Trading is not just a risky business to be in with a survivor rate of less than 5% but a expensive one as well. Most traders are engaged with the markets on a full time basis which means that they cannot earn a living elsewhere. Of course, a lot of guys do trade from their office, but most of them are there for the thrill rather than engaging in the act of earning substantial returns from the investment they make. Of course, like any other field there will always be outlier’s who are not only able to trade successfully but also hold a good paying job elsewhere.
The whole playing field is actually loaded against the trader. Take taxes for example. A investor who holds a share for more than 1 year can enjoy the gains without paying a cent in taxes, traders pay taxes at multiple levels.
Whenever a trader transacts, not only does he pay the brokerage charges but also pays Service Tax on it and Security Transaction Charges. While a investor may deal very few times, a trader by nature is active on most days (depending on the strategy he follows) and hence ends up paying a pretty packet under these accounts.
While earlier, it was essential for a trader to sit at a brokers place, with the advent of internet trading, this is no longer necessary though even today, you shall find clients sitting behind the dealer and placing their trades at may a broker’s office. But if one were to trade outside the broker’s office, it requires a place where you can sit and trade without being disturbed.
While many a trader works from home, professionals generally prefer a quieter place since unless the house is empty during the day (trading time), its tough to avoid disturbances from family members no matter how much one tries to avoid. Add to that, trading not being recognized as a activity in itself, a person at home is generally seen as unemployed rather than self employed.
Once you have a place of your own, the next in line is the investment one needs to do to ensure access to a trading terminal through the day. This means a UPS to ensure that power failure does not affect one’s trading as well as Internet connection to be able to connect to the brokers server.
While a single laptop + a broadband connection may be good enough, most traders prefer to have some redundancy build in for that rainy day when one suddenly finds that not only is his system switching on, but a damaged cable has meant that he has no access (virtual)
to the outside world.
Building redundancy is expensive but can save one’s butt when things go awry right from the world go. Just to recount a personal experience I had recently, my main system suddenly crashed and my system guy informed me that I will need to reformat and re-set up the whole thing right in the middle of a trading session.
Since I have a secondary system, I did not bother much at that time and continued working from the other system. A hour into that, the SMPS of the back-up system literally went up in smoke. Talk about coincidence.
Most traders use Technical Analysis as their trading tool and this means investment in Charting Software + Live Data Feeds. Of course, you do have internet based charting data providers as also free live data providers, but if you really want to test ideas, you would need to invest in them. And even there, one may need some redundancy. Today for example, right when the market was crashing, Global Data Feeds server crashed. If I were to have had a big long position during that time, I would have had no way to know whether to hold the position or exit and short the market.
While most traders I know trade with only one broker, bigger trading friends of mine actually trade at multiple places to ensure that in case a broker’s server goes down (for any umpteen reason), they are able to hedge themselves somewhere else. After all, if you were holding 10000 Nifty (400 contracts), you cannot wait for the brokers server to be reset even as the market starts to move against your position.
Trading as a hobby (which is what its for many) is a pretty expensive sport to be in. Above are some of the issues that needs to be thought into before you jump into a trade. And even after doing that, you may end up having the worst luck and getting killed because you could not get out of your positions fast enough.
Most traders get killed not just because they lack a strategy worth trading but also because they are highly under-capitalized while at the same time trying to earn a full time living out of it. In a future post, I shall detail what I think is the minimum capital a trader needs to start off with if he wants to survive for a period longer than the average trader.