How much money do you really need to begin trading for a living?
I’m not good at onomatopoeia but if I were, this would be the perfect place for me to insert the written version of a drum roll. As the buzz grows louder and louder and the intensity, now palpable in your chest, reaches its near orgasmic conclusion, with a Wagnerian thunder-clap I would then reveal the long-awaited answer……
I have no friggin’ idea!
If you came to this post thinking that I was going to give you some “one size fits all” answer to that question you really need to leave. I’m serious…leave! Get the hell off my pages and delete this blog from your bookmarks, because your need for a quick and easy answer already reveals a flaw in your character that I guarantee will cause you to blow up your entire account within a matter of months, and I’m not going to take any responsibility for ruining your life.
[Note to self.....refrain from writing blog posts before you have had your morning caffeine.]
Determining the amount of money you need to start down the path of trading for a living is a complex process and one for which there are no shortcuts. The biggest and most lethal mistake that traders make when they decide to go “full-time” is being undercapitalized. It will be your “patient zero” of mistakes, from which all others will be spawned.
I wish I could make it easy and just give you a formula like….
[ (Age of paternal grandmother at time of death) x (your current shoe size) ] / the square root of the CPI = Amount need to trade full-time
….but that’s not how this works. Fear not though, for just as there is a way to determine your correct position sizing by reverse engineering the process, we can do the same with this conundrum.
Quality of Life
First, let’s begin at the end, so ask yourself, “how much money do I need to make in order to support my desired quality of life?” You will see that I have phrased this question in a very specific way. It asks you to think. To think about what your “desired” quality of life is. This is key because depending on the stage and circumstances of your life, you may have some flexibility in this area that will help you to reach an acceptable answer to this question.
Are you early in your earning years, unmarried, with no children, mortgage, or student loans to service? Are you supporting a family and a debt structure, close enough to see the retirement train, still off in the distance, but definitely coming down the tracks? Or are you somewhere in between those two examples? Wherever you are, you need to decide what you need to make in order to have piece of mind, financial stability, and ideally the ability to grow your net worth.
Once you have that number in place, then you have to determine what amount of capital is needed in order to generate that number based upon a reasonable return on a percentage basis. If you have prepared for your move into full-time trading as I outlined in my previous post in this series, then you should already have a rough idea of what that percentage return will be on average.
The Pure Play
Let’s start with the most conservative and straightforward approach that assumes no leverage, meaning you open a margin account in order to have buying power returned immediately when a position is sold, but you don’t use that leverage.
So for example, if you have been averaging 20% return for the last five years, and you need to make $50,000 a year in order to support your desired quality of life, then the magic number for you is $250,000 of working capital. But wait, there’s more.
Throw an extra 20% onto that number to give you some cushion….that makes it $300,000. But there’s still more.
You need to have a minimum of one year’s expenses saved in order to start your new venture without the daily pressure of knowing that every one of your trades is being done “to make the rent.” Now you are up to $350,000. This is fun isn’t it?
Sure, it’s a lot of money to some, but this scenario will give you the most piece of mind and ideally a longer runway in which to achieve consistent profitability. This number will obviously change based upon what your actual average return has been and the amount of money you need for maintain your desired lifestyle. Make 40% on a regular basis the number goes down, but if you need $100,000 to stay in pretzels and beer, then it goes up.
But What About Margin?
Many of you are saying to yourself, “Brian, what about the magical powers of margin? Why do I need so much money when I can get 2x buying power for swings and 4x for day trading?” Good question. Let’s take a closer look at this bitch-goddess of trading.
There is no doubt that the proper use of margin can enable you to reduce the amount of capital you need to sustain your desired lifestyle, but….
In most cases you are about to go from the security and piece of mind of knowing that every two weeks you will be getting a paycheck to an environment where you may have a whole month where you don’t make any money. Maybe even a whole quarter. Even wackier than that, when was the last time you got your company paycheck and it said you actually owed them money?
The mental transition that goes along with starting to trade full-time can be perilous. You think you know how you will handle it, but you really don’t until you get there. Do you really want to start this, well let’s just be frank, risky venture, having to leverage up your account equity? Margin can make you money fast, but if can lose you money even faster if it is not used correctly as part of a risk based methodology.
The ideal situation would be to go into full-time trading fully capitalized, and then once you have completely transitioned and become comfortable with your new career, only then begin increasing your use of leverage while freeing up and segregating your excess capital from your trading activities.
The Wing and a Prayer
But let’s just assume, in theory of course, that you think you are the next coming of Marty “Buzz” Schwartz, and are going to crush it right out of the gate. You want to know the bare minimum that you would need to proceed, right?
There are traders that I personally know who support their desired lifestyle with only $5,000 in trading capital. Yes, you read that right. Five thousand measly dollars, but that is because they trade with a prop shop that gives them 10:1 leverage on their money.
And they day trade only, with the goal of chopping out between $800 and $1200 from the market on a daily basis. With the markets open an average of 250 day per year they are shooting for $200,000-$300,000 annually.
But these are highly focused traders with a style they have perfected and are comfortable with. They are like machines who don’t chase red herrings or the latest stock being profiled on CNBC. Is that how you are currently trading?
If so, then by all means feel free to jump in short-stacked. I would still highly recommend that you have a least one full year’s worth of money set aside, separate from your trading capital, and that you find a reputable shop who will give you the needed leverage. Best of luck to you.
The Average Joe
In all honesty, this is the category that most are going to fall into; not having the ability or desire to do the full “Pure Play” but having at least enough common sense not to try to attempt the “Wing and a Prayer” option. You are going to come in with a decent chunk of change, but you will probably have to use overnight or day trading margin on a semi-regular basis. If that is you, then as much as I hate to do this to you, I am going to have to answer this blog post’s title question by revisiting previous questions. Questions you need to ask yourself and honestly answer.
- How much do I need/wish to make per year to live my desired quality of life?
- How much reserves, separate from my trading funds, and do I need for piece of mind?
- Am I comfortable/disciplined enough to use margin right out of the gate?
- What trading style am I most comfortable/successful with and what capital requirements does it necessitate?
And most importantly…..
- What amount of money do I feel I need to start with to HONESTLY GIVE ME A FIGHTING CHANCE AT SUCCESS?
You will notice that I have overused the term “honestly” here in this section because everything thing else I am talking about doesn’t matter if you are not honest with yourself in determining not only you lifestyle and financial needs, but your trading ability and mental toughness.
Don’t get me wrong, I’m not saying that you must have no doubts, and believe 110% in your conviction that “everything will work out.” Nothing in life is a sure thing, and I don’t want the normal question marks that are a part of every major life decision, from changing careers, to getting married, to having kids, to deter you, I just want to make sure you take this decision with your eyes wide open.
Additional Sources Of Revenue
But Uncle Brian is not going to leave you in a lurch here, without some (hopefully) new or different insight into how you can financially stack the odds in your favor when trying to become a full-time trader. After all, that is what you come her for I hope, not just an endless regurgitation of worn and weary platitudes, but real, practical, and relatable information on the markets, trading, and life!
Make sure to check out my new book Trading:The Best Of The Best-Top Trading Tips For Our Times (just click the banner below).