Revisiting Interview with a Prop Trader

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In future posts we will be hearing from Michael Barrett who continued long into his Prop Trading career, winding up as head mentor for new traders at a major prop firm in Sydney, alongside a profitable trading career of nearly a decade. Before we go there, here are takeaways from the original interview we did with Michael, focused on his trading development during his first year as a professional prop trader.

It is worth noting that spread trading was the main strategy of this particular prop firm at the time, however they have recently shifted to other markets and strategies, of which we hope to hear more about in a future discussion with Michael.

Trader Development

1. Training Process: The training at the proprietary trading firm is systematic, starting with online courses, followed by drilling sessions and strategy development. Trainees are required to participate actively and maintain a consistent schedule, showcasing their commitment and discipline.
2. Importance of Logistics and Personal Circumstances: The interview process emphasizes the importance of the trader’s personal circumstances, ensuring that they have the financial stability to sustain during the initial period where there is no salary.
3. Trading Strategies – Fading and Relative Value:
   • Fading, initially uncomfortable for the trader, became a core part of his strategy.
   • Understanding relative value, which involves comparing different markets and identifying which ones are cheap or expensive, also became crucial in decision-making.
4. Office Environment and Emotional Experience:
   • The trading office is vibrant, with a diverse age group of traders.
   • Emotions play a significant role in the trading environment, contradicting the stereotype that traders should remain entirely unemotional or detached.
   • The emotional intensity in the trading office can resemble that of a sporting arena, reflecting the high-pressure nature of the job.
5. Trading Focus: Most traders in the firm focus on trading derivatives of treasury products, and spreading (trading two related securities) is a common strategy, particularly between Australian and U.S. markets.

Trading Desk Setup

1. Office: The trading desk setup involves long rows of desks with multiple monitors showing different applications like trading software, charting software, and news feeds. Financial news channels like CNN or Bloomberg play continuously. The office environment is designed to be stimulating with memorabilia from past trading days.
2. Charts: A trader might have a monitor showing charts shared among six colleagues. This requires collaboration and discipline as only one person can manipulate the charts at a time.
3. Consistent Charts: Trading decisions are ideally pre-planned, and on-the-fly decisions during market action can be risky. Keeping a consistent chart view is crucial as frequent changes can disorient a trader.

Strategy

1. Spreads: Traders might have opposing positions in the same office, but they probably don’t know about each other’s positions.
2. On Outrights: Outright views on market movement can be expressed by dynamically entering and exiting spreads. This offers more opportunities than just holding a static position, especially given market volatility.
3. Spreading: Spread trading is preferred over outright trading because it provides tighter control and efficiency. If a market position is moving in the trader’s favor, they might enter a spread during a rebound rather than reversing the outright position.
4. Value: Trades are triggered primarily by the spread rather than specific price action details. If a spread is right, traders are trained to enter and then manage their trades.
5. Size: As for trading size, new traders might start with a cap, but as they demonstrate consistency, their maximum size increases. Some experienced traders might trade with hundreds of contracts, but the size depends on the market session and the risk associated with the trade.

Risk and Reviews

1. Reviewing Trades: Regularly reviewing your trades is essential for success, but it shouldn’t be done too often to avoid over-adjusting strategies based on short-term market behavior.
2. Risk Management: Risk monitoring departments mainly intervene when traders are not adhering to set size limits. They don’t generally interfere with strategy alterations.
3. Trading Strategy Reviews: After trading sessions, traders are encouraged but not mandated to reflect on their decisions. They are asked general questions to stimulate introspection rather than detailed technical analysis.
4. Flexibility: Rigid rule-following can be counterproductive. While having a core philosophy is vital, being adaptable to market changes is equally crucial. This adaptability can be more effective than strict algorithms or rules.
5. Trading is a Skill: Trading can be learned, but individual backgrounds can influence the learning curve. Some might pick up faster due to their past experiences, while others might have to unlearn certain beliefs.
6. Challenges: Trading is not an effortless task. Often, the most profitable trades are challenging to enter. Traders are paid to take on risks and deal with discomfort.
7. Continuous Learning: Even experienced traders continually learn and encounter new challenges. Discovering and rectifying unhelpful beliefs can lead to better performance.
8. Market Predictions: While traders always speculate on potential market movements, including major shifts or crashes, markets tend to be resilient over time.