:38
psychology trading psychology refers to
4:41
the emotional aspects of an investors or
4:43
trader's decision making process it's
4:45
how the emotions affect your trading or
4:47
and trading affects your emotions and
4:49
there are some important considerations
4:51
to make here
4:52
most traders fall into the trap of
4:54
thinking they can achieve trading
4:55
success with little thought of their
4:57
psychological makeup and let me tell you
4:59
fighting the market is hard enough let
5:01
alone when you're fighting with yourself
5:02
too successfully aligning your trading
5:05
strategy with your psychology implies
5:07
you may need to give up or change some
5:08
of your values and beliefs
5:10
for instance do you value the need to be
5:12
right a trader who values the need to be
5:14
right is more likely to refuse to set a
5:16
stop loss and take a small percentage
5:18
loss in case the trade goes haywire
5:20
another example might be do you do
5:22
overnight moves keep you up at night
5:24
then if that's the case perhaps a day
5:26
trading style is better suited for you
5:28
you need to find a trading style that
5:30
suits your trading psychology and
5:32
addresses your strengths and weaknesses
5:34
this doesn't mean a risk-averse person
5:36
can't adopt a swing trading style it
5:39
also doesn't mean that if you value
5:41
being right you're perpetually going to
5:42
be wrong when it comes to following your
5:44
stops it just means that traders need to
5:46
understand why they're embracing a
5:48
trading approach and have safeguard
5:50
against their deficiencies and often you
5:52
can flip a weakness on its head for
5:55
example let's go back to someone
5:57
struggling to stop out the first issue
6:00
might be that they do not understand
6:01
what they're trading and why they're
6:02
trading it if they're trading specific
6:04
mean reversion scenarios they shouldn't
6:06
be using stops at all position sizing is
6:09
actually the key to risk management in
6:10
this scenario however let's assume that
6:12
trader was a long-only swing trader if
6:15
they're a breakout trader not following
6:16
the stops likely they don't have a deep
6:18
understanding of what a breakout is and
6:20
why they work now i could spend hours
6:23
discussing breakouts but for now let's
6:25
understand two things roughly 70 percent
6:27
of breakouts fail and successful
6:29
breakouts rarely retrace to the low of
6:31
the day with this market knowledge a
6:33
trader now can be correct and still stop
6:36
out they understand that their win
6:38
percentage should be between 25 and 35
6:40
percent and they understand where to
6:42
place their stop and why i often find
6:44
understanding solves most trading
6:46
psychology challenges and now we're
6:48
almost done with the five show-stopping
6:50
questions remember the first was know
6:52
your why you know why are you doing this
6:54
the second is making sure you have an
6:56
edge the third is aligning your
6:58
psychology to your trading strategy and
7:00
the fourth and fifth are about making
7:02
sure you've got enough capital in time
7:04
to be able to make this work and you
7:06
start off by understanding your return
7:08
assumptions now return assumptions refer
7:10
to the rate a return an investor or
7:12
trader expects to make from their
7:14
trading activities right so all active
7:17
traders really have one goal in common
7:19
is to utilize their trading capital to
7:21
make as much money as possible while
7:23
assuming a certain level of risk for
7:25
that reason it's critical to set your
7:27
expectations right to figure out a rough
7:29
idea of what return you might achieve
7:32
before you kick off your trading
7:33
endeavors especially if this is going to
7:35
be your full-time gig so how do you
7:37
determine a reasonable rate of return
7:39
well whether you're a you know regular
7:41
regular business or a trading business
7:44
the answer is the same you need to look
7:46
at your return history and your
7:48
competition's average annual returns for
7:50
each individual system or set up and
7:53
determine whether or not you know that's
7:55
a number you can realistically achieve
7:58
and this number what you think that
7:59
you're able to achieve is called your
8:01
target compound annual growth rate and
8:03
it's critical that you get this number
8:05
right because it's the basis for all of
8:07
the other calculations and thinking
8:09
whether or not we can actually make this
8:10
trading business work both by how much
8:12
profit we should be making and how much
8:14
capital we need to make this business
8:17
run so to keep the math easy if you make
8:19
ten thousand on a hundred thousand
8:20
dollar account your average annual
8:22
return is ten percent
8:24
unless you have a history to back it up
8:26
investors shouldn't set their cager
8:28
above 15
8:29
and traders shouldn't set their care
8:31
above 40
8:32
now i know some of you might think that
8:34
these compound annual growth rate
8:36
numbers are tiny but remember
8:37
exceptional returns are the exception
8:39
and not the rule and if you're curious
8:41
on some of what other hedge funds are
8:43
generating you can check out the
8:45
associated website article for this
8:47
video now what is the bare minimum that
8:50
we need to make this is called the
8:52
minimum absolute return so with an
8:54
understanding of what you're likely to
8:56
achieve it's time to figure out exactly
8:58
what you need to achieve this minimum
