Doctors, lawyers, and engineers need to go to school for years before they are expected to be professionals and earn a living. A pro baseball player spends a few years in the minors before getting called up to play with the big boys. Football and basketball players start out by playing college ball for 4 years, and then only the best get drafted. Electricians, plumbers, and welders are apprentices first. These people do not just decide to work in their field and start doing so from day 1; they work up to it.
So why should traders think they are any different or better? After all, they are trying to enter what I believe is the hardest profession of all with hopes of being successful with little or no experience. The same way it takes years to become a surgeon, a trader needs to put in time before expecting to be capable of doing it successfully. Just as in every other profession, a trader needs the proper education. Unfortunately, Harvard doesn’t offer any degrees in trading. The only “schooling” traders get in learning their profession is hands-on, and the money they lose can be considered their tuition. It is through these losses that they will, they hope, gain the experience needed to be a great trader.
Trading is an ongoing learning process, not something that can be learned overnight by reading a book or going to a seminar. People can read five books on learning to play tennis and take a few lessons, but until they get out there and practice, practice, practice, they won’t be competitive. Trading is not much different; it takes lots of practice to get good. The only difference between tennis and trading is that when you are bad at tennis, you still have fun and maybe lose a few pounds while getting in shape. With trading you may still lose a few pounds, but that’s because you may not have money for food.
Many professional traders go through extensive training before they are expected to succeed. In some financial institutions, they expect all new traders to lose for the first 2 years. Those who come in planning to start making money immediately will be disappointed. During those 2 years traders learn how to trade. For the first 3 months they don’t even trade but instead just sit in classes all day learning about the different trading opportunities and paper trading. Afterward they are given limited share size and are forced to follow strict rules until they prove themselves. Only then are they given more share size, buying power, and the freedom to trade independently. The firms risk very little on these new traders during this period. Even when one loses $50,000, it means nothing to the firm; they see it as a part of a new trader’s tuition.
Major firms such as Goldman Sachs, Bear Stearns, and Merrill Lynch go to the top business schools around the country and offer the top students disgustingly large sums of money to enter training programs to become traders. They don’t just hire these people to trade; they hire them to train them to be traders. The reason they take only these elite candidates is that these people are proven learners. The firms figure these people will be easier to teach than someone who was only able to get into a mediocre graduate school with modest grades.
One should start to wonder: If professional trading firms expect their traders to take a few years to develop and are willing to risk a large sum of money in training them, why does the typical average trader think he can open a trading account for $5000 having never traded before and expect to make money immediately? Even those who trade on the floor don’t just go out and get a seat; most of them were clerks for years before they ventured into the pit to trade. People should be realistic about their progress and plan on having enough capital to get them there. They should not get discouraged if they lose their initial capital; instead, they should see it as a part of the tuition toward their ultimate goal—being a winning trader.
Main source: High Probability Trading