Ep. #1: Low Expectations

Some CTAs expect to lose money in the first few years. This expectation leads them to overspend, which creates exactly what they expect—losses. Other CTAs expect to be profitable—in the first year of business, and every year after that—and they are profitable. Listen to this episode and learn how to put yourself in the profitable group.


Welcome to The Profitable CTA, the only podcast that helps commodity trading advisors grow their businesses and boost their bottom lines. I’m Kelly Hollingsworth and I’m very glad you’re here because CTA profitability is suffering, and in this show we’re going to talk about how to fix that.

In every episode, we’re going to discuss a common problem that undermines CTA profitability. So to clarify, this is not a podcast about how to trade. It’s a podcast for talented futures and forex traders who already make money in their own accounts, and who want to learn the business of trading other people’s money. This is the business of being a commodity trading advisor, and it’s a business where you can make a great deal of money. It’s in fact the most lucrative business that I know of, but here’s the thing. Most CTAs don’t make money, and that’s the problem this show is going to solve, because there’s simply no reason for that to happen.

The CTA profitability problem that we’re going to discuss today is low expectations. This may not seem like a problem. If you ask, most CTAs will tell you, “That’s definitely not me. I want to make money.”

And this is true. Every great futures and forex trader, those who are most likely to start successful CTAs, are confirmed capitalists. They definitely want to make money. The question is, do they expect to make money in this business?

All too often, the answer is no, and I blame the internet for a lot of this.

If you google, “how to launch a commodity trading advisor,” or “how to become a commodity trading advisor” you will get a whole lot of hits that tell you to have a big cash cushion, because in the first couple of years, you can expect to lose money as a CTA, and you will need to use that cash to stay afloat.

To this, what I’d like to offer is that there are two kinds of CTAs. There are those who expect to lose money in the first couple of years, and that is exactly what happens to them, because with the expectation that they’re going to blow through cash, that is exactly what they do. They burn through a serious operating budget on things they simply do not need for their businesses, things that are in fact counterproductive for their businesses–we’ll talk a lot about what to spend your money on, and what not to spend your money on, in upcoming episodes—but for now suffice it to say that when CTAs blow money on needless things, they then find that what they were expecting to happen in their businesses does in fact happen—they lose a whole bunch of money in the first few years.

The other kind of CTA is the CTA that expects to make money–in the first year, and every year after that. These CTAs exist. I know they exist because they’re my clients. The fact is that a CTA business, done properly, is not an expensive business to run. You’re trading for yourself anyway, so starting a CTA business is simply a matter of a few simple add-ons that will let you also trade for other people in addition to your own account.

Now, this is where struggling CTAs tell me I’m crazy. They say, “What are you talking about? We need an office and a team and a board and everyone on that board better have an Ivy-League MBA and we need a travel budget for a protracted road show so we can start chasing institutional investors because we’ve heard it takes a lot of time to catch them, and we need a website and graphics and letterhead and branding, and on and on and on…” Their lists of everything they have to buy for their businesses is endless, and so are their operating losses.

So here’s what I’d like you to notice about overspending in the CTA business: Struggling CTAs have all of these things, they’re bleeding cash out of their eyeballs, and yet they’re not making money in their businesses. So I’d like you to question this advice that you need all of this stuff. Think about this: If you knew someone who, with a little bit of capital, could turn information into money (and this is what CTAs do by the way), would you care if they had a team and a board and an office and infrastructure, whatever that is, behind them? No, of course you wouldn’t. You’d do what the vast majority of happy CTA investors do—you’d put up some money and you’d sit back and reap the rewards.

In upcoming episodes, we’re going to discuss where the advice to fork over cash for all this unnecessary stuff comes from, and why you can feel free to disregard it. For now, I’d just like for you to know that the leanest, easiest-to-operate CTAs are also the most profitable. You don’t need to add a bunch of weight to your business to get it off the ground. The idea that this could possibly work is too crazy to even contemplate.

Now this is where struggling CTAs like to tell me, “Kelly. You don’t get it. We want to start an institutional-quality business. Other CTAs, mom-and-pop shops who just want to trade retail, well this advice about staying lean might work for them. But we want institutional customers. So we have to check all the boxes. We’re going to lose money checking these boxes on their due diligence checklists, and that’s just the way it is.”

Let’s get one thing straight right here. The important box to check, on any institution’s checklist, is the ability to earn trading profits on ever-increasing amounts of capital. This means that your trading program must show a track record of a certain length, and that more and more people are buying into that trading program over time. This is the box above all boxes. If you can’t do this, it doesn’t matter how many other boxes are checked. It doesn’t matter how many team members you have, how big your board is, how many Ivy-League degrees they have, where your office is, or what your business cards look like. No one cares if a CTA that has never traded size profitably can check 99% of the boxes on any institutional checklist. And if you can trade size, pretty much no one cares about anything else. All of the other institutional “requirements” generally fall away if you show a long and lovely track record on ever-increasing amounts of assets under management.

