So you want to be a trader, huh? You like the lifestyle, the ultra-competitiveness, and of course the compensation, right? The extreme difficulty somehow doesn’t outweigh the glamor to you. Well good for you, for knowing that trading what you want to do.
So now that you know what you that you want to be a trader, how do you become a trader? Good question. Thank you for asking. There are 2 main paths.
There are 2 Paths
You can either become a professional trader or a retail trader (or both). There are pros and cons to both paths. Let’s dive right into the differences.
Professional trading is where you’re most likely going to make the big bucks, shake hands and rub shoulders with the rich and the famous, and maybe make a name for yourself. However, professional trading is extremely competitive to break into. There are a few ways you can do it.
Work For A Fund
This the most simple and straightforward. Most college graduates have this on their mind when they think of finance and trading. Is it the best option? That depends on you, your circumstances, and what you’re trying to achieve.
There are many benefits that come from working for a fund. These benefits mainly include things like a salary, healthcare, bonuses, and your typical employee stuff. The downside is that it isn’t likely you’ll start off trading.
You’ll most likely be indoctrinated into the fund as a new hire, go through their ranks, and if you show enough dedication and brains you might have a shot at becoming an asset manager.
Moreover, you’ll be an employee. You’ll have to abide by the firm’s rules and policies. You’ll have more security than some of the other options, as long as you remain competitive and on top of things (i.e. as long as you don’t get fired).
What’s more, there are also different types of funds that you could work for, e.g. hedge funds and mutual funds. For more info on the difference between the two, here’s a great article by Life on the Buy Side.
Proprietary trading is sort of a blend between professional trading and retail trading. Often times, you’ll have to make a capital contribution to the prop firm, in order to trade. The advantages of working at a prop firm is that you’ll likely get very good trading education, and be surrounded by other traders on their trading floor.
Some prop firms will allow you to trade remotely, like from your house. You’ll sacrifice the camaraderie that’s built on a trading floor, but you’ll have the added convenience of working from where you would like to.
Some of the disadvantages of working for a proprietary trading firm is that you eat what you kill. Didn’t make money trading this month? You don’t take any money home this month. You won’t get a normal salary, nor will you get any healthcare, or benefits.
But then again, you want to become a trader because the normal work-life balance isn’t your cup of tea, right?
A lot of people are attracted to a prop firm because it’s possible to trade bigger size with the firm’s money. However, at a firm where you need to contribute capital this deal doesn’t make any sense. You’re in effect leveraging the money that you have with the firm, but higher leverage isn’t always a good thing. Moreover, as a professional trader, you will need to pay for your own data fees and tools, which is not the case as a non-professional trader.
Some of the other problems with prop firms are that there are a lot fewer prop firms today than have been in years past, so your possible choices are narrowed.
Here’s an expansive list of proprietary trading firms. You’ll also want to keep in mind that each firm specializes in different things. While some firms might focus on Equity Options, others might focus solely on Futures, and some might let you trade nearly everything.
Start Your Own Fund
Whether you start at a fund, proprietary trading firm, or start as a retail trader, opening your own fund can be done by anyone. This is the level that most dream of getting to. This is where the ultimate freedom comes from, because you’ll be implementing your own strategy and you’ll be the manager of the entire fund.
You get to decide what’s what, and whose money you want in your fund (you don’t want everyone’s money). You’ll be out of the realm of retail trading and into a more formal business setting, without the bureaucracy, office politics, and other nonsense of working for someone else.
The major downside here is that you need to get good at fundraising. How are you going to maintain a fund if no one has heard of it? Moreover, is it really a fund if you’re the only investor?
What’s more, there are several different types of funds you could start. Theoretically, you could start any sort of fund (barring capital requirements for certain funds).
While starting a hedge fund might be out of reach for most of you, you may want to consider opening a Commodity Pool (if you mainly trade Futures) and become a Commodity Pool Operator, or open a managed account. Both of these are great ways to form a fund, without needing accredited investors or large AUM’s.
Some types of funds will require you to obtain certain licenses, like a Series 3 (Needed for Commodity Pool Operators or Commodity Trading Advisors) or a Series 65 (Needed for most Investment Advisors). Again, it depends on the type of fund and the nature of the funds business. Consult a professional on the exact specifications when opening a fund.
Keep in mind that when you’re starting a fund, you’re not only acting the role of Fund Manager but also business owner and entrepreneur. You’re going to have to manage the fund itself and the business around it. In effect, you’re becoming a Fund Manager and Entrepreneur.
For those of you thinking of starting a fund, I would recommend reading the E-Myth: Revisited by Michael Gerber and Principles by Ray Dalio. These books aren’t on investing per se, but speak on how to effectively manage your own business.
Retail trading is simply what non-professional traders are. Anyone who trades through an online brokerage firm is a retail trader. There’s nothing wrong with being a retail trader. You just don’t want to be a bad one, just like you don’t want to be a bad professional trader.
The main benefit to trading your account is that you get to choose your strategy, and can change things on a dime. If something is not working, you have the freedom to do as you please. You also don’t have to answer to anyone but yourself, which could be a good or a bad thing.
The main pitfalls of retail trading is that you’re trading your own money. While it’s possible to crossover from trading your own money to managing small funds, you’ll likely need to build up a bit of a track record to do so.
When it comes to retail trading, choosing the right broker is one of the biggest factors. A broker with good commissions and features that are necessary for your style of trading is a must. If you’re thinking of choosing a new broker, check out our review on our pick of the top 3 online brokers. No, we are not affiliated with any of them. We just like them, and think they might benefit you.
Which Should You Do?
No matter which road you decide to go down, in my opinion, you should start with Retail Trading. There many pluses that come with trading professionally. However, trading professionally is competitive, and most funds are going to favor those with prior trading experience.
The good news is that firms will look at you in a better light if you have any form of real experience, when compared to those with only booksmarts.
That’s the ironic catch-22 of any job market; they all want prior experience, even for entry-level positions often times.
You can check out this article on the best way to learn Options. If you’re new to trading, or experienced, I would highly recommend that you learn about the Options market and how to trade Options.
Conceptually, Options are one of the more difficult things in the world of trading. But once you learn them, they take your level of trading to a whole new level.
The reason that I find Options to be so important for people to learn is that they deal in probabilities. Trading is heavily “odds” based, meaning that there is no such thing as being able to predict the future outcome of the market with 100% accuracy.
You’re left with basing your decisions off of probabilities, and Options provide a concrete way to do that. Options help you to identify what the odds of a Stock reaching a particular price level are. For instance, does a stock have a 80% probability of reaching a price level, or a 5% probability?
Anyhow, I hope you found this article to be of use in more ways than one. If you found some benefit in reading it, please let us know in the comments below. Thanks!