There certainly is no absolute upper limit to earnings. From time to time Forbes and various other publications publish lists of the most successful traders. Profits made in any single year can be well in excess of $100 million.
However …..these people are of course the David Beckham’s of the trading world and whilst in theory it is possible for you or I to replicate those results in practice it is highly unlikely. One reason lays deep within each of us and is known as our personal psychological ceiling.
Personal psychological ceiling / self worth levels.
Most people find an income and capital level that they are reasonably happy and content with and then stay there. They want more money but are generally not prepared to do more to make it happen.
This is known as the personal psychological ceiling and is inextricably linked to our own feelings of self worth, self esteem and self concept. These in turn are a product of many things such as our upbringing, beliefs, values, family pressures, financial desires and so forth.
Once we have satisfied those financial desires we tend to spend more of our time pursuing other goals rather than simply acquiring more money. I suppose you could say that we then seek to get a better balance in our lives or seek to achieve self actualisation as Maslow put it.
There has been much research on this subject. One area, for instance, is the study of what happens to big lottery winners when they suddenly acquire great wealth. Statistics from the FPB show that around 30% of lottery winners lose all their money within five years.
One common contributing factor for this tendency is our psychological ceiling and floor. The floor is the minimum amount we think that we are worth and the ceiling is the maximum amount. When our actual wealth or income is broadly between these two levels we are generally content and happy and seek to remain in this “comfort zone” or “rut”. If our income/capital levels fall below what we think we are worth we take positive actions to get back above that minimum floor level (take on a new or second job, work overtime, start a business etc) and if our income/capital levels rise too quickly and far above what we think we are worth as a maximum, our ceiling level, strange as it may seem, we often take self destructive negative actions in a subconscious to fall back into our comfort zone.
In the case of lottery winners they do not feel that they are worth say $50,000,000 and tend then to subconsciously take steps to bring their wealth back into alignment with their own feelings of self worth.
The personal psychological ceiling can become a particular problem in trading because it is very easy to crash up through several ceilings in really quite a short period of time – a bit like a mini lottery win or a winner on X factor.
Suddenly we find ourselves In a rarefied atmosphere of maybe making tens of thousands of dollars in a day. At this point many will start to feel a sense of financial vertigo. We have risen higher and faster than we had ever expected and perhaps we are making much more money than we feel, deep within ourselves, that we are either worth or indeed our efforts justify. I remember an interview with Rod Stewart where he said exactly that. After his first few albums he began to feel a sense of great guilt about just how many millions of Dollars he was making from simply sitting down for 30 minutes and knocking out a hit song. Fortunately, at that time, he had Britt Ekland to help him spend it and keep him on the treadmill !
So everybody has their own personal psychological income and capital ceiling. For some of us that may be just a couple of thousand dollars a month for others it may be $100,000 a month or more. But the truth is most of us in the end are self-limited by our own psychology. We do not actually aspire to making tens of millions of dollars and deep down probably do not believe that we are actually worth those sums anyway.
As Henry Ford once said “whether a man believes he can do a thing or cannot do it then either way he is correct”. In other words we can only succeed to the degree to which we believe that we are both capable AND deserving of that success. Most of us are limited by relatively modest self expectations.
Psychologists will tell you that it is very difficult, although not impossible, to change these psychological ceilings.
So typically we are limited not necessarily by trading itself but by our own personal psychological ceiling.
Also we have a tendency to become side tracked for long periods in our lives by various other issues which tend to take centre stage such as children, relationships, sickness, holidays, personal disasters etc. Once we have moved into our financial comfort zone, then these other considerations tend to move higher on our list of priorities.
So typically how much do successful home-based individual E-mini traders make. Well firstly the enormous sums of money mentioned in the first paragraph are not made by individual home-based traders they are typically made by hedge fund operators and owners.
I suppose over the years I have got to know perhaps 30 or 40 successful home-based traders. Nobody will sit down with you and tell you exactly how much they earn or are worth but judging by the lifestyles I would say that maybe only one or two of them are earning much more than $750,000 a year. I would guess that the average figure is probably around $200,000 to $500,000 a year.
I suspect in order to earn much more than this as a private home based trader you would need to be psychologically extremely special and also overcome one or two other limitations that we will cover in future articles.
Of course if you do not believe in all of this physco babble you could simply adopt the perspective of the comedienne Rita Rudner who said.
“Some people get so rich that they lose all respect for humanity……………………………………..……..and that’s how rich I want to get !”
Maybe we should start there !
I have now been offering training courses to both individuals and corporate clients for nearly 15 years.