And here’s another thing to notice about institutional investors and their due-diligence checklists. They care how you trade. They care about how you’re trading this year, and how you traded 5 years ago, and 10 years ago. But there’s no look-back for the other things on their lists. If you trade well out of a shack in Bangladesh for the first 5 or 10 years of your career as a CTA, the rare institutional investor who won’t relax the fancy-office requirement when they see your amazing track record will be satisfied if you get the fancy office now, at the time they confirm they’re interested in your CTA. No one is going to refuse to give you money because you didn’t have the fancy office ten years ago. So you don’t need to pay the freight on a big lease for a decade prior to this discussion with this institution.

And you shouldn’t, because no one trades well, or conducts business well, when they are bleeding cash out of their eyeballs. Actually, I’ll rephrase. You can learn to manage your mind in any circumstance—a difficult market, maybe you’re facing a family issue or a health crisis—CTAs must learn to keep on an even keel emotionally no matter what’s happening around them, and the way you do this is to expend some mental energy to manage your mind and your emotional response to whatever’s going on. The critical skill of mental and emotional management is something I teach my clients to do, even if bombs are going off in your business or elsewhere, but I don’t see any reason to plant bombs deliberately. They shouldn’t be part of your business plan. And CTAs who take on a lot of overhead and are hemorrhaging cash for no good reason live in constant fear of explosions. They live this way unnecessarily. They have a constant weight on them, and I think there are better ways to use your mental energy than working to remain calm and focused in a business where rampant losses have been planned for the first two or three years.

Now many CTAs fall into overspending because they aren’t confident about their trading skills or their ability to generate profits for their customers. So they spend money on all of the items on the institutional checklist in an effort to feel confident. To feel legitimate. But all I can say to this is that you can’t solve an emotional problem—feeling unconfident or illegitimate–by creating a financial problem. You’re just adding fuel to the fire and digging yourself into a hole, because when you need the money, on a trade or in a trading business, is when you’re least likely to earn it. In terms of trading, we all know that the trade you need is the one that will bite you ever time. And in terms of client-attraction, all I can say is that desperation gives off a smell, and for many CTAs, it’s practically impossible for them to feel anything but desperate when a river of cash is running out their doors.

Now, for the most gifted traders among us, cash flow isn’t going to be the problem. These traders trade so well in their own accounts that they’ll always have cash. They’re unlikely to feel desperation in a business that’s losing money. What they are likely to feel is frustration. The best traders—those who have the best chance of starting a successful CTA–have enough personal assets to float a failing business for many years, but if you’re in this group and you get sucked into the unprofitable way of doing things, you’re very reasonably going to wonder, why did I get into this business of trading for other people if it’s just going to cost me money?

This is a big reason that the industry is suffering from a lack of good CTAs. They’ll tell you we need you—the industry does need more great CTAs—at the same time they’ll tell you that you can expect to lose money in this business just for the privilege of being in it.

And this brings me to my final point about why you don’t need to overspend on needless things–why you can in fact operate a streamlined CTA that’s profitable from year one and still attract customers. A CTA is a business that has the ability to take a small amount of capital and generate enormous trading profits with it. This is a business that should never struggle. If this business can’t turn a profit early on, what business can?

That many CTAs are struggling and headed toward failure is a sign that something stinks in Denmark. The advice CTAs receive about how to launch, how to operate, how to market their services—everything they’re routinely told to do–is the problem. So the last thing I want to offer to you today is that this doesn’t have to be you. One of the big points I want to convey to every great futures and forex trader—all of you who live off of the profits in your own accounts and don’t need to run a CTA–is that if you want to get into this business, your experience can be very different from struggling CTAs. If you follow the advice in this show, your CTA experience will be very different. Your business can be easy, fun, and profitable, in your first year, and every year after that.

Most CTAs will never know the fun of a business like this. The sad truth is that most CTAs struggle, lose money, and eventually close their doors. All of this is highly avoidable. If you want a different result, it’s critical for you to commit to doing things differently. Today we discussed the first thing to do differently: expect to be profitable. This is critical, because if you expect profits you will conduct yourself in an entirely different manner than if you expect that business losses are inevitable. You won’t overspend. You’ll run a lean, mean CTA that allows you to trade well, so you attract customers and serve them well, and this will help you attract more customers and your business will snowball from there.

So that’s what I have for you today. Raise your expectations. Expect to be profitable, not later, but now, and you’ll be on your way to making that happen. This is possible for every CTA, and it’s possible for you, too, so I’m glad you tuned in to the show, and I want to thank you for joining me today. It’s my pleasure to have you as a listener, and I look forward to connecting with you next time.

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