So You Want To Trade For A Living: Monetizing Your Trading

If you have gotten this far in my series on trading full-time and are still intent on making the plunge, you are going to find one of the most frustrating things you will have to deal with is your income, or more specifically, the ebbs and flows of your income.

The goal of every good trader is, or should be, to make a consistent and steady return; something you can count on every week, or month, or quarter.  It’s a nice theory, something to strive for, but in the real world it’s pretty much like communism…only really works on paper.

You are going to have times when you make money, sometimes a lot of money (hopefully).  And you are going to have times when you lose money, sometimes a lot of money (hopefully not).  This back and forth can play havoc with you mind, causing you to lose focus, stray from your methodology, and ultimately undermine your ability to be profitable.  What you need is something that helps to normalize your income, that smooths out your equity curve, and this is where thinking of your trading as a business comes in.

First off let me say that I fully acknowledge that most traders at heart are mutants.  Mutants in the best mad scientist, comic book mogul, Howard Hughes-ian sense of the word.   Yeah, we give lip service to the whole “freedom” part of the story; how we can come and go as we please, decide when and how much to work, and trade on a beach from our laptop if we want to, but come on?  Why not just throw some princesses, fairy dust, and a pink unicorn named “Spirit” into this yarn while we are at it?

At the core of our freakish psyche we know why we really want to trade; so we don’t have to deal with customers, or employees, or bosses, or HR departments, or OSHA regulations.  We basically just want to sit in a room, by ourselves, and coin money without distraction, free to urinate in a Gatorade bottle at our desk if we wish.  And as beautiful and uplifting of an image as that seems, unless you are an extremely talented trader, it is just not a reasonable reality; or at least not one you can expect to achieve as a newbie full-time trader.

In a previous post in this series I mentioned that the most important thing that you could do in preparation for making the transition to being a full-time trader was to track your trading for an extended amount of time (minimum one year) and to be able to display your percentage return and drawdown in report form.  And here is why.

By treating your trading like a business, and by being able to show a track record of trading success, it opens up ways for you to monetize what you are already doing, with the goal of providing additional streams of revenue that will help stabilize your income, and give you piece of mind.  There are numerous was to do this, some of which I have listed below, starting with those that are the most intrusive to your trading and ending up with some which are very lightweight add-ons.

Running Money

A lot of retail traders don’t think about this option, and for good reason.  There are a variety of regulatory, legal, and structural issues involved in setting up what in essence is a hedge fund and these may be too complex and cost prohibitive for the average full-time retail trader to attempt, especially as a newbie.  However, if done correctly, the compensation may be worth the aggravation for the more adventurous of traders.  And it really just comes down to math.

If you have one hundred thousand of your own money to trade and you make twenty-percent in the first year you pocket twenty grand before commissions.  But if you are trading one million dollars of client’s money and make that same twenty percent, based on a normal two and twenty structure, (two percent of total assets as a management fee and twenty percent of profits as a performance fee), then your compensation for the year would be sixty thousand dollars. Ding, ding…..!!!  That’s two hundred percent more income than if you were just trading your own money.

And if you are really good, and make outsized returns for your clients, you can raise your fee structure to “two and thirty.”  And if you are really, really good; like Stevie Cohen good, you can raise your structure to the same as SAC Capital’s “three and fifty.”  Of course SAC has averaged a 30% annual return over the last twenty years and only had one losing year, but its nice to have something to shoot for.

This is a “heavyweight” way to monetize your trading.  It involves approaching high net worth individuals and “selling them” on your ability to bring them unusually high returns; which is why having a documentable history of your trading is so key.  This, in addition to giving them some feel for your performance, will show them your methodology, and their expected average drawdowns, all information that most serious investors will demand.

Trading Newsletter/Chat Room

You are already going to be doing charting and analysis for your personal trading, so why not make it available to others and charge a monthly fee?  A nightly newsletter showing set ups or potential trade candidates is a pretty simple way to do this.  This option is definitely much more lightweight than running money, although it will require you to manage your subscriber base and set up some sort of payment processing like PayPal.

