SLIDESHOW: Five Things Every Prop Trader Must Know
Big banks may be running from it as they attempt to streamline their operations, but there is still a lot of money to be made in proprietary trading.
Rob Friesen, President and COO of Bright Trading, LLC, recently sat down with Benzinga to discuss how one of his company's members overcame a bad break and made a million dollars.
"We had a doctor that took a long time to learn the business," said Friesen. "As a merger trader, he worked hard, built his account up, but didn't take any money out. He was stuck in a merger -- remember the Dow (NYSE: DOW) / Union Carbide merger that blew up? He was stuck in that thing, so he lost all of his money as well as ended up with a deficit to Bright Trading.
"So he went into the office and said, 'What do I do now?' We said, 'What do you wanna do? You wanna walk away? We'll eat the loss. Do you wanna stay and save your career and work at it?' He said, 'I'll stay.'"
The doctor made a smart move. After paying back all of his expenses -- as well as his deficit to Bright Trading -- he had net earnings of $1 million.
Not all traders will be that successful, but everyone has to begin somewhere. To start things off right, Friesen has provided Benzinga with five key tips that every prop trader must know.
Louis Bedigian is the Senior Tech Analyst and Features Writer of Benzinga. You can reach him at 248-636-1322 or louis(at)benzingapro(dot)com. Follow him @LouisBedigianBZ
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Rob Friesen: "I think one of the big areas that's missing is this whole area of risk management. So proper position sizing. You know, understanding what they're trading in terms of its risk, volatility, liquidity, red flags that might show up in the fundamentals.
"To really come to grips with what they're trading and how it's different from something else. So the uniqueness of each product, and then position size correctly for that."Image Source: Wikimedia Commons
It Seems Wrong, But It's Not
Rob Friesen: "When you take that approach -- to focus on risk first -- it seems like it's the wrong thing to do because everybody thinks you should be focused on profit first. But that's not how it works. You have to be focused on lowering the variance, because it's the variance that takes people out.
"We spend a lot of time educating our traders on how they can lower risk through hedging, diversifying, trading multi-time frames and multiple non-correlated strategies. We absolutely desire for them to be successful and will do what we can to increase their odds of success."Image Source: Wikimedia Commons
Follow Your Plan
Rob Friesen: "You also need to know, it's really about discipline. A trader can pass the Series 7 exam and learn some strategies from us, but what about the discipline? If you're not disciplined, you're going to trip yourself up. You're going to second-guess things. You're going to start to make too many discretionary decisions. You will deviate from your business plan.
"A lot of times when people have left my office and I ask, 'How'd your day go?'
"[They reply], 'Oh, if I had just followed my plan.' How many times have I heard that? 'If I had just followed my plan.' So discipline is so huge."Image Source: Wikimedia Commons
Think Like a Blackjack Expert
Rob Friesen: "Like blackjack, for example, we've referred to before. The discipline to play basic strategy perfectly is necessary. To count cards would be even more necessary, and to avoid making mistakes. Because if you make too many mistakes throughout the night you're going to give back your edge. So discipline is huge."
"And in trading, the market efficiency is so high that discipline is absolutely necessary.Image Source: Wikimedia Commons
Extraordinary Intelligence Not Required
Rob Friesen: "You don't need extraordinary intelligence to do this business. You don't need to be the brainiest guy. You don't need to be the smartest guy. You don't need to be a Harvard graduate. It's kind of back to that Forrest Gump thing. He bought Apple. 'Stupid is as stupid does.'
"We laugh about that and we say it's better to be lucky than smart, but you gotta have rules. You've got to take the time to make the rules and then you've got to follow them."Image Source: Wikimedia Commons