Saturday, May 10, 2008

Do Traders Really Die Broke?

Last week, in response to my invitation to submit market sayings, one anonymous commentator who identified himself as one who had spent 16 years on the floor of the NYSE suggested a saying he attributed to folks who worked there. The saying is: "Traders die broke." Of course, I've heard the saying before as well as its companion: "Traders drive Fords, investors drive Cadillacs." Since I am a trader, and since I have a book out entitled "Trade Your Way to Wealth," the saying is of definite interest.

Incidentally, I DO have a Ford (along with 4 other vehicles and 5 homes) so I am speculating on how it will come about that I will die broke because I am a trader. First, I should note that trading does involve risk and the trader who trades as a gambler is, I agree, quite likely to die broke. Trading, however, can be done with limited, measured, or, at times, even no risk depending upon the strategy utilized. Since I have long been concerned with people who trade with little or no awareness to the real risks they are undertaking, I wrote "Trade Your Way to Wealth: Earn Big Profits with No Risk, Low Risk,and Measured Risk Strategies." I also write these Newsletter articles with the hope that readers will incorporate things like business plans, money management, exit strategies, and risk awareness and control into their own investing and trading.

In general, it is probably fair to say that the lower the risk, the lower the potential reward. A trader who uses no risk or very low risk collars, for example, may not make as much as fast as someone who chooses a very high risk strategy like simply buying a stock with no exit for example. However, the high risk trader stands a greater risk of dying broke than the risk aware or risk controlled trader. A trader can take wild swings hoping to hit the home run (that seems to be what most do) or he can use an approach with a lesser measured risk and attempt to generate wealth in a safer manner. Personally, I chose the latter. Success comes in trading the market much like the way one would eat an elephant, one bite at a time. The wild swinging trader may, indeed, hit the home run, but in my experience coaching and speaking with traders, it is the wild swinger who is most likely to go broke. Even if they do connect for the home run, they seem to take yet another wild swing with the proceeds of the first success and let it go down the drain.

It is important to understand who we are listening to. When someone who worked the floor of the NYSE (assuming not as a janitor) says "traders die broke," who is this person? Is it the broker who recommended you hold Enron to the bitter end? Is it the person who was urging you to continue to buy tech stocks coming into the 2000 crash, or is it one of the brilliant minds at one of the big firms that recently have had to write off billions of dollars because of the stupidity of their investments in the sub-prime markets?

When did the saying arise? Was it at a time when a trader had no chance to make a buck on a spread because commissions were so outrageous, or was it in more recent times when commissions were much more manageable? After all, it would be awfully difficult making any money writing covered calls if you had to pay a $200 commission on a single contract. Today, it can be done with a $5, $10, or $15 commission, giving the trader at least a better chance.

Finally, I do agree that traders may die broke if they trade like gamblers, do not discipline their trades or do not know how to discipline them; if they fail to incorporate principles of sound money management, or fail to enter positions with an exit strategy. On the other hand, I believe traders who apply discipline, money and risk management, and don't constantly swing for the fences do have a decent chance of doing well provided they expend the effort to educate themselves -- at least as a trader who has done those things successfully so far, I hope so.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

20 comments:

Anonymous said...

I STARTED OUT AS AN ODD LOT BROKER THEN BECAME A SPECIALIST AND FINALLY A FLOOR TRADER. THE ODD LOT BUSINESS WAS THE BEST

Anonymous said...

Very interesting article, I am a day trader after being laid off from a bank, I understand the risk, but your article points out some interesting facets of trading, is it really gambling? are you taking the profits from a 'big' score and plowing them back into loser trades (yes). I have lost a lot of money but I chalk it up to experience, as they say the learning curve can be expensive but stay the course to be successful, after a terrible day of loses yesterday, I look at your article as a sign that maybe I should reevaluate, as I don't want to die broke...

Anonymous said...

YOU HAVE TO SELL THEM WHEN EVERY ONE ELSE WANTS THEM AND BUY WHEN NO ONE WANTS THEM. YOU WILL HAVE SOME GOOD SUCCESS WITH THIS UNLESS YOU BUY TOO SOON

Anonymous said...

Here are the figures from the MONEY SHOW 2008 on new TRADERS and the first three years of their trading. 80% of these folks loose 100% of their starting capital;16 5 who work very hard to learn by reading, taking courses, etc etc break even and that great and 4% ax=cutally make money. Making money BTW was not defined a sole source of the families income

Anonymous said...

As somebody who has traded for 4 years I wish I had had the advice of Bill and others in the early days. I am down over this time, but nearly all of that was when I stopped trading and followed a newsletter recommendations - a disaster.

But I can say that I have turned the corner and am seeing a series of higher highs and lower lows in my two trading accounts.

My advice would be the same as Bills - educate yourself and seek out other traders, but there is no substitute for EXPERIENCE!

One final bit of advice, follow the market. If it is in a uptrend go long, if down short. If in doubt, sit on the sidelines in cash (I am mostly in cash at this moment)

Anonymous said...