Another option that can be either an add-on to your newsletter or offered as a standalone service is a trading chat room.  During the trading day you can allow subscribers to login and watch your live commentary and trading calls while you trade your own account.  You can choose the amount of back and forth interaction you have with your chat room participants based on your comfort level.  I’ve seen traders even run their chat rooms with audio or video chat, both of which can be muted if you need to bring the Gatorade bottle out.

Lead Trader Service

I’ve written this blog for over a year and a half now, and I have yet to “talk my book” in one of my posts, but I am going to do so now.

My company, Ditto Trade, has developed a technology that allows any person to take part in the actual trade of any other person, whom we call a Lead Trader.  And when I say “the actual trade” I don’t mean cloning, or mirroring, or copying a trade; I mean taking part in the actual same block as the Lead Trader.  No slippage, no portfolio drift, the exact same price as the Lead Trader, every time.

So if you are good trader you can offer a Lead Trader service and charge a subscription fee to your followers allowing them to “ditto” your trades automatically.  The best part is that your followers have total transparency, always being able to see what positions they are participating in,  if they are up or down on those positions, and total control, being able to either sell their positions out separate from the Lead Trader, or taking over the positions from the Lead Trader any time they want.

Wait, I was wrong….the actual best part is that your followers can also use our mobile app to manage their positions with your Lead Trader service, or decide, with the touch of their finger, to trade-off of your alerts at their own discretion.  And our mobile app was created in way that your subscribers will actually use it in the real world, because despite the TV ads you see from other big box brokers, most people don’t trade $SPY options on their smart phone while on vacation in Italy.  It’s just not the form factor to do market analytics on.  Our app turns your trades into integrated, actionable alerts in real-time, which your followers can modify or execute with the push of a button.

MobileApp-AlertScreen

Followers can trade independently off your Lead Trader alerts on their mobile device.

In fact the very reason we started Ditto Trade was so that traders could easily create a “business” based upon the trading they were already doing, allowing them to add an additional revenue stream in the most lightweight way possible.

Conclusion

Still a mutant?  Still want to just trade your own money?  I wish you the best of luck, but if you find that the swings in your P&L are making you uncomfortable, don’t be afraid to branch out just a bit and leverage what you are already doing to give yourself some financial piece of mind.

Previous – So You Want To Trade For A Living: How Much Money Do You Really Need?

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Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

So You Want To Trade For A Living: How Much Money Do You Really Need

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!

Previous – So You Want To Trade For A Living: Making The Transition

Next – So You Want To Trade For A Living: Additional Sources Of Revenue

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Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

So You Want To Trade For A Living: Making The Transition

There he is.  That piece of human garbage in a suit.  The sound of his voice causes the hair to stand up on the back of your neck and the smell of his closeout special aftershave makes you want to vomit, even on the mornings when you didn’t spend the previous night drowning your sorrows at a local watering hole.  And now he is coming your way.

As he approaches your desk, ready to ask about some redundant sales report or wishing to schedule a time to “discuss” your latest performance review, you decide that you can’t take it any more, and that’s it…..you snap! Standing up and yelling at him for all to hear, you inform your soon to be ex-boss that you have had it with his pedantic rules and procedures, that he and the company as a whole has never valued you as you deserved, and that you are through–consider this your resignation.

And with that you grab your personalized coffee mug and mouse pad and walk out the door, free at last, and ready begin your new career trading for a living.

Despite the poetic justice and dramatics of the above scene, that is exactly the wrong way to make the transition.  The decision to trade full-time and the transition from your current job or profession has to be planned out well in advance in order to give you the best chance at succeeding in your new endeavor.  In fact that preparation should begin not just months, but years ahead of time.

Ready, Set, Uh…….

Hopefully it goes without saying that you should already have been trading, and trading successfully, for some time before you quit your job.  How long? Five years minimum. Wha….wha…..WHAT..???  Yes, I know that I just popped a lot of eager beaver bubbles out there, but there is a logic to that time frame.

Think of starting to trade full-time like starting a new relationship.  Say you meet what you think is the love of your life and after only two weeks of dating you head out to Vegas and get hitched.  Chances are you’re going to find out over time that you have incompatibilities with your partner, at least one of which will probably be deal a breaker, causing your marriage to end, and end badly.