One aspect of my dealings with potential clients has always intrigued me. In a nutshell it is that individuals will contact me and discuss training. They will then choose not to move forward with me and effectively disappear off the radar for two or three years. After that prolonged period they will then often re-contact me and book a training course – pretty well out of the Blue and with little further discussion!
Generally the story I hear from them is pretty much the same. Namely that in the intervening period they had indeed pursued trading and had attended several other training courses or purchased products and services. The results during that period were at best breakeven and often very much worse where they incurred significant trading losses and wasted a lot of their own time in the process.
When I investigate their experiences there are generally two common paths that they have taken:
Firstly there are the people that simply go for the courses or products that make the biggest promises. Ie start with $500 and make $5 million by the end of the year. Needless to say these courses or products are a complete rip-off. The promises or assertions that they make are completely false. The vendors know this when they sell the product and so does anybody with any trading experience whatsoever. Typically those types of products are therefore pitched at absolute novices who have zero experience and consequently no way of knowing any better. The solution to this is if people are promising outrageously high returns at outrageously low prices really common sense should tell you that it is just a straight con. For further information read my PDF “how to avoid the marketing men”. It is however quiet surprising how so many novice traders keep moving from one of these con merchants to another without apparently realising their mistake.
The second path that people often take first is to go to “the big-name courses”. The purchaser draws confidence, quiet understandably, from the fact that they are dealing with a big national or international company with an impressive website and many different products and services.
Such companies are often “training” thousands of traders each and every year. The websites and the information on them is extremely compelling. Often they are fronted by a particular “big-name “trader””. I’ve put the word trader in inverted commas because almost without exception if one looks a little deeper we will find that that “trader” does not actually trade for himself or worse still when they did trade they actually lost money.
It is very easy for would be purchasers too carry out this sort of pre-purchase due diligence research but most of us are fired up with enthusiasm and have a tendency to just to believe what we are told. This is especially the case with these large companies with massive advertising budgets. They are extremely credible and appear to offer a proper quality “education”. It is quite understandable that traders with little or no previous experience have a tendency to sign up for these types of courses first. They see it as the safe bet and are drawing confidence from the credibility of a big organisation.
In the “avoid the marketing men PDF” I covered how asking a simple single question would protect you from making both of the above mistakes.
Another way to avoid the “big-name course” trap is to simply…………… apply a little common sense !
By this I mean almost invariably these courses are offering a whole host of additional products and follow-on services. Often there is for instance a bronze trading course, a silver trading course, a gold trading course, Platinum trading course etc together with umpteen additional products and services that you can purchase from them. You know the sort of thing special indicators, special software, additional training modules, monthly subscription services, signal services, additional trading systems. All of these and many more come, of course, at additional cost on top of the basic course fee.
So what do I mean by applying a little common sense ?
Think it through for a second. If you are subscribing for their bronze trading course which promises to teach you to trade then why do you then need a Silver trading course let alone a Gold trading course ! Why if they really are going to teach you to trade successfully on that first course do you need to then purchases all these additional services and educational products ?
To put it bluntly if the first product they offered worked there would be no need for most of the subsequent products !
These big trading educators are geared up to selling products and making profits. They are not wonderful human beings trying to benefit mankind they are businessman trying to make as much money as they possibly can. There is absolutely nothing wrong with this so long as you recognise that fact and understand it for what it is. Their best interests are served by you NOT learning to trade. That way they can then “up sell” a plethora of new and different, and often more expensive, products to an existing customer base.
Their best financial interests are absolutely not served by initially teaching you to become a successful trader – you would go away and spend no more money with them. Their best financial interests are served by keeping you on the hook and keeping you jiggling around trying to reach that next piece of bait that is dangled in front of you. After you first bronze course they now tell you that “real” success comes when you purchase the silver course and then all of your problems would be over. Of course after the silver course comes a gold course and so it goes on. This “soaking” of existing customers for more and more of their money is a well established business practice.
There is a further serious problem with this particular business practice with respect to trading education. In order to keep you “biting” they have to present to you what may well be an unrealistically optimistic picture of what you can achieve from using their services. This means that very very often clients are only given one side of the story. They are told all that is wonderful about trading and nothing about the inherent difficulties. I am a firm believer that it is absolutely imperative to explain to people the inherent difficulties of making money in trading. It is only by knowing where the potholes are in the road that you can avoid falling in to them. The real danger with the up selling concept is that it deliberately glosses over the difficulties.
So if you go to a website and you see a mass of products available to purchase, understand that this is not a good thing ! Rest assured they will be doing their level best to make sure you buy every single one of those products.
