The first thing most people ask me when they discover I am a professional trader is "how do you trade for a living?".


Simple answer. "I don't."

And neither should you. Ever. It sounds contradictory but by the end of this article you will see the light. Trust me.

To equate capital gains (trading profits) to income requires backward logic and an erroneous assumption about the true nature of random outcomes and linear models. Some might even call it ignorance.

The financial markets cannot, and indeed should not, ever pay you like a wage. Let's take a closer look.

A wage is a linear system. The job holder receives a steady, continuous, predictable sum distributed at periodic intervals in exchange for time (service). Expense is not a consideration in the model.

Market speculation is (or at least should be) a non-linear system. Small, negligible losses in consecutive transactions are interrupted by break-even trades, small gains and extremely large winners if you are doing it properly.

Loss (expense) is an indispensable consideration in the model.

Just imagine a job where every so often, or occasionally frequently, your employer visits your cubicle and arbitrarily demands reimbursement. This loss would offset the benefit of 'continuous, predictable sums' distributed at periodic intervals.

What would you do? You would look for another job where expense was not an issue.

Speculators who entertain notions of income (on a daily basis, let's assume), unwittingly attempt to make the non-linear nature of speculation linear. They might as well shoot themselves in the foot while they are at it.

What is worse, linear models are fragile. That means they are prone to random blow-ups. It is easy to lose a job, or to be 'downsized'. Similarly, a loss can wipe out many small gains.

Non-linear models are anti-fragile; or at least robust. Think about it. Randomness and volatility are the exact criteria necessary for extreme gain. These criteria are the bane of linear models.

Just imagine arriving at the office Monday morning expecting randomness and volatility. Well, I guess some people probably do.

In plain English: If you attempt to trade for a daily or even weekly goal, you eliminate the possibility for outsized (random), extreme profits in your sample. This means small profits and small losses - a sure recipe for churn and frustration.

INFINITE YIELD

"So what do you do, Frank?" Good question. I trade for infinite yield.

Let's define it. Infinite yield is the maximum amount of profit possible in a pre-determined context using pre-determined trade management techniques. Quite simply infinite yield means I will always at least have a shot of capturing extreme outlier profits.

For example, as I write this I can think of 4 setups in my current sample that have exceeded 30% leveraged gains. One is over 50%. Had these been subject to linear (wage-like) profit-taking, the gains would most likely be a fraction of this.

Over time, the wealth-destructive properties of tight targets are compelling and depressing. They might even take you out of the game.

DAYTRADING

It is possible to achieve robust (or anti-fragile) reward/risk ratios on short intervals, provided you trade for infinite yield. This means that your context will probably not appear on a daily basis an any given interval.

When I train daytraders I tell them to be prepared to only be busy 8-10 sessions per month. There is great variation here, however, especially in times of extreme volatility such as market corrections and crashes.

Why? If my expectancy is 5-10 R (5-10 times risk) over a sample of X, I will require the benefit of dedicated institutional buy/sell programs and most likely broad market correlation. Given that my scan must be focused enough to limit hits to the strongest context, it is unlikely that I will enjoy such expectancy more than just a few instances on any given day.

HIDDEN COSTS OF TRADING

I love the conversations I have with aspiring traders who tell me, "if I can make $1,000 a day, that would be a quarter of a million ($250,000) dollars a year!"

But when I ask if they would mind enjoying $30,000 in profit over 5 to 6 days per month and $5,000 in loss over the other 12 or 15 days the color immediately drains from their faces. They begin to imagine sitting all those hours without tangible, quantifiable progress.

This stress is a hidden cost of short-term trading. And one that should not be overlooked.

There are others including, but not limited to, tax, no 'benefits' (retirement plans, vacation, insurance, social security, etc), loss, emotional stress during the novice/learning curve (which can be several years), and open positions still in the risk window.

I remember speaking with one trader who told me he was going to trade until he was 75 years old. Seriously? In what world is that feasible?

INFINITE YIELD MEANS WEALTH CREATION

Let's reduce this to the take-away. Trading for infinite yield, even if it is only achieved several times in any sample, is the surest way to wealth creation.

When people ask me how I trade for a living, my answer is that I don't really. I trade to generate wealth. Especially in tax-advantaged accounts. Now that's powerful.

It makes the best use of my time, knowledge, experience and the love of my life...randomness.

Regardless of how you decide to structure your trading business, consider first the non-linear as it relates to wealth creation. You'll make more by doing less.

And if your samples generate enough revenue to cover your cost - that is, you make a living - great. You are doing something right.

Come to the light. Trade for infinite yield. Because at 75 you should have much better things to do with your time than staring at screens.