Retail trading vs Prop-house trading
For a start, when many people think of being a self-employed day trader, they may think of someone that is in a room on their own, has their setup at their house and looking at charts in their underwear. These are called ‘retail traders’ (not specifically those that trade in their underwear) and are generally considered part of the retail market. In other words, they access the financial markets through online brokers.
But in fact, many traders at institutions are also self-employed. These are called ‘prop-traders’ and the places that they trade at are called ‘prop houses’.
Now, it is not that black and white; not all those that trade at home would be considered part of the retail market – you can get institutional setups at home. But for the purpose of this answer, and introducing people to the life of a self-employed trader, we’ll start by generalising a little.
There are pros and cons for both:
Trading at a prop-house
Firstly, you are subject to the costs of running a business. You have have to rent your desk space, news and data feeds and trading software. All of this can be of a starting cost from £2000 per month. This means that you have to make at least £2000 to even make break even in a single month.
However, this cost is not for nothing – you will generally get excellent execution times and cutting edge software. The only thing to consider is that the technology gap and execution speeds between what is available at the retail level and prop/institutional level is closing fast- if it hasn’t closed already.
The great thing about being a prop-house trader is the fact that you are immersed at a physical level.
When you are trading at home and you are by yourself, you may have squawk boxes and other notifications of breaking news. However, nothing can substitute the building of energy that occurs when something ‘breaks’ in the market.
You can feel the buzz of people talking, discussing trading positions and you can develop a sixth sense when someone else put on a trade – you can benefit from simply being there.
Trading at home
That is not to say that you can not build an environment at home that allows you to trade with others – you can, and it is highly recommended that you do. You can find online groups on Skype, communities and forums, as well as trading rooms – all where you can share information with others.
However, there are a number of things that you will need to take into account. Firstly, you will have losing days. You know this, you have experienced this if you are trading already and you think that it’s no big deal in your current setup. But think about a losing week!
When the markets are simply not playing ball, it is difficult to keep up morale and motivation and not resort to psychological influences. Imagine taking the tenth setup only to see the markets whipsaw you out of your position again!
A week can seem like a long time and so it would be advisable to build a fail-safe into your planning. Who are you going to speak to and how are you going to manage your psychology when you need help? This is where online communities and online coaching sessions help – simply because you can be in contact with others.
The software for retail traders is powerful and simple
As already discussed, the technology available to retail traders is becoming more sophisticated and easier to use everyday. In fact, some prop-house traders sometimes prefer the tools available to the retail markets, simply because of the usability of it. Also more often than not, the software is provided free by a broker and can be customised to suit the the trader.
This also means that the cost of doing business is very low, as you do not have to pay for a professional setup and maintain it each month.
Maintain contact with the outside world
Life as a day trader on your own can be tough and you need to make sure that you have adequate contact with others. This may be laughable as you think how simple this is, but ask anyone that works from home for a living. They will tell you that the most difficult thing is lack of contact with other people. It’s easy to go a full week without meeting and talking to people; most people that work in an office take this for granted.
This is compounded as a trader, because you never know what the end result of your efforts will be. Day trading, like any other trading, is a game of probabilities and you never know how your month is going to end, how much money you will make and how big of a drawdown you may get. You need to make sure you can get things off your chest, otherwise things can be very difficult.
However, you must also make sure you talk about your trading to other traders. Your friends outside this trading world will not understand where you are coming from. They may encourage you to give up, telling you its too difficult. You need contact with those that have been through the pain barriers and have come out on the other side.
This is why is it very prudent to make sure that you become part of a forum or go to live coaching webinars where you can interact with other traders.
Being a day trader does not mean that you are glued to the screens all day long either. Many people make the mistake thinking that to be a day trader means that you are looking at charts all day long.
The fact is that many day traders may look at a set of charts every hour, 4 hours or just once a day. You are still a day trader, but instead of taking many small trades that last for a short period of time, you take far fewer trades that last for a few hours, days or even weeks. Their interaction with the financial markets is actually quite minimal.
This means that you have plenty of time to do other things. Perfect if you are a free-lance writer, self employed plumber, electrician, work in a retail shop or hospital where you have shifts – any situation where you need to weave your chart time into your normal daily routine.
This also means that you can relieve the burden of having to make your money through trading alone. The advantage to this type of day trading is that you lighten the pressures of having to pay for your rent, food and other essentials in the face of having a possible losing month.
And this leads to the next point – being properly financially setup .
Have more than one source of income
When you are self-employed, you need to make sure that you (and also your family if you have one) can eat at the end of the day. Having a losing month can lead to a downward spiral as you constantly try and fight the markets and make subjective trading decisions.
If you do decide to become a self-employed day trader, you need to make sure you have a primary income other than trading; at least in the beginning. This way, a winning day, week or month becomes a ‘nice to have’, not an essential.
Scalping the markets
That is not to say that your destiny may not ultimately result in becoming a scalper ( a trader that scalps the market for trades that last for a matter of minutes or even seconds). Scalpers that trade for a living can literally be in and out of the markets in an instance.
Imagine getting up at 7:30 am, scalping money out of the markets and hen going for breakfast at 8:00 am. Sounds too good to be true? Well, you know what they say. The fact is that there are traders that do scalp and there are traders that do actually make their money by 8 am. But this is very hard to do and you need to have a very good understanding of probabilities and the markets. And always bear in mind, those traders that scalp money out the markets and are in and out in a matter of seconds, may still be looking for a setup for a few hours.
This requires intense concentration.
It wouldn’t be advisable to be doing this all day either. Many scalpers find an optimal time to scalp – say, at the open of a market, such as a forex trading session, and they do it for a short period of time. Scalping requires attention and focus and so those that scalp for a living seldom keep up this level all day.
The right approach
In summary, day trading can be a horrid slog or the best job in the world with financial freedom at your fingertips.
Which side you fall down on simply depends on your approach and whether you get into it in the right way. The right way is to look at this is as starting a business.
To start any business requires starting capital. Expect to deal with expenses and costs, as well as considerations on how advanced you are in your trading knowledge to be able to do it for a living.
Education is everything
You need to know what you are doing and so your education is extremely important and you shouldn’t rush it – especially if you are entering the self-employed trading world from a non-financial institution/background and have learned everything from self-study.
As long as you approach it right, and you have the right setup from the beginning then the answer is easy:
What is it like being a self-employed day trader?
It’s the best job in the world!