But what if you were to give the relationship more time before the nuptials?  Time to experience the ups and downs that new couples inevitably have and to see if you could adapt to them, survive them, and ultimately create a relationship that will flourish no matter what is thrown at it?  It’s the same concept with trading for a living. Five years gives you enough time to experience different types of markets, to see if you can adapt and evolve your trading as they change, and stay profitable in the process.

One of the mistakes that thousands of people made in the late 90′s was to assume that because they had been trading profitably for a couple of years that they were ready to make the move to full-time trading.  What they didn’t realize was that they had only been profitable because the market was in the middle of a massive bull move.  When that move ended in 2000 those new full-time traders did not know what to do because they had never seen this “new” type of trading environment.   Eventually the vast majority of them lost all their money and had to go back to their day jobs

Location, Location, Location

Another thing you want to think about ahead of time is where you are going to trade; at home or at an office.  Now I know this seems like a no brainer to most,  the assumption being that because of advances in technology trading out of your house is the answer; but you want to think long and hard about this.  Sure, a home office saves money and affords you the added bonus of being able to roll out of bed and start your trading day unshaven and in pajamas, but there can be some major drawbacks to this arrangement.

Trading on your own means you are your own boss; nobody tells you when to start working or when to stop, and if you are someone who needs structure, this can be a problem.  I remember my first month of college, when I realized that unlike in high school, nobody cared if I showed up or not; it was completely up to me to create my own structure in order to make sure I got to class on time, studied the appropriate number of hours, and showed up for exams.  And for me it wasn’t long until I was cutting class, missing tests, and ultimately dropping out.

Having an office to go to every morning forces you to get up, take a shower, put some clothes on, and mentally get in the mood of “going to work,” which is what you may need in order to stay sharp and focused in your trading.  Going to an office also eliminates the issue of being interrupted by kids, your spouse, solicitors, the phone, the gardeners who are cutting the neighbor’s tree down, and a host of other distractions.

And trust me, if you are married and/or have kids, don’t fool yourself into thinking that you can just go into your home office, shut the door, and act as if you are not home. They know you are in there, and you’ll be interrupted “just for a second,” on numerous occasions during the trading day, one of which will surely coincide with the next flash-crash.

If you live alone, distractions don’t bother you, and you don’t have a problem saying “no,” then definitely give trading from home a try, but if not, you can usually lease an individual private office for $300-$600 per month, which might be the best investment you ever make towards you trading career.

Track You Trading History

Another important thing that you must do to prepare for your move into full-time trading is to begin journaling, logging, and auditing your trades.  Every day after the market is closed you should be reviewing each and every one of your trades and creating a spreadsheet that includes entry/exit prices, profit/loss, both in dollars and percent, percentage of overall capital used, and notes relating to each specific trade. Then based on those numbers you should generate an overview report which can easily display your percent return and drawdown for any given period of time.

This process has a number of benefits and it is crucial for two reason that you have at least a years worth of your trading history documented (though the more history you have the better).  First off it will tell you if there is consistency and method to your trading, something you may think you already have, but may be shocked to learn you don’t when the raw numbers are reviewed.  Second, it will help you when it comes to deciding how much money you will need to start, something I will cover in more depth in the next post in this series.

Your First 30 Days

Let’s assume that you have done all your preparation, decided on your location, and (gracefully) exited from your job on a Friday afternoon.  You are now free to pursue your dreams and begin trading full-time, so what is the first thing you should do when the opening bell rings on Monday morning?  The answer is nothing, because you are not going to be at your trading desk.  You are going to be far away from the markets, ideally doing something you have always wanted to do but never had the time to.

Look, chances are that the job you just left barely three days before was one that required you to work a full eight hours.  In fact in today’s fast paced world you might have worked ten, twelve, or fourteen hours per day.  Maybe even six days a week. And all those hours were probably filled to the brim with phone calls, emails, presentations, meetings, seminars, webinars, and any number of other things that make up the corporate world today.  You have been conditioned for years, perhaps decades to always be doing something.  Go, go, go….don’t let one hour, one minute go to waste.

Once that bell rings your instinct will be to “do something.”  You won’t feel right if you aren’t “doing something” at all times.  But that is not what trading is about.  Most successful traders spend the majority of their time “sitting on their hands” not trading.

