What Are the Minimum Requirements?

When I tell people I am a self employed futures trader, they often ask “What would I need to do to get into that?” They are attracted by the obvious life style benefits enjoyed by a successful day trader, but they have very little idea of what is involved. Here are the five most important things an aspiring trader must consider, and make decisions about, before leaping into the lions den.

1. Capital: You can only trade for a living if you have capital to trade with. That begs the question of how much capital is required? Before addressing that question, let me ask you what return on capital you would expect from any other business you invested in? How much return would you expect from a fast food business, or a taxi cab, or an engineering workshop? Then ask yourself what sort of returns the really smart money managers on Wall Street are producing in the various investment vehicles on offer. That is the reality check! You would be amazed how many people think they can put in a couple of thousand dollars trading capital, and immediately start earning a 6 figure income. It could happen, but it is not likely (to put it mildly!). When I work with clients, we aim at a return of 10% per month, which I regard as a real “stretch” target. That is a clue to the trading capital you need if you are going to live off your trading profits. If you need $6K per month to cover your living expenses, I recommend a trading capital of at least $60K. You also need to understand that trading income is “lumpy”. You might get a terrible month followed by a couple of great months. To be on the safe side, it really helps to have enough money in the bank to ride through one or two low income months without dipping into your trading capital. If you do not have this much capital, you can still trade – but you should keep your primary job until you build your capital nest egg.
2. Trading System: Trading is a business. When you operate a business, you need a business plan which shows clearly where your profits are coming from. For traders this is their trading plan or trading system. It clearly lays out all the elements of your trading activity – when you will enter a trade, how large a position you will take, how you will react to various scenarios as they unfold during the trade, and precisely when, and under what circumstances, you intend to close the trade.
3. Experience, or the Benefit of Experience: When you start a business, any business, you need to have some special expertise in your field of operation. This certainly applies to trading, as your competitors are very bright people, hand picked and carefully trained by some of the most prestigious financial institutions in the world. They have the further advantage of not having to trade their own capital, which reduces mental stress. It is the height of arrogance to think that just because you are a successful lawyer, or airline pilot, or a success in any other walk of life, you will be able to start trading and immediately be better than these people. And yet, it happens all the time… So, how do you overcome your lack of experience? Well, there is always the school of hard knocks. You can just start and learn as you go, but if you do that be prepared to spend quite a lot of money to gain your experience. When you sign up with a futures broker you will sign a document warning that you should only trade with money you can afford to lose. If you have no prior experience, you had better take that warning seriously! Another way of gaining experience is through education. There are many, many organisations offering trading training programmes, many excellent trading books, and a wealth of information on the Internet for a diligent researcher. Just make sure that the information, wherever you find it, is coming from a reliable source. Every good trader I have ever known realizes the value of education. It is only sensible to learn as much as you can about your business. Yet another way of gaining experience is to purchase a successful trading system. This is similar to the concept of buying a franchise in a conventional business. You may not know much about the fast food business, but buy a good franchise and you get a well designed, well supported business plan based on years of good experience put in by the franchise developer. But there are good franchises and bad franchises, and there are good and bad trading systems in the market place. Be sure to seek proof that any trading system you buy is truly performing as claimed. In particular, make sure that it is not just advertising results based on hypothetical historical trades. (It is the easiest thing in the world to construct a system that has spectacular results when you are working with historic data. After all, you already know what happened!)
4. A Good Broker: Your broker provides your window into the market, and you need to make sure you have the best there is. A search engine will quickly throw up scores of brokers and it can be hard for a novice to decide which one to go with. One very important criterion is cost, because like any other business, cost control is a vital element of trading success. (Particularly day trading, where you have a higher volume of trades than longer term traders.) You want the transaction fees for buying and selling futures contracts in your preferred market to be as low as possible. But that is not the entire picture, because some brokers supply free what others charge for. Check for platform costs, data costs, charting packages, withdrawal and deposit fees etc. You also have to consider functionality. What markets and what kinds of trading instruments are supported? What order types are supported? Are orders transmitted immediately to the market electronically, or is their a delay caused by manual intervention? Is it cumbersome and slow to enter orders, or is there a slick single-click order entry process? Every minute you put into researching your choice of broker is time well spent!
5. Infrastructure: Traders are fortunate because their necessary business infrastructure is not expensive. You will almost certainly be trading over the Internet, so you need a reliable computer and Internet connection. Often trading platforms are quite “busy” with a number of windows available, so a large screen is good. However, there is no requirement for high end processors or massive storage devices. Backups are handy. I normally trade on my desktop machine, but can switch to the laptop if I need to. I have a very reliable broadband ADSL Internet connection, but I have a backup dial-up service just in case…Trading demands a lot of concentration, so you will need a workspace where you can work without interruption

David Bennett trades US commodity futures from his home on the Gold Coast in Australia. He is the author of the TradeOnAuto system which is building an outstanding real trading record. He is currently working on a project demonstrating how to turn a small futures account into an account large enough to support a regular trading income. Follow his daily trades, supported by published broker statements, at http://www.tradeonauto.com/blog.

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