So you want to trade for a living? In this article Geoff Turnbull looks at what you need to consider before you take the plunge.
There can't be many traders who haven't at least considered the idea of telling the boss what they think of him, throwing it all in and going off to trade the stock market for a living. It's a big risk financially, and that uncertainty is what stops most from jumping ship. Is it really possible to trade for a living?
The Dream
You know how it is, you're sitting in a traffic jam at some unearthly hour of a particularly wet and miserable morning, on the way to the same office you have sat in for too long to remember, and you're thinking - there must be a better way - life shouldn't have to be like this. Your mind starts to wander and you find yourself thinking back to that stock you bought only a week ago, and how it skyrocketed giving you enough profit to takes the kids to Disneyland in the summer, and you begin to consider if you couldn't make a fulltime living at this trading game. The advantages are certainly tempting; no more pointless meetings with the manager, hours to suit, holidays whenever you feel like it, and with your home-office - no more traffic jams. Heck, come to that you could even make home anywhere you want it to be! By the time the traffic starts moving again. you're busily calculating how much cash you could make if all your trades went like that last one - you're almost ready to write your notice letter there and then!
The Bad News
Time for a reality check. Certainly all of the above benefits are there to be enjoyed, but it's a huge step from full time employee to full time trader. Are you really ready to give up that monthly pay-check just yet? Can you really cope not knowing how much money you're going to make month to month? Are you prepared for the months when you actually lose money instead of make it? There are many things to consider before taking the leap of faith.
Considerations
Before you even think about trading for a living you have to know how much money you need to live on, that is, how much cash do you need to generate every month in order to survive. As a financially minded person you already have good home accounts, or are at the very least vaguely aware of where the money goes. So take the annual figure (monthly is no good, you need to account for annual recurring items like insurance premiums, car servicing, and vacations), add 50% and divide by 12. Why add 50%? Because there will always be unexpected expenses, and as traders we are always prepared to expect the unexpected. Now you know how much money you need each month, you can look at your savings and work out how much buffer money you have, that is, how long you could survive without earning anything at all. You can't expect to be an instantly profitable trader, and even the best and most experienced have periods of drawdown, so you need to be ready for the worst. If you can't live for at least six months from your savings then you are probably under capitalised and are not ready to give up that pay-check just yet. An important but often overlooked aspect of under capitalisation is the effect it will have on your trading; if you are trading because you need the money, then you are trading scared and you're almost certainly going to lose. You cannot distance yourself from the money-aspect of the trade if you are relying on the money.
Living expenses are only one part of the financial equation. Next you must consider how much trading capital you need. This is the money actually facilitate trading, in other words your account balance for trading margin, and the money you will be spending on data feeds, software, and internet access. You must account for this separately, you cannot start eating into your daily living expenses money just because you took a bad trade and need some more margin.
The amount of trading capital you require will depend very much on your trading style. To day trade the US Stock Markets for example, you must have at least $25,000 in your account, so budget for $30,000 to allow for positions moving against you (if you fall below the $25k minimum even briefly, your account can be frozen for up to three months). If you are holding positions overnight you may manage with a lower balance but bear in mind your buying power and consequently returns will be reduced.
If all this is starting to sound expensive, well it is. There's no two ways about it, you simply cannot survive long term as a trader if you are under funded.
More Costs!
Let's move on to equipment. Presumably you already have a PC and internet connection by virtue of the fact you are reading this on the internet. But are these both up to the job of trading full time? Again the specifications for both hardware and ISP will depend largely on your trading style, but if you're relying on a 100Mhz Pentium II and a dial up service, you're setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too - expect the unexpected. Many traders make the mistake of saying "This will do me whilst I start out, and I'll get something better when I make some real money". This is quite simply false economy, you are unlikely to ever make real money with a substandard setup (and this applies equally to substandard software and data feeds). This is a cut-throat business and 95% fail, you must give yourself every advantage you can. You wouldn't enter the Indy 500 in a go-kart with the intention of buying a better car when you've won a few races, and the same thing applies here.
Earnings
When you've added this all together, you have a pretty good picture of how much money you need to generate from your trading in order to live. Does your past performance suggest you will be able to meet this target? It's tempting to say "When I go full time I'll make much more", but how do you know this is the case? Perhaps you can take a couple of weeks holiday and try it out - if you don't make enough in that two weeks then you're not ready. A few weeks really isn't enough time to know if you're going to succeed though. An ideal next step then is to cut your day job hours to part time and trade maybe two or three days a week. This way you know you have some money coming in, you get to trade for real, and if it all goes horribly wrong you are probably better placed to get back into full time employment than someone who quit the working world completely.
