The Biggest Hurdle When Trading-For-A-Living

The hypnotic allure of trading-for-a-living is undeniable.

No more bosses. No more distracting co-workers. No more rigid schedules. No more pay raises denied. And unlimited upside.

In our minds, trading-for-a-living can wipe all our problems away, leaving us with only money in our bank accounts and happiness in our hearts.

So why doesn't everyone do it?

The first problem is finding a trading system. Actually, that's not really a problem. There are a lot of good systems out there.

The real problem is finding a trading system we like. That's much harder.

If a trading system makes the proper amount of money, but:

  • takes so many trades it puts us on edge, or
  • takes so few trades it puts us on edge, or
  • bugs us to death because it stops out so much, or
  • bugs us to death because the drawdowns take too long,

then the trading system won't work out for us and we're still not free. I've been down those roads. They're not pleasant.

But once we find something we like, there's still one more major hurdle: the droughts.

At some point every trading system stops performing up to our standards. There are going to be certain market conditions that don't agree with our system, and during those times, we're going to get a bunch of stop-outs. We'll find that our money tree is suddenly starving.

Or, if we've chosen a 100%-style system, we'll be winning all the time, and then at some point we'll wake up to find ourselves mired in a long drawdown. If we're in a drawdown, we're obviously not making the amount of money we want to make, and thus we have a drought of a different sort.

Either way, there are going to be periods where we're not meeting our monthly budgets.

Here's an example.

Let's say we found a trading system we like. We like how often it trades, enjoy the winning trades (either lots of small wins or infrequent monster wins), and don't mind the losing. Psychologically, we're all set.

Financially we're also set because, over the long term, we believe this enjoyable system makes the amount of money we need.

So here's what can happen.

Let's assume we want our trading account to pay our car payment forever. The average car payment in the United States is $479 per month, so we need our system to pay for that.

As it turns out, over the past 162 months, our hypothetical trading system has averaged $537.83 per month.

Great! We need $479 every month and our system makes $537 per month. Problem solved!

Problem not solved. Not entirely.

The $537 number is an average number, not an automatic number. The $537 doesn't just plop itself into our trading account every thirty days. Not at all. It plops an average of $537 into our trading account each month, and that's a totally different thing.

For example, in our first trading month, our system soars and $1,000 flows into our hypothetical account. Hooray! We can make the car payment and buy something nice for ourselves on the side. Life is magnificent.

But in our second trading month, we make nothing. This time zero dollars flows into our account. We still have a $479 dollar payment, but we don't have any extra money to pay for it.

Or do we? If we decided not to splurge last month, we'd have enough left over for another payment this month. Whew. Glad we didn't buy three Amazon Echos after all.

In our third trading month, we lose $100. Uh oh. We don't have any money left over from our big winning month and we don't have any money in our accounts to pay for this month. What now?

Therein lies the problem. Just because a system averages the right amount of money doesn't mean it will provide it in a nice and tidy manner to our everyday lives.

Taking it one step further, here's some data from a robot we've talked about before.

This robot has data going back 162 months, and it does average $537.83 per month. But there are multiple periods during those 162 months where it wouldn't satisfy our car payment needs.

In total, there are 11 multi-month periods where this robot did not make money at all or was far below our $479 number. That's almost one multi-month drought period per year.

A fairly recent example was from June, 2012 to December, 2012. In that 7-month period, this robot LOST an average of $26 per month. Seven months, no gain in our trading account.

And if you look at 2012 overall, it only averaged $340.17 per month. So that's an entire year where our system didn't fully make our car payment.

Think about that. Over 13.5 years, our robot paid for everything and more. But during that 13.5 years, there was one entire year where it didn't make enough money to meet our goals.

So what do we do?

The first solution would be to make sure we have some savings set aside before we ever start relying on our trading system to pay our bills. If we have extra money set aside, then we can dip into that savings and pay our bills from that pile on the months that don't make our quota. Then on the months where our system has big wins, we can put money back into that account to replenish it. That way we're covered, and we can relax and let our system do its job.

Or we could simply increase our account size (or raise our trade size). If we multiplied our account size by 1.4 (or multiplied our trade size by 1.4), then we would make our payment even in a year like 2012, where our average fell below what we need. That might mean we have to wait longer to get started, but at least it would insulate us from the years with long droughts.

Or we could find a different system where the droughts are more conducive to what we need. Keep in mind, this is a dangerous road. You can spend many years of your life searching for a better system without ever finding it.

Trading-for-a-living is tricky. Even when we find a system that seems to provide what we need, we still have to be sure we can handle the lean times.

Once we're ready for that, then that car payment doesn't stand a chance.