July 2016 Trading Combine®| Summary Part 4

Lesson 10 Chapter 2

In the previous post, I shared with you how we had a potential customer who expected to turn $20,000 seed money into $48,000 in one year of trading.  Despite the fact that one of the most lucrative, albeit high risk, investment choices would only return 45% per year, this customer still felt that they should make a 240% return each year.  C’est la vie!

In the last post (part 3)  I promised I would tell you how this example about having realistic expectations, pertained to trading TopstepTrader combines and now I will.

Realistic Expectations – Will I Pass Every Combine?

I want to start by saying that the reason I continue to take TopstepTrader combines in the day trading chat room, is not because I need to prove I can do it, but rather that we have a strong desire to assist people with becoming properly funded traders and to stop trading under funded trading accounts (and yes, a $20,000 trading account is underfunded).  Also, the rules set forth by TopstepTrader are “best practice” rules and if consistently adhered to, will provide you with the best opportunity to become a long-term, consistently profitable trader.  We want to show our traders that with the proper tools and information we can put them into the best possible position to be successful.

But back to the question; “Will I Pass Every Combine?”.   Honestly, the simple answer is “no” I will not pass each and every combine that I take.  Trading combines are HARD and in a lot of ways, harder than trading your live account.  In your live account, you don’t have the same strict trading parameters (although you should) that are required from you at TopstepTrader.

In fact the most recent combine I traded, I did not pass and the details of which can be found in part 1 of this series.

Having said that, I have passed my share of trading combines (part 2 of this series) in front of a live trading audience, and when you consider the investment needed to take a trading combine (first one with us is FREE and then it is a fixed cost based upon the amount of trading combine you take), the investment is far far lower than trying to weather the inevitable drawdown in an under funded trading account.

Other People’s Money 

We have all heard the term “OPM” or “Other People’s Money”.  In business this term has legitimate examples in our everyday life.  For example: An automobile insurance company has 10-million policyholders, each paying $100 per month.  The insurance company is collecting nearly $1-Billion every 30 days.  Now, eventually this insurance company will pay out most if not all of the money collected.  But the keyword is “eventually”.  What the insurance company does, is take this money that has been collected and then invests it (hopefully wisely) into investments that are then profitable for the company and its shareholders.  Essentially, since all of the money will eventually be paid out to policy holders, the insurance company has received a loan from its customers, to be used to make investments designed to be profitable for the insurance company.  Hence, they are using OPM to make a profit.

Trading Other People’s Money (OPM) – The Right Way and the Wrong Way

There is a right way and a wrong way to use other people’s money to further your trading business / career.

Let’s briefly talk about the wrong way to do this. Going to your friends / family / business partner and asking him (or her) to invest money into your trading account and promising lavish returns.  Not only is this idea hazardous to your relationships, in a lot of cases (as documented on TV and Internet) can be hazardous to your personal freedom; i.e. illegal.

The right way to go about using Other People’s Money is to get a fully funded trading account with trading firm like TopstepTrader. While there are other firms out there that are providing trading capital to traders, TopstepTrader is the first and best firm out there.  There are many reasons that I say this, but that is for another post.

Realistic Expectations – Return on TopstepTrader Investment

Ok, let’s take that same $20,000 trading account (seed money) from the previous example and let’s apply it to a TopstepTrader combine.

Let’s assume it takes you 5 attempts to get through the $50,000 trading combine.  We have already discussed that while we would like to, it is unlikely to pass every single combine attempted.  Remember, trading a combine is hard for a reason.  It is essentially a job interview where at the end, you will be given a “live” trading account with “real” money to trade.  (but I digress).

The Math – ROI

Assumptions:  Each $50,000 trading combine costs you $195.  We will not count the fact
that you get the first one from us for $1.  And it takes you 5 attempts to get through the trading combine.  Now, let’s assume you want to make $35 a day (net) day-trading.  Wait, what?  $35 a day…are you kidding?  No, I’m not kidding, bear with me…it will make sense in a minute.  Now, let’s assume you have made it and are now a live trader.

  • Cost of trading combines needed to achieve live trading account = 5 tries x $195 = $975

  • Time involved to pass: Assume 3 months needed to pass the combine. Your time has value, but so does the fact that if it takes you 5 tries to pass the combine, you are not doing this in your live trading account. Meaning that any losses sustained during this time are not “real losses”. So, the 5 tries to pass in your “live” account has a value as well. So, for the sake of this discussion we will call it a “wash”.

  • $35 net per day: While this does not seem like a lot of money when you multiply $35 per day (x) 21 trading days, you are at $750 per month. 12 months x $750 is $9,000 per year.

  • Now, you keep 100% of the first $5,000 with TopstepTrader. So, your net would be $5,000 + (80% of $4,000) = $8,200 after year 1. ** Note: TopstepTrader keeps 20% of the profit after the first $5,000.