Every week I hear from traders
interested in affiliating with a trading firm. They recognize that
such affiliation provides them with deeper access to capital, a greater variety
of trading tools and technologies, lower commissions, and the benefits of
interaction with other successful traders.
Not all trading firms are created equal, however. Here are a few things to look
for when considering affiliation with a firm:
1) Will you be trading your capital or the firm’s money? Your payout (share of
profits earned) should be significantly higher if you’re taking all the risk.
Conversely, don’t expect firms to take 100% of the risk by fronting you money
unless they also can recoup losses by taking a decent share of profits.
2) Are fees reasonable? Firms provide you not only with software, hardware, and
fast connections to exchanges; they also maintain and upgrade the technology.
Fees cover that, as well as your physical overhead (rent) and office support.
Make sure you compare apples to apples: some fees look low, but higher
commissions add to the overhead. You need to compare total overhead to total
overhead to see which firms are offering relative value.
3) Is the firm a learning organization? When markets change, to paraphrase
Churchill, traders who don’t hang together will hang separately. Some firms
encourage sharing of information, research, and insight among traders; at other
firms, traders jealously guard their “edge”. Access to other traders is a major
benefit of affiliation with a firm, but it won’t do you any good if traders
don’t work together and trust each other.
4) Is the firm breaking new ground? The best firms support traders with new,
proprietary trading tools and market research. Automated trading tools, trading
systems, advanced screening tools: these are becoming standard. You want to
affiliate with a firm that is constantly innovating. Ask yourself: Where is the
firm’s edge? If the firm isn’t constantly developing and extending its edge,
it’s hard to see how it can contribute to your success.
5) Is the firm devoted to training and development? At the best firms, senior
traders mentor junior ones. Training programs bring new traders up to speed, and
mentors keep traders on a learning path. There is a continuous feedback of
results to each trader and emphasis upon setting and reaching of goals. If each
trader is on his or her own to learn the markets, the odds of success are much
lower than if senior traders are incentivized to help junior ones. Beware firms
in which established traders have no meaningful financial stake in the success
of junior ones.
The most common mistake traders make when looking to affiliate with a firm is to
focus solely on money and not upon the competitive advantage that the firm
brings. Fees may be higher and/or payouts lower at firms that maintain the best
technology, the most active mentorship, and the deepest access to markets and
capital. The question, however, is where you will become the best trader. It
doesn’t matter if you can keep the lion’s share of profits if the firm can’t
help you make any.
Brett N. Steenbarger, Ph.D. is Associate
Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of
The Psychology of Trading (Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
www.traderfeed.blogspot.com. His book,
Enhancing Trader Performance, was recently released for
publication (Wiley).
