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I’ve been furloughed or lost my job. Should I take up trading to replace my income?

Posted by: Garth Mackenzie Posted on: 2020-04-13


By Garth Mackenzie


Until recently I had not heard of the word “furloughed” but it is a word that is now being widely mentioned as the economic impact of CoVid-19 bites down hard all over the world.

 

The word furlough means to be granted a leave of absence from your job, on full or partial pay.

 

Some companies are granting this option to their employees – particularly in areas of the economy where these employees are unable to carry out their work due to the lockdown. It serves to protect the employees’ jobs and income during the lockdown period. The assumption is that those people will return to work when the lockdown period is over.

 

Not everyone has the luxury of being able to do their job from home behind a computer screen. Think airline pilots, bartenders, waiters, factory workers among many others.

 

In the current climate, those who have been furloughed are the lucky ones. Some of the not so lucky ones have seen their jobs terminated altogether as businesses fail.

 

In light of this, I have been inundated by people with no trading experience who are eager to take up trading as a way to replace their income and utilise the current time off to become full time traders.

 

This terrifies me.

 

I have traded the stock market for half my life. I have run the derivatives trading desk for a large private client stockbroking firm. And for the past decade I have occupied my time running a trading analysis and education service via my TradersCorner.co.za website and the TradersCorner TV show on BusinessDay TV (The TV show terminated in July 2019 when I relocated from South Africa to the UK).

 

I have experience in the world of trading and I know that it is not nearly as easy to succeed as what is often marketed. I’ve witnessed many stories of people who have been financially destroyed in the financial markets.

 

I get annoyed when I see scummy forex firms that are registered in questionable jurisdictions portraying trading in a glamorous way in order to lure in starry eyed wannabe traders. We’ve all seen the adverts: Some guy with a gorgeous girls on his arm, alongside a Ferrari or a yacht or a helicopter. All the implied trappings of riches that come from trading in the financial markets. What nonsense.

 

There is a strange mystique around trading that leaves susceptible people vulnerable to such false marketing.

 

Perhaps it’s because the barriers to entry have become lower and lower over the years. With the advent of online trading, it has become easy for private individuals to enter the arena of financial markets that were previously reserved for qualified brokers and investors who had financial muscle or the backing of large firms behind them.

 

Now days, anybody can open an online trading account with a broker, download their trading software, transfer some funds to the account and start trading. And hey-presto, suddenly Mr Average Joe has access to play on the same arena as the biggest hedge funds and institutions in the industry.

 

Getting access to the arena is easy. Making a success of trading is not easy. Yet many people overlook this fact.

 

Take the following scenario: You buy yourself a set of golf clubs. Go to a local pro at a golf course for a few lessons and then sign up to join the PGA Tour and start making a living from playing golf.

 

Or this scenario: Buy yourself some design software, complete a basic online design course and take up a job with a major architectural firm designing skyscrapers.

 

Ridiculous right?

 

Yet many who see how ridiculous these scenarios are will be the same people who think they can take up trading in their private capacity and earn a regular steady income from it, or even join the Ferrari brigade.

 

The statistics of success for people who take up trading for themselves are desperately poor. This is particularly the case on leveraged products such as forex, futures, spread betting and contracts-for-difference (CFDs).

 

Financial regulation requires that providers of these products boldly disclose what percentage of their clients lose money. This is akin to the health warning splashed across cigarette boxes that say “Smoking can kill you”.

 

Browse any CFD provider’s website and you’ll notice that at the top of the home page there is a disclosure of the percentage of clients who lose money. Typically the number is between 70% and 80%. I’ve noticed the numbers ticking higher recently following the recent market crash.

 

And don’t be fooled into thinking that the other 20% or 30% are flying around in helicopters. They’re not. Most of them are bumbling around taking one step forward and one step backwards and battling to make any headway.

 

There’s only a very thin sliver of traders who make consistent money from trading the financial markets and who really do well from it. And I can assure you, those traders have put years and years of effort into mastering their skill and have the requisite foundations in place to make a success of trading. Those foundations include the copious amounts of financial and emotional capital that is required.

 

Don’t get me wrong. I’m not saying that trading success is out of reach for everyone. Every successful trader started somewhere near the bottom. I’m simply stating that the facts and statistics are heavily stacked against Mr Average Joe who has just started out with starry eyes. And somebody who has been furloughed or has lost their job should be aware of these realities about trading before assuming it is an easy way to generate an income.

 

So assuming that you’ve read this far and you’re still interested in starting to trade, how should you approach it?

 

I have been interviewing a variety of successful traders over the past few weeks in the “Talking with Traders” podcast series sponsored by IG Markets. https://band.link/IGtraders

 

One of the questions I have asked each of the interviewees is what advice they would give to start out traders. There is a fair amount of commonality among the answers each of the interviewees have supplied.

 

Here are the most important points raised by the traders I interviewed:

 

(1)    Start out small and without leverage

 

Leveraged products such as CFDs, futures and forex allow you to take on position sizes that are larger than what your capital input is. As the name suggests, this allows you to leverage your capital, but also means that your returns are leveraged on both the upside and the downside. This adds an increased level of risk to your trading and is something that start out traders should be really careful of.

