types of scenarios. They know how to adjust
to what the market presents. They protect
positions. They cut losses. In other words,
FTTs adapt their strategies to high or low
vol, or when they think directional strategies might work better than market neutral,
or vice versa.
If you’ve never experienced a market with
high vol that stays high, or you haven’t seen
big swings in your p/l that might be too much
for your account or your psyche to handle,
these types of market fluctuations can teach
valuable lessons in risk management. They
have the potential to train your instinct better
than anything you’ll read about in a book.
In fact, FTTs never brag about their risk.
They know from experience that a lot of risk
can spell doom if the market and vol move in
ways they don’t expect. And the market and
vol frequently move in ways we don’t expect!
Take a look at a chart of the SPX and the
VIX, for example, for the period you’ve
been trading. Have these indices been docile? Or have you survived their big moves?
Rest assured, FTTs have their own unique
Look hard at your net liq
Your account’s net liquidating value
(“net liq” in trader lingo) is the value of your
positions, plus any cash. It’s the amount of
money you’ll use as a trader to generate profits. After all, trading is a business. And your
net liq will be how you support that business.
Any net trading profits after commis-
sions can be divided by that net liq to
determine a rate of return. Imagine you’ve
had a profitable year and made 20% trading
returns after commissions. What’s 20% of
your net liq? If your net liq is $5,000, that’s
$1,000 profits, after commissions. If your
net liq is $200,000, that 20% return would
be $40,000 in profit. How does that $1,000
or $40,000 (or whatever the number is)
fit in to your finances? Does it cover living
expenses, or just a few bills?
Keep two primary trading rules in mind:
One, just because you made money in one
year doesn’t mean you’ll make it in the
next. Two, a higher potential return generally comes with more risk.
So, your net liq has to be big enough to
keep you trading after a losing year (yup,
trade and risk management). And you have
to be realistic about what your potential
profits might be, if or when you make them.
If you need to get 100% returns every
year to keep the lights on, you’re going to
have to take on significant risk. FT Ts must
have realistic trading goals, and a solid
understanding that they may make or lose
money in any given year, or even have a
string of losers.
A smaller net liq, and smaller returns that
might only cover designer co;ee, does not
mean you can’t consider yourself a trader.
In this case, while your day job may cov-
er most living expenses, as a trader with
you’re still building
lets you check
boxes one and two.
As long as you’re
engaged with the
market, and have
a solid reason for
trading the way
you do, you can
still call yourself
a trader—even a
even though your
profits might not be as large as the income
from your “job.” Hey, as long as your net liq
is growing even a little, it counts.
Bottom line? The hallmark of devoted
traders is attitude. When you’re able to talk
about a stock, or the market, and you know
exactly what strategy you’d use; or when
you have consistent profits across di;erent
markets over extended periods; or when
you can honestly say that your net liq is
more important than your ego, and you can
make the right decision even when your
heart disagrees, then you can proudly call
yourself a full-time trader.
So get to work. The market never closes.
SPRING 2018 ; tdameritrade.com ; 19
FIGURE 1: Which spreads did you trade? You can see your trading history by selecting Account Statement from the Monitor
page of thinkorswim. Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
by type of
For more on the general risks of trading and trading
options, see page 37, #1– 2.
Learn more about
techniques in the
archives at tickertape.
and search for the