So are these big companies all conmen? Of course not. But they are, first and foremost, businessman seeking to maximise profits. What do you get on these big courses? Well you get taught ABOUT trading. They will teach you about indicators and how indicators should be applied etc . That’s fair enough, we all have to acquire that basic understanding from one source or another. In truth it is generally not much more than you could have got from a £50 book on Amazon.
The real problem is that educating people about trading is absolutely not the same thing as teaching them how to make money from trading. The two things are entirely different. Be aware that the big trainers teach people ABOUT trading not actually how to MAKE MONEY FROM trading – the two are very different things.
So after one of these courses you will probably have a much greater understanding about trading but almost certainly be no closer to turning that knowledge into profits. See my PDF on this subject.
Finally if having read the forgoing you still do not accept my views then at the very least it should still have raised another simple question in your mind that requires an answer:
If indeed what I say is incorrect and these big-name courses are in fact churning out successful traders by the thousand ……. Then where are they all ?
We should be tripping over them every time we go to Tesco’s. Everybody should know a friend of a friend who is making a fortune from trading – but we don’t do we !
If you want to know ABOUT trading then buy a few books from Amazon. If you want to make money FROM trading speak to a professional trader who is not trying to earn his living from just teaching courses or worst still upselling countless products and services to you.
If further proof is required in one very famous instance one of the big name courses was challenged to produce a single student from the thousands of students they had trained that was actually making real serious consistent money from trading – they could not provide a single student !
The best courses are generally those that are not offering a mass of extra bolt on products and services. You need to be dealing with somebody who does not have a vested financial interest in making you come back and spend yet more money with them.
So whilst it always surprises me a little when people disappear off and do a big-name course in preference to my own training course I am confident that in two or three years time many of them will come knocking at my door somewhat chastened and always significantly poorer.
What is a shame is that they did not first read a few of the PDFs that I have produced over the years as these expose many of the tricks of the trade and show you how to avoid repeating the mistakes of others. That way novice traders could save themselves wasting often thousands of pounds in training course fees, further thousands of pounds in trading losses and often hundreds and hundreds of hours of often wasted and misdirected study.
Still I can say exactly the same thing about most of the advice I give to my children !
Sadly they have to learn by their own experiences and repeat the same mistakes I made at their age. They do this no matter how hard you try and provide them with a shortcut – namely learning through somebody else’s painful experiences rather than just repeating the same mistakes.
The problem is children cannot be as wise as their parents, who have so much greater experience because they have been around a lot longer (been there, seen it, done it and got the T-shirt if you like). In exactly the same way, novice traders cannot be as wise as established profitable traders. So most children and most novice traders I suppose are condemned to walk a much longer and more problematic path than is in fact necessary !
Quite rightly there is much talk at the moment of whether we are at or close the top of the current bull market and hence about to enter bear market.
I thought it might be helpful to provide a few statistics and facts on both bull markets and bear markets. Whilst these are all very boring statistics I urge you to read on as they might just save your financial life one day. These statistics all relate to the USA S&P index covering the period from the 1920’s to the current time. Statistics for the British FTSE would be very similar.
A bear market is defined as a fall in the index value of at least 20% from a previous high.
There have been on average around one bear market every four or five years. They are not at all uncommon although of course they do not occur like clockwork every four or five years.
There have been 16 bull markets since 1929. Most bull markets last between 2 and 5 years with an average duration of around 3.5 years and all bar 4 have lasted less than five years.
The longest bull market in modern history (commencing in 1990) lasted slightly over nine years. The current bull market is now the second longest bull market in modern history and has lasted around 7 ½ years
The average price earnings ratio over modern history is around 17. The current price earnings ratio is around 23. The S&P would need to fall by around 30% to get back to its average P/E ratio.
When a bear market does occur the extent of the decline is generally proportional to the extent of the rise that occurred in the preceding bull market. I.e. big bull markets tend to roll over into becoming big bear markets.
Almost always the bear market will take back at least 50% of the previous bull market run up. The smallest ever give back in modern history was around 30% of the previous bull market run up. There have been 5 instances in modern times where the bear market give back was actually greater than 100% of the preceding bull market run up.
Bear markets are typically over quite quickly with over 50% completing within 12 months and all bar one bear market having completed within 24 months
Bull markets tend to be relatively slow ponderous affairs whereas bear markets are often quick and very savage affairs.
Whilst there is certainly no guarantee that markets will continue to act as they have done historically that probably is still the way to be betting.
Boring statistics I agree but they should give us all food for thought.
A recent blog explaining that the S&P index is now at one of its most extreme overbought and overvalued levels since the 1920s elicited many responses.
Firstly what I found interesting was that very few people actually took issue with the basic premise that yes indeed the S&P is extremely overvalued at these levels.
The debate was more about what steps one should take, if any, when prices are at these historically very elevated levels.
The basic argument against my “defensive” stance appears to be along the lines of “I don’t care if the market is overvalued because at the first sign of trouble I will be getting out – more or less at the top”
Historically the problem with this “plan” is that when everybody is running for the exits at the same time only a few can make it out.
This is because many participators will be referring to the same, or very similar, levels of support and resistance and therefore when prices penetrate those levels there is often a stampede for the exits – think 1987.
What also happens on sudden falls in the stockmarkets is that people’s attitude to risk changes in the blink of an eye. The crowds attitude suddenly switches, in an instant, from being “risk on” or extremely bullish to “risk off” and extremely bearish.
When this happens everybody’s first concern is to get out of risky assets and into safe assets, such as cash, irrespective of the returns either are offering. Our priorites swing away from how to make more money to how to protect what money we still have.
This rapid change in the risk profile of a large group of participators (for instance all those using margin debt to finance speculative positions) creates a buying vacuum which in turn leads to sudden uncontrolled drops in the market (more sellers than buyers if you like). The market falls precipitously as it tries to find a new equilibrium level.
It is a bit like when an aeroplane hits an air pocket. Everything seems fine then suddenly without warning the plane drops more or less vertically. Again think of 1987 or certain days in the 2000 and 2007 meltdowns or the more recent “flash crashes”
When you do get a buying vacuum prices can fall dramatically 10 or 20% in very short periods of time indeed. Many long-term investors who had decided to exit on the first small drop suddenly find that “small drop” is in fact a 15% fall and now hesitate to pull the trigger and realise such a large loss.
At this stage cognitive biases also tend to take hold of our thinking and often the gambler’s bias takes over which is where people are so reluctant to take a loss they are prepared to risk or gambler ever larger sums in order to try and prevent the crystallisation of that original loss.ie the tendency to be prepared “double down” hoping for a rebound is a classic example.
We also have a tendency to “anchor” to the previous high prices. We now consider those to be the “correct” or “normal” valuations and start to believe that the current much lower prices are simply a short term aberration that will shortly reverse.
These cognitive biases generally make us extremely unwilling to pull the trigger and take those initial losses that we had previously promised ourselves that we would happily swallow.
Then of course the next day the market falls a further 5%. Now we would certainly grab yesterday’s prices with both hands, if offered them, but it is too late. We are now even more reluctant to exit at today’s even lower prices. And so it goes on day after day. Very few private traders get out anywhere near market tops once the first fall has taken place, it is just too psychologically difficult to do so.
When you look at the way these down moves unfold from extreme overvaluations it really is quite terrifying.
We spoke in an earlier blog about the possibility of 50% falls similar to what happened in 2000 and 2007. A 50% fall in the market is equivalent to the market first dropping 25% and then dropping a further 15% before then finally dropping a further 22%.
The point is that it is very easy to say that we will exit at the first sign of trouble but bear in mind the first sign of trouble may be a precipitous down move. Also after that first 25% fall mentioned in the paragraph above all the commentators, with vested interests, will be telling us that the market is due for a bounce, and only fools would be selling at these levels and that buy and hold is the only sensible game in town. This re-enforces our own cognitive biases and we keep hanging on in the desperate hope of recovering our losses. Then the market takes its second leg down and falls a further 15%. Those previously bullish commentators suddenly do not sound so sure but advise us that the worst is over now. Finally the market takes its 3rd leg down and falls another 22%. Now everybody is of the opinion that the world will end and it can only get worse – so we finally and belatedly throw in the towel and sell – yes very close to the bottom !
It is a simple fact that in these big bear markets private investors do not get out at the top they almost always get out at the bottom. In fact professional traders will tell us that one of the best signals of the bottom of a market is when the “public” finally give up, throw in the towel and exit.
This happens time and time and time again. In every bear market were not just fighting the bear market we are fighting human psychology.
For those that have money in the bank the buying opportunities that then occur at the bottom of these bear markets are once in a decade opportunities. Sadly most participators won’t have money in the bank. They will have money psychologically locked into a falling market and are unable no now take advantage of these once in a decade opportunities.
I repeat it is not that I believe the market is going to plunge tomorrow, simply that when it does inevitably roll over into the next bear market we will again revisit current prices and almost certainly prices significantly lower than they are today.
The really big money making opportunities do not lay in capturing the next move up in already long in the tooth bull markets (if indeed there is even a next move up) but rather they will occur for those with spare capital held outside the market after the next bear market downturn has played out.