Thanks to my ex-broker and his "Never Sell! It'll always come back!!" philosophy, I still have my 1000 shares of Enron! After charging me $25 or so they sent me the certificate and I had it framed. It's on my wall as a reminder of what can happen!

Bill's comments are very appropriate and I thank him very much for his advice.

Bill Kraft, MarketFN.com said...

Thanks for the information regarding the odd lot business, Anonymous. Very interesting.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for writing, Mr. Anonymous Day Trader. In "Trade Your Way to Wealth," I have tried to emphasize the importance of basics in trading that includes both money management and risk management. I believe those elements are critical to profitable trading and I would suggest you look carefully at those areas as you re-evaluate.
Bill Kraft

Bill Kraft, MarketFN.com said...

Anonymous, regarding the Money Show figures, I am very interested in the source of the information. I have little doubt that it is quite likely that new traders frequently do lose all their capital and only a few really make money. The key, as it was for me, I believe, is to do the work first. Study, read, practice, learn money management and risk management FIRST, then trade small amounts. Most, I have seen jump right in expecting to make a fortune and fall flat on their faces. Trading is a skill that needs to be learned and risk appreciated. That is one of the primary reasons I wrote "Trade Your Way to Wealth." Thanks for your comments.
Bill Kraft

Bill Kraft, MarketFN.com said...

Great point, Anonymous. Trading against market direction can be a path to the poor house.
Bill Kraft

Bill Kraft, MarketFN.com said...

Dear Enron Anonymous, sorry about your experience, but it certainly is an important lesson. Examples like Enron are reasons why I believe it is so critically important to have an exit strategy before ever entering a position. Thanks for writing and wise choice on framing the certificate.
Bill Kraft

Anonymous said...

My question Bill is do you make your money trading or selling Tading Materials? I gave myself 26 hrs/day 8 days a week to learning and trading and i ended up bankrupt. i read your collum and others like Dr. J. just to see if i've missed anything. I've back tested every strategy ever devised by man and i've even invented several of my own. Nothing and i repeat nothing works, and i have the data and notebooks full of my trials to proove it. I've come to the conclusion that the only ones making the money are the Brokerage Houses who charge the commissions and the Trading Teachers who sell their books, newsletters and financial advice. The conclusion of the matter is this: unless you're on the inside, you're on the outside. The markets are self regulated and the illegal and illmoral activities that take place within them is discusting. Even at my limited low level of playing i have witnessed so much corruption that i liken it to a Las Vegas casino. Even when i do win the house comes after me and seeks to disallow my trading. I cringe and want to scream when i see all the TV commercials and Internet advertizing that phishes for suckers to come into these waters. I went through a class action law suit against one of the biggest shisters in the teaching-to-trade game and we could not get a conviction or a penny of our money back. Old timers lost their pension accounts, thousands lost their life savings and their childrens college funds. I was wiped out. So Bill unless you've got some kind of crystall ball i would recommend you come clean and post your trading results - all your trading results, because everything i've read by you has been regurgitated over and over by all the gurus of trading.

Sam said...

Another great article. I thinkit should be gamblers die broke. But the smart ones ended up with casinoes in las vegas.
I have been trading the past two years and I am now starting to get in sync with my training and get some winners. Thanks and keep smilinbg

Anonymous said...

I been trading for a few years now with up and down but if you trade with your knowledge rather than with your heart or rummer. You will still coming out ahead. I do my research and pick the stock base on my research. If I trade option, my option return would be minimum 2% a month return.
I was using The trade Center as my research Software, but now it change to Edu trader software. My question Bill is which software are you using for your research tool and what is the monthly fee for the software you are using? How do I sign up for the Software that you are using?

Anonymous said...

Very interesting article.
When you hit a downturn like, the january 2008 crisis..
Then you are in deep troubble, if you do trade, without very carefull intensions..
Here money management is very important.
To have an exit plan ready, is crucial.
Thanks for you collum.

Bill Kraft, MarketFN.com said...

Thanks, Sam. I agree and know there are ways to "be the casino" rather than "be the gambler" in trading. It's tough to go bankrupt playing collars, for example.
Bill Kraft

Bill Kraft, MarketFN.com said...

To: Anonymous who wants to know whether I make my money trading or selling trading materials: I make my money trading. The subscription services bring in a relatively small amount and even though "Trading for a Living" has sold comparatively well, it is not a big moneymaker either.
Bill Kraft

Bill Kraft, MarketFN.com said...

Anonymous, I rely most heavily on Worden Brothers TCNet and their Blocks (Blocks.com) software for my charting service. You can reach them at WordenBrothers.com. I also use a program called OptionVue that is very helpful with my volatility trading.
Bill Kraft

Anonymous said...

hello,

Please tell me how can you make " Big profits with no risk" you mentioned in this article.

Thanks
Bashir

Bill Kraft, MarketFN.com said...

Bashir, the no or low risk strategy to which I referred is the collar and adjustments to the collar. I wrote fairly extensively about it in my book, "Trade Your Way to Wealth" which is available at amazon.com. Thanks for writing.
Bill Kraft