The option of part time work is a luxury many of us don't have however. So does it have to be all or nothing - trade or work? Why not keep the day job and trade outside your working hours as well. If you are trading and end of day strategy, then this is easily achieved by doing your research in the evening and placing the appropriate combinations of Stop and Limit orders with your broker. For day traders, certainly practising is easier if your intended market is not your home market, for example if you want to trade the US and you live in the UK where you can come home and paper trade in the evening. There are other try before you buy options open to the day traders who want to practise trading their home market outside of normal hours though. eSignal allows you to download tick data for any symbol and play it back in real time or speeded up so you could trade the whole day in an hour. Other vendors have similar offerings, and if you have an IB account you can use AutoTrader to record tick data during the day for playback into a demo version of SierraCharts or QuoteTracker for free.
The bottom line here is that before you take the plunge, you need to have done everything in your power to prepare yourself for what lies ahead. It will still be harder than you ever thought, but it will be nigh on impossible with no preparation whatsoever.
Other Considerations
There are a few non-financial aspects to consider before going full time with your trading. If you have a family, how will the change impact them? Do you have the space to work uninterrupted during the day? It's important that the family don't assume that because you are at home you are automatically available to take the kids to school, or walk the dog. Make sure from the start that everybody knows the ground rules and that you can separate your working time from your free time effectively.
Consider also the social impact of leaving your full time employer. Again, if you have a partner or family are you going to drive each other nuts being in the same house all day? Relationships can be tested to the limit! Or if you live alone, are you going to drive yourself nuts being on your own all day? Trading full time can give you enormous amounts of free time, but if you have nothing to fill that time with you can quickly lose the plot - I've seen it happen and it's not pretty.
Is It Worth It?
Nobody can tell you if trading for a living is for you, it's something you have to find out for yourself. I've seen traders go through highs and lows to challenge those of any stock chart, but for most it has proved to be a good move. The long list of benefits are all there for the taking, as with any change of career or indeed any major life change, as long as you go into it with your eyes open, and above all prepare, then there is no reason why it cannot work for you.
There can't be many traders who haven't at least considered the idea of telling the boss what they think of him, throwing it all in and going off to trade the stock market for a living. It's a big risk financially, and that uncertainty is what stops most from jumping ship. Is it really possible to trade for a living?
The Dream
You know how it is, you're sitting in a traffic jam at some unearthly hour of a particularly wet and miserable morning, on the way to the same office you have sat in for too long to remember, and you're thinking - there must be a better way - life shouldn't have to be like this. Your mind starts to wander and you find yourself thinking back to that stock you bought only a week ago, and how it skyrocketed giving you enough profit to takes the kids to Disneyland in the summer, and you begin to consider if you couldn't make a fulltime living at this trading game. The advantages are certainly tempting; no more pointless meetings with the manager, hours to suit, holidays whenever you feel like it, and with your home-office - no more traffic jams. Heck, come to that you could even make home anywhere you want it to be! By the time the traffic starts moving again. you're busily calculating how much cash you could make if all your trades went like that last one - you're almost ready to write your notice letter there and then!
The Bad News
Time for a reality check. Certainly all of the above benefits are there to be enjoyed, but it's a huge step from full time employee to full time trader. Are you really ready to give up that monthly pay-check just yet? Can you really cope not knowing how much money you're going to make month to month? Are you prepared for the months when you actually lose money instead of make it? There are many things to consider before taking the leap of faith.
Considerations
Before you even think about trading for a living you have to know how much money you need to live on, that is, how much cash do you need to generate every month in order to survive. As a financially minded person you already have good home accounts, or are at the very least vaguely aware of where the money goes. So take the annual figure (monthly is no good, you need to account for annual recurring items like insurance premiums, car servicing, and vacations), add 50% and divide by 12. Why add 50%? Because there will always be unexpected expenses, and as traders we are always prepared to expect the unexpected. Now you know how much money you need each month, you can look at your savings and work out how much buffer money you have, that is, how long you could survive without earning anything at all. You can't expect to be an instantly profitable trader, and even the best and most experienced have periods of drawdown, so you need to be ready for the worst. If you can't live for at least six months from your savings then you are probably under capitalised and are not ready to give up that pay-check just yet. An important but often overlooked aspect of under capitalisation is the effect it will have on your trading; if you are trading because you need the money, then you are trading scared and you're almost certainly going to lose. You cannot distance yourself from the money-aspect of the trade if you are relying on the money.