You are going to need some time to decompress and learn the art of “not doing something” and that is going to take some time.  The best thing to do once you’ve quit your job is to take the next two weeks off.  Do anything you want, just don’t watch the markets, and try to relax.

When you return then spend the next two weeks just watching the markets.  Don’t trade, just watch.  Learn how it actually feels to “not trade” while the market is open. Use that time to figure out what you will be doing in between the times you are trading, such as reviewing charts, creating scans, or communicating with other traders.

Previous - So You Want To Trade For A Living: An Introduction

Up Next – So You Want To Trade For A Living: How Much Money Do You Really Need?

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).

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Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

So You Want To Trade For A Living: An Introduction

“How much money can I reasonably expect to make from trading full-time?”

“Do you know anyone who is making a living trading full-time?”

“Who do you know that I can talk to that can prove that they are making money trading full-time?”

These were the questions I was being peppered with on two separate, successive phone calls recently.  One was from a gentleman whose day job was in financial services, but had been trading part-time for thirteen years.  He was tired of the “rat race” as he put it and was working up the nerve to follow his dream and trade for a living full-time.

The other was from a young man who called me asking a question regarding real estate, having thought I was an active agent (I have a license but have never used it), and once realizing his mistake, inquired as to what in fact I did do.  I was tempted to give my pat answer, “I work in an ice cream shop,” but his voice sounded very sincere and enthusiastic and I decided that I would divulge the truth.

The first question I asked myself after I put the phone down was, “why don’t more (hot) women call me about trading?” but I digress…

The second thing that came to mind was how peculiar it was that two different people, at opposite ends of age, career, and experience were both asking essentially the same questions.  There was a difference in the tone of the questions; the first caller inquiring with an uneasy insistence, a slight quality of desperation in his voice, and the second, greener of the two, with a lively and somewhat naive curiosity.  But the questions were the same.

Out of the all the questions I get asked in bars or airports,  meet-ups or seminars, on social media or at social gatherings, the most frequent one is some derivation of the ones these two callers asked, in essence, “Is it possible for me to trade for a living?”  I have spent a lot of time thinking about the answers to this question, and not in an abstract sense.  I am very familiar with the pros and cons and potential pitfalls of this endeavor.  After selling my company in early 2005 I spent nearly four years doing just that, trading for a living, until I stopped in order to co-found Ditto Trade.

Trading for a living is the ultimate fantasy for anybody who has ever invested their own money in the market; it’s the musician’s version of being a rock star, the scribe’s version of being a best seller, bringing with it the potential financial freedoms of both, the difference with trading is that your success is not determined by the fickle tastes of your fan base; it is all within your power.

Perhaps the allure is best summed up by something Eric Bolling wrote a few years back in a piece entitled The Benefits of Trading….

I am lucky to have spent a career trading so that I can find the busy market and trade it. I can trade from my office, my beach house and even my car. I don’t have to be in Manhattan to work.

I can trade from Miami, Spain or wherever the phone and Internet work. It is a gift given to me and I appreciate it every day. I respect it and that keeps me a viable trader.

That is the reason it is so important to be able to trade. Look, I am no smarter than most of you readers. I just made the decision to learn how to trade and just do it.

Sure there are bumps in the road and the trading landscape changes daily. But with diligent homework, a desire to make it work and a definitive fear of losing, almost anyone can make a career out of trading — anyone with the discipline to cut a losing trade that is.

My goal in this series is to inform you of what I know and what I lived, what I did right and what I did terribly wrong, so that you can, with complete lucidity and of your own volition, decide if taking this step is right for you.  I am approaching it from the point of view of a retail trader, which is what I, and what most of the people who read this blog are. That doesn’t mean that you can’t eventually end up running the Goldman Sachs trading floor or your own eponymous hedge fund, but I want to speak in terms of people who want to start with making a living first.

What I will not be doing in this series is telling how to become a successful trader; there is enough information, free or otherwise, out there that deals with that topic (including about 400+ posts on this very blog), and frankly, at the end of the day that is a job that ultimately you can only do yourself.

I would love to get your feedback and/or questions on this series so feel free to leave them in the comments section below.

Up Next – So You Want To Trade For A Living: Making The Transition

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).

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Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.