|
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:
- 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.
- 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.
- 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.
- 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.
- 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.
www.brettsteenbarger.com |