Living expenses are only one part of the financial equation. Next you must consider how much trading capital you need. This is the money actually facilitate trading, in other words your account balance for trading margin, and the money you will be spending on data feeds, software, and internet access. You must account for this separately, you cannot start eating into your daily living expenses money just because you took a bad trade and need some more margin.
The amount of trading capital you require will depend very much on your trading style. To day trade the US Stock Markets for example, you must have at least $25,000 in your account, so budget for $30,000 to allow for positions moving against you (if you fall below the $25k minimum even briefly, your account can be frozen for up to three months). If you are holding positions overnight you may manage with a lower balance but bear in mind your buying power and consequently returns will be reduced.
If all this is starting to sound expensive, well it is. There's no two ways about it, you simply cannot survive long term as a trader if you are under funded.
More Costs!
Let's move on to equipment. Presumably you already have a PC and internet connection by virtue of the fact you are reading this on the internet. But are these both up to the job of trading full time? Again the specifications for both hardware and ISP will depend largely on your trading style, but if you're relying on a 100Mhz Pentium II and a dial up service, you're setting yourself up for failure. So budget for quality equipment, budget to keep it up to spec, and budget for some repairs too - expect the unexpected. Many traders make the mistake of saying "This will do me whilst I start out, and I'll get something better when I make some real money". This is quite simply false economy, you are unlikely to ever make real money with a substandard setup (and this applies equally to substandard software and data feeds). This is a cut-throat business and 95% fail, you must give yourself every advantage you can. You wouldn't enter the Indy 500 in a go-kart with the intention of buying a better car when you've won a few races, and the same thing applies here.
Earnings
When you've added this all together, you have a pretty good picture of how much money you need to generate from your trading in order to live. Does your past performance suggest you will be able to meet this target? It's tempting to say "When I go full time I'll make much more", but how do you know this is the case? Perhaps you can take a couple of weeks holiday and try it out - if you don't make enough in that two weeks then you're not ready. A few weeks really isn't enough time to know if you're going to succeed though. An ideal next step then is to cut your day job hours to part time and trade maybe two or three days a week. This way you know you have some money coming in, you get to trade for real, and if it all goes horribly wrong you are probably better placed to get back into full time employment than someone who quit the working world completely.
The option of part time work is a luxury many of us don't have however. So does it have to be all or nothing - trade or work? Why not keep the day job and trade outside your working hours as well. If you are trading and end of day strategy, then this is easily achieved by doing your research in the evening and placing the appropriate combinations of Stop and Limit orders with your broker. For day traders, certainly practising is easier if your intended market is not your home market, for example if you want to trade the US and you live in the UK where you can come home and paper trade in the evening. There are other try before you buy options open to the day traders who want to practise trading their home market outside of normal hours though. eSignal allows you to download tick data for any symbol and play it back in real time or speeded up so you could trade the whole day in an hour. Other vendors have similar offerings, and if you have an IB account you can use AutoTrader to record tick data during the day for playback into a demo version of SierraCharts or QuoteTracker for free.
The bottom line here is that before you take the plunge, you need to have done everything in your power to prepare yourself for what lies ahead. It will still be harder than you ever thought, but it will be nigh on impossible with no preparation whatsoever.
Other Considerations
There are a few non-financial aspects to consider before going full time with your trading. If you have a family, how will the change impact them? Do you have the space to work uninterrupted during the day? It's important that the family don't assume that because you are at home you are automatically available to take the kids to school, or walk the dog. Make sure from the start that everybody knows the ground rules and that you can separate your working time from your free time effectively.
Consider also the social impact of leaving your full time employer. Again, if you have a partner or family are you going to drive each other nuts being in the same house all day? Relationships can be tested to the limit! Or if you live alone, are you going to drive yourself nuts being on your own all day? Trading full time can give you enormous amounts of free time, but if you have nothing to fill that time with you can quickly lose the plot - I've seen it happen and it's not pretty.
Is It Worth It?
Nobody can tell you if trading for a living is for you, it's something you have to find out for yourself. I've seen traders go through highs and lows to challenge those of any stock chart, but for most it has proved to be a good move. The long list of benefits are all there for the taking, as with any change of career or indeed any major life change, as long as you go into it with your eyes open, and above all prepare, then there is no reason why it cannot work for you.
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