 

It is advisable to start out trading vanilla shares or Exchange Traded Funds (ETFs) on indices. Whilst these instruments are not as exciting as the leveraged products, they are a good place to start out and learn how the market functions. It’s much like learning to swim in the shallow end rather than the deep end. A platform like Easy Equities offers start out traders the ability to trade shares with low commissions.

 

(2)    Being properly capitalized is crucial

 

It’s important to treat trading like a business. As in any business, you need to be properly capitalized to have a fighting chance at being successful. If you’ve reached the point where you are experienced enough to trade leveraged products and take trading on seriously, then six figures is a good starting point. R100,000 minimum. That will allow you to have the firepower to overcome transaction costs and to come back from a few losing trades without being wiped out. Trading with a capital base that is too small makes it difficult to ever get out of the starting blocks.

 

If you have less than that, then rather take a conservative approach with your capital and buy into shares or Exchange Traded Funds (ETFs) and add to these over time as you are able to save and invest more money. See point 1 above.

 

On the point of trading capital, it is also very important to realise that this needs to be viewed as “risk capital”. It should be money that you can set aside into a “trading” portfolio and needs to be money that you can afford to place at risk. Physiologically, it is very difficult to trade with scared money. With the potential for higher reward comes higher risk. If you cannot afford the risks that come with active trading in leveraged products then perhaps you’re better off sticking with vanilla equities and ETFs as in point 1 above.

 

(3)    Stop losses and risk management vital keys to success

 

Whenever you enter a trade, it is vital that you understand how much you may lose on the trade. The standard rule as taught my most trading educators is that no trade should ever lose more than 2% of your trading capital. That means that if you have R100,000 in a trading account, then your maximum loss on any single trade should be no more than R2,000.

 

Placing a stop loss such that you’ll never lose more than 2% of your capital on a single trade is important. Small losses are part of the business of trading and are to be expected. The key is to make more on the winning trades than you lose on the losing trades and to have more winners that losers.

 

Never add to a losing trade as this is a sure way to the poor house. Always cut losers quickly.

 

There are 4 possible outcomes to all trades: Big profit, small profit, small loss, big loss. All of the first 3 are acceptable. Big losses must be avoided always if you want to be successful over the long term.

 

(4)    Treat your first few years as tuition and expect to pay school fees

 

Almost all successful traders have a story to tell of how they struggled in their early years. It’s almost a rite of passage into the space occupied by experienced traders. In my own trading career it took me 6 years of regular losses and wild swings in my trading account before I learned to become consistently successful. And even after that I had occasional ups and downs.

 

Trading is not something that is taught in university. Sure there are trading courses one can attend such as my own High Probability Trading Course, but most of what you will learn is on the job. Such courses can teach you the basics, but the real learning happens by simply getting your feet wet and learning through experience.

 

Demo accounts are offered by some brokers and this is a good place to start and to learn the basics of how markets work. But if you really want to get to experience the true emotions of making and losing money, there is no better way to do it than to simply place your own money on the line.

 

You’re likely to lose money while you learn. Consider this your school fees to learn a new skill, much like you’d pay tuition fees to become a lawyer or an accountant. Try to ensure that your school fees are not excessive. You can achieve this by starting out small and making sure you keep your losses contained.

 

(5)    Read, read, read. Learn, learn, learn.

 

There are hundreds of books on trading, technical analysis and various methods of trading that have been written by numerous experienced traders over the years. Read as much as you can. But also practise doing your own analysis. Look at charts. Study market fundamentals. Attend trading courses and seminars. Surround yourself with other traders. Place trades and learn. Much like learning to play a sport, trading is something you’ll need to DO to gain experience. You can only read so much in a book to give you guidance or learn so much on courses, but the real skill is acquired by DOING.

 

(6)    Get a mentor

 

As with anything, if you have an experienced guide or a coach to show you the way, this will help you in your learning. Trading mentors are difficult to find as many are private people and pre-occupied with their own trading. My TradersCorner.co.za service acts as a form of online mentorship community for private client traders. We have assisted hundreds of private retail traders to hone their skills and become better traders. Having your hand held by an expert will certainly help to make better trading decisions.

 

(7)    Make sure you’re profitable as a part time trader before taking it up full time

 

This is really important for those wanting to take on trading full time. It is imperative that you’ve managed to become profitable as a part time trader before you decide to break away from the safety of full time employment or some form of risk free income.

 

Even then, many successful traders have some other source of income besides their trading to provide them some level of income security and diversification. Depending entirely on trading for a monthly living can be immensely pressurizing.

 

To go back to the original point of this article: Should you consider trading as a way to generate an income if you’ve lost your job or have been furloughed? Probably not. But should you get started and begin to responsibly learn the way to become a trader? Yes, sure. Go for it. But be realistic about your expectations and approach it with the understanding that it is a journey of personal growth and will come with many challenges along the way. It’s certainly not an easy way to replace your income from home. If it was, everyone would be doing it.

 

Garth Mackenzie is the founder of TradersCorner.co.za.

Listen to his latest Podcast series called “Talking with Traders” here https://band.link/IGtraders

 




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