9:00
absolute return refers to the minimum
9:02
return that you set over a period of
9:06
time this return needs to cover your
9:08
business expenses which i'll cover some
9:10
samples shortly and your owner's draw
9:12
the draw is the salary that you need for
9:15
you and your dependents living expenses
9:17
the minimum absolute return is typically
9:19
your break even level it's not the
9:21
target and now the target absolute
9:24
return is pretty easy to figure out
9:25
we've already calculated what we expect
9:27
to make through the target keger right
9:30
now all we need to do is take that
9:31
percentage and multiply by our starting
9:33
capital and that should be how many
9:34
dollars we should make at the end of the
9:36
year so we're almost there we almost
9:39
know exactly how much capital we need to
9:40
make but the first thing that we need to
9:42
figure out is how much capital we might
9:44
actually lose and that is the our
9:46
maximum drawdown this maximum drawdown
9:49
refers to your maximum downside risk
9:52
over a bearing it's a maximum observed
9:54
loss from peak to trough so for instance
9:56
if your portfolio value is a hundred
9:58
thousand and you lose thirty thousand
10:00
your drawdown would be thirty thousand
10:02
minus a hundred thousand divided by a
10:03
hundred thousand or thirty percent which
10:06
is thirty thousand dollar terms it's
10:08
important to note that maximum drawdown
10:10
only measures the extent of the most
10:12
considerable loss it excludes the
10:14
frequency of significant losses and
10:16
maximum drawdown is used to determine
10:18
how much capital you'll need to start
10:20
your trading business assuming you've
10:21
included multiple market cycles in your
10:23
analysis armed with an understanding of
10:25
your minimum absolute return and your
10:27
maximum drawdown we can finally
10:28
determine how much capital you'll need
10:30
to start your trading business and
10:32
capital required really just refers the
10:34
amount of money a trader needs to carry
10:35
out their trading activities with the in
10:37
the financial market so consider your
10:39
capital is essentially the raw material
10:41
that powers your trading activity in the
10:43
stock market or any market and really
10:45
it's really the raw material that powers
10:47
any business for that matter but let's
10:49
go through the math and i'm purposely
10:51
not going to go through leverage here
10:52
because you can reduce your initial
10:53
capital using leverage but there's other
10:55
risks that you need to think about which
10:57
i'll discuss a few of them later on but
10:59
remember these are unlevered returns so
11:01
let's go through the math if you need to
11:03
generate 50k per year and you expect
11:05
your minimum compound annual growth rate
11:06
to be 10
11:07
you would need 50 000 divided by 10
11:09
percent or 500 000 without a drawdown
11:12
keep in mind if your kaggar return is 10
11:14
you probably shouldn't be uh trading
11:17
anyways but i'm keeping the numbers
11:18
simple just for explanation purposes but
11:21
remember you have to figure out that
11:22
drawdown and a drawdown of 20 on a
11:24
starting capital of 500k is another 100k
11:28
or 600k so you need 600k in order to
11:30
make this trading business a reality and
11:32
obviously i know 10 returns are terrible
11:36
but the point being is you know what
11:38
starting a trading business isn't free
11:40
it's not free for money and it's not
11:41
free for time and when you first start
11:43
out just like any business you need to
11:44
spend tons and tons and tons of time to
11:46
get this thing off the ground if you're
11:48
an algorithmic trader you've got to
11:49
build out your systems and your process
11:51
potentially build your own back testing
11:53
library and create different strategies
11:56
and implement them and if you're a
11:57
discretionary trader the same thing is
11:59
true you need to take a look at the
12:01
markets understand why they worked and
12:03
moved the way they do build your
12:04
different various setups and test them
12:06
on your you know on yourself build up
12:08
your trading and market intuition and
12:10
your situational awareness in fact you
12:13
know at first it is so overwhelming and
12:15
there's so much time that you have to
12:16
put in and it gets easier they say that
12:18
the first million dollars is the hardest
12:20
and that's so true once you get your
12:22
systems in place and figure out what
12:24
you're doing it gets much much easier in
12:26
fact sometimes it even can be lonely at
12:29
times because you know there's really
12:30
not nearly as much to do believe it or
12:32
not but again that is way down the line
12:35
not right when you first start so if
12:37
you're excited and you pass these five
12:40
show-stopping questions one you know
12:42
your why two you've got that edge three
12:45
you understand your psychology and why
12:47
you're trading the strategy that you're
12:49
trading four you've got the capital that
12:51
you need to make it a reality and five
12:53
you're willing to put in the time then
12:55
you say yes i can make this reality and
12:57
you can follow this video up here to
12:59
figure out how to create this thing like
13:02
a business because as i always say
13:04
trading is most successful when it's
13:06
done most business like hope you enjoyed
13:08
this one and see you in that one bye
13:30
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