If you have a gunslingers mentality and think you can outdraw the market – good luck but take care because the odds and historical precedence is most definitely not in your favour.
If so you are probably thinking that you are nearly “there” and one more push should see you join the ranks of consistently profitable traders.
I was in the same position many many years ago. I just needed a little bit more consistency and I would be there. I would have periods where I was just red hot and virtually every trade I put on was a winner – finally I had cracked it. Then a few unfortunate losers, badly judged trades and I was back to breakeven or thereabouts.
This is the storyline that most traders follow. We learn the basic skills apply them to the markets and are often pleasantly surprised by the strings of winning trades that we encounter. But then just as quickly those profits disappear through one or more unfortunate mistakes or errors or other unexpected external factors causing us to “give back” those profits.
VERY FRUSTRATING – if only we could get a little bit more consistency in our trading we will have it cracked !
Well that may indeed be the case. However what is much more likely is that we are drawing possibly incorrect conclusions from the way that essentially random outcomes unfold in real life.
We know that if we spin a fair coin enough times it will come up approximately heads 50% of the time and approximately tales 50% of the time. We also know that we can have strings of spins where the coin comes up just heads or just tails purely by random chance. We also accept and understand that over a period of time these fortuitous strings of winners or losers will correct themselves and results will tend towards 50% heads and 50% tails.
Most of us when we are trading tend to attribute winning trades to our mastering of the trading technique ie “doing it right” whilst attributing losing trades to some external events or us “doing it wrong”.
The reality is trading is not a precise art or skill and it is actually quiet possible to do everything “right” and still have a losing trade or do everything “wrong” and still have a winning trade.
In other words it may be wrong to assume that when you have had a winning trade that you have done something right and vice versa for losing trades.
The sad reality for most traders that are breaking even is that they are in fact just getting random outcomes in the same way as you would if spinning a coin. It certainly does not feel that way but the results bear this out
The mistake we then make is to assume that if we can analyse and then repeat what we did on the winning trades and eliminate or reduce the ”mistakes” we made on the losing trades then we would be home and dry.
This would be the case if we had indeed acquired a genuine skill or edge.
However if you look at the coin spinning example what is much more likely is that when we have a string of five winning trades it actually has very little to do with our skill and very much more to do with how a random sequence of outcomes just happens to be unfolding.
In other words if we spun a coin and it came up several heads in a row would we say “now I have discovered a way to spin a coin and for it always to come up heads” if only I could now master this spinning technique I could make a fortune in the coin spinning business.
Sure it MIGHT be that you really have acquired a “knack” but far more likely is that you are ascribing more significance to the outcomes than they warrant.
This is sort of the basis for the null hypothesis assumption in statistics – ie that any kind of difference or significance you see in a data set(winning v losing trades or heads v tails) is due to chance. Until this can be refuted in statistical terms it is best to assume the hypothesis is true. Ie it is just chance.
Ie unless we can prove in the statistical sense that we do have an edge it is wise to assume that we in fact do not.
Breaking even in trading is not a refutation of the null hypothesis it is in fact a confirmation.
Another way to look at it is to say if you are a breakeven trader that is pretty well what you would expect to get if you were simply sticking a pin in the FT (or rolling a dice) to decide on your trades.
Ouch that hurts ! ….. but…….. it is very often the case.
The people that go on to make money are those that can accept that fact and move on to acquire the skill necessary to acquire a genuine provable edge and finally are able to refute that null hypothesis.
There are more aspects to trading success than most are initially aware of and I know it was certainly the case with me that I spent nearly 10 years being “nearly” there whereas in fact I was actually nowhere near “there” and I had much much more still to have to learn and understand.
I had reached the limits of my ability to improve on my own, under my own steam, and needed external help. I reached out for help to a proven successful trader and that in truth was when my trading took off.
It is certainly true that you do not have to be born with an innate skill to become successful in trading but by the same token if any of us have been trading for a few years and are still just breaking even (or worse) we would be wise to accept that there is probably additional information about this business out there that we need to be acquire and incorporate into our own trading.
I am reminded of that old quotation for the definition of insanity “insanity is continuing to do the same thing but expecting a different outcome to somehow occur”. If it is not working for you then you have to change it.
Trading courses such as the pro-trader course seeks to give you a full and complete picture of trading and provide all the missing pieces to the jigsaw puzzle. Quite understandably novice traders, do not, and cannot, be expected to realise that they are trying to assemble a winning strategy from an incomplete box of pieces.
Achieving breakeven results (or worse) over a protracted period of time is strong evidence that you are missing some vital information.