How Much Money Do You Need To Trade For A Living?

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If you have a hat, you might want to hold onto it. Get the smelling salts out……and keep them close by.  If anybody is in the other room, call them in and tell them to assume the “I’ll catch you” stance behind you.

Ready?

I wasn’t always a babe magnet.

It’s true.  In the dark days before I met my wife, I wasn’t actually beating women off with a stick.  I mean, I had dates, but they were not as numerous as you would assume.  This meant each one was special, however one in particular stands out.

I was very young, working as a bellman at the Sheