From the archives - Should you quit your job to become an independent trader?

I’m currently working on a series on trading S&P 500 futures. This will take more time to write, so in the meantime here is a post from the archives, revised and updated.

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In 2017, I left my cushy job managing a trading desk at a bank to manage my own capital full time. I started paying for my own Bloomberg, rented an office, established relationships with brokers and research firms, and treated the endeavor like a full-fledged business. That mindset was key to my success and part of why I’ve survived longer than most independent traders.

Since then, I’ve seen a number of former colleagues and traders I knew in the industry venture out to trade their own money (known as trading PA, or “personal account”), with various degrees of success. Some have asked me for advice before taking the plunge, and it has become such a frequent question that I had to write a post about it. I’ve also coaching a number of successful independent traders, and have heard the stories of how they reached “exit velocity” and learned the different ways they generate profits.

Deciding to trade PA full-time is a scary transition, and one can be full of doubts about whether previous trading performance can be replicated in one’s PA. In this post, I answer the following questions:

• How much capital should I have?

• How skilled of a trader do I have to be?

• Where will I get research and ideas?

• Should I get a Bloomberg subscription or a cheaper alternative?

• Will going independent derail me mentally and emotionally?

• Managing drawdowns

• How to structure your day and manage your time

• What if I am undercapitalized and don’t have enough experience to get hired somewhere?

Capital

Most people I speak are trying to decide whether they should leave a trading job at an institution (a bank, hedge fund, or prop trading shop) to trade PA. Let’s start with the most important consideration, which is the math behind the money. The primary factor in the decision is upside capture of pnl on a good year vs how much one will lose on a bad year in either career path. In other words, risk vs reward. Let’s use a hypothetical trader named Harry as an example. Harry is a mid-level trader at a bank where he makes $300k/year in salary. In a good year of trading, he might make an additional $300k in bonus. He can withstand two down years in a row before he loses his job and that $300k salary. By working at the bank, Harry has a lot of downside financial protection, which means the upside of trading PA should be high enough to make it worth leaving his salaried job. If he ends up having a down year trading his own capital, he will be significantly worse off than if he was trading at the bank. This means he should have the ability and enough capital in his PA to at least triple the compensation he would make in a good year at a bank. If he can’t shoot for a large multiple of that number ($600k of total comp in Harry’s case), the personal downside risk simply isn’t worth it.

Not only do you need to be well-capitalized enough to out-earn what you would make at a bank, you should also have a couple of years’ worth of expenses saved up on the side (not at risk in the trading account). It also helps to have some side income from other investments or a spouse who pulls in a full-time salary. Blowup risk is real, especially for global macro traders who are trading futures and leveraged FX. A flash crash or a 6-sigma move overnight could wipe out an entire trading account.

For the above reasons, I find myself advising most people against trading PA full-time. For those who are confident in their trading abilities, I usually suggest keeping the full-time job while trading PA, if possible. When the time comes when a month’s pnl exceeds a year’s worth of compensation on a regular basis, that’s a sign you’re ready to leave your job.

Track Record

An equally important consideration is your track record of making consistent profits year after year. Some hedge funds ask for three years of track record before hiring a portfolio manager, but I would go a step further and say that you shouldn’t be comfortable trading PA full time unless you have over five profitable years under your belt. Five years of experience means one has likely traded through a business cycle, multiple regimes (high vol, risk off vs low vol, risk on), and multiple crises. You also should be brutally honest about how much of your performance at the institution was the result of franchise flow and information that will not be available after you leave. If a lot of your performance was dependent on negative skew strategies (those that involve picking up pennies in front of a steamroller), you won’t be able to replicate that in a margin trading account without exposing yourself to significant blowup risk.

Research and Ideas

When trading at a bank, prop trading firm, or a fund, traders have access to abundant sources of market research and ideas. I remember when I was at the bank, there was a constant flow of information pouring into my Bloomberg terminal and email inbox, not to mention the frequent exchange of views and ideas on the trading floor. After I left, I had to find my own sources of research and ideas. X.com and Substack are excellent low-cost sources for analysis and research. Lately I’ve found myself paying for more Substack subscriptions because the quality of research here has been getting better and better.

One decision I made earlier on was to spend 1-2% of my AUM on research. Some may be shocked at how much I personally spend on research and subscriptions, but I consider it an investment into my trading process and a source of ideas and inspiration. Every research provider has their own niche of what they’re good at. I try to put together a diverse research stack where each provider plays a specific role in the mosaic of the markets. It’s useful to have some research focusing on data and quant-driven analysis, and other research focusing on economic fundamental analysis. Some provide short term trade ideas, and some provide long term ideas. There’s also asset class-specific research that goes deep into just a handful of markets. If you’ve read my blog long enough, you’d be familiar with some of my research sources.

The idea of getting cut off from a steady stream of institutional research and having to pay for it all yourself isn’t as bad as it seems. When I was trading at the bank, there was so much noise that part of the challenge was sifting through what was useful and what wasn’t. Now that I’ve curated my flow of information and analysis, I can cut to what I decide is important and be more efficient with my time.

The one thing that’s impossible to replicate is the buzz and chatter of a trading floor, if that’s the environment you are leaving to trade PA. The good news is that without a full-time job, you’ll have more time to build and maintain relationships with other traders. When I left the bank, I became more diligent about making new friends who were also traders and maintaining contact with the existing traders in my network. The worst thing a trader can do is to retreat into social isolation, without a sounding board for ideas or an emotional support system.

Software

Bloomberg is expensive ($2665 USD/month plus tax) so I wouldn’t recommend getting one unless you have used it extensively in your career and know how to get the most value out of it. There are much cheaper options like Koyfin and Refinitiv Eikon that one can try out before shelling out money for Bloomberg. I find Trading View to be best in class for charts, as they have a mobile app that syncs seamlessly with the browser app, and subscribing to live data is inexpensive as well.

The mental and emotional game

I’ve found that independent traders swing one way or the other when it comes to risk appetite after leaving an institution. For some, the stress of having one’s own money at risk can cause a trader to trade tighter than usual. For others, the freedom of being able to do whatever you want without a boss or risk manager tapping you on the shoulder results in an increase of risk-taking. Either way, the transition to PA trading can throw a trader off his center, and he must be aware of this and correct for it. One way to manage this is to create a formulaic position sizing framework that decides the percentage of capital risked on each trade. Inputs into the framework can be the trader’s track record in the market being traded, and how big of a drawdown the trader is currently in.

Drawdowns can be more emotionally draining when trading your own capital vs trading other peoples’ money. Losing your own money is never fun, especially if your trading gains are the only source of income for you and your family. This may be obvious to some people, but you should have your spouse 100% on board with the idea of trading PA full-time and do some financial planning to make sure you’ll survive if trading doesn’t work out.

Every year, I’d have at least one drawdown that was uncomfortable enough that it put me in an emotional rut for weeks on end. I’d go through all the usual emotional states that traders have when going through a drawdown. Denial (which results in revenge trading), despair (feeling like a cloud was hanging over me, which also affected how I behaved around people), and acceptance (coming to emotional terms with the drawdown and taking constructive steps to work my way out). Over the years I’ve learned that the faster one can move through the first two phases and get to the acceptance phase, the better it was for my pnl.

Since you’ll have more time on your hands without a full-time job, you’ll have space in your day to focus on mental health. Stuff like sleep, exercise, and having side hobbies are key to managing stress levels and keeping yourself centered. It is much easier to go on tilt when trading PA because you don’t have a boss or risk manager tapping you on the shoulder when position sizes or losses spiral out of control.

Lifestyle

Leaving a full-time job for an individual pursuit sounds like everyone’s dream. Most people have the impression that you can lounge around at home or sit at the beach all day. This cannot be farther than the truth. If you want to take trading seriously, you’ll need to be conscious of how you allocate time to your trading business vs everything else. People will label you as retired, and your friends and family might start assigning you responsibilities or ask favors that take up your free time. It’s important to be aware of this as it’s happening and set boundaries around the time you need to dedicate to the markets. I try to limit meetings and social events to two per day to leave enough idle time to read and ruminate about the markets. My typical weekday looks like this:

8 am - Gym or sports

9:30 am - Meeting with people in North America and reading emails and research (most of my research goes to my inbox)

12 pm - Lunch

2 pm - Meetings and appointments, writing and research for Fidenza Macro, administrative stuff

5 - 9 pm - Family time, dinner

9 pm - Read email and research, watch markets

11 pm - Read a book and wind down for sleep

This schedule exactly fits my style of trading and Asia time zone, as well as how I like to spend time with my family and engage with my hobbies. I’m still doing market-related work for seven hours a day, which is as much time as most people spend working in a full-time job. The difference is that I now intersperse hobbies, family time, and social engagements in between work. This allows me to maintain a high level of energy throughout the day, while giving me space to learn and be curious about things inside and outside of financial markets.

What if trading PA is your only option?

Some traders don’t have enough experience to get a full-time trading job at a bank or prop firm, or simply can’t stand the idea of a full-time job. Perhaps trading PA is the only way to develop a track record to raise capital or get hired somewhere. Most people I know in this situation are severely undercapitalized and not experienced enough, but commit to this path anyway. The few successes I’ve heard of (and the large majority are failures that you don’t hear about) did NOT make their fortunes in global macro but instead played in more speculative and smaller markets where there can be significant upside skew and volatility, such as crypto altcoins and small/mid cap stocks. In these markets, the participants are sometimes unsophisticated and emotional retail traders, as opposed to sophisticated financial institutions with decades of experience or huge computational resources at their disposal. I recently posted on X a hierarchy of asset classes from easiest to make money in to the hardest:

#1 Crypto - asymmetric and convex returns on the long side, lack of efficiency and transparency, lots of dumb money, opportunities to trade on insider or advanced information

#2 Equities - asymmetric and convex returns on the long side, lots of inefficiencies and misplacing, huge universe of tradable assets and strategies

#3 Commodities - asymmetric and convex returns on the long side, strong tendency to trend, long term cycles that are more predictable

#4 Rates - Strongly anchored to fundamentals and policy outcomes. While it’s not the most profitable market to trade, it’s the most useful to be able to predict as interest rates drive the price of all assets

#5 FX - By far the most difficult asset class to trade, as it’s the deepest and most liquid market and therefore the most efficiently priced.

I have to caveat that this current cycle in crypto was much harder on traders than previous cycles. The maturation of the crypto market and the entrance of tradfi capital means that crypto profits won’t come as easily as before. It’s also a feast-or-famine market - everyone makes money in a bull market, whereas it’s very difficult to make money in a bear.

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Overall, the decision to leave whatever job you’re in to trade PA full-time is a decision that must take into account every unique aspect of your personal situation. The decision process must incorporate a high level of self-awareness and some hard realism. Instead of jumping in with both feet, there are halfway steps that can be taken to determine whether trading PA makes sense, such as working a job and trading simultaneously, or paper trading before you trade real money. If you need any advice or clarification on this topic, feel free to reach out by replying to this email.

Disclaimer: The content of this blog is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments. The blog is not a trade signaling service and the author strongly discourages readers from following his trades without experience and doing research on those markets. The author of this blog is not a registered investment advisor or financial planner. The information presented on this blog is based on personal research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this blog are at your own risk. Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this blog will be profitable or suitable for your specific situation. The author of this blog disclaims any and all liability relating to any actions taken or not taken based on the content of this blog. The author of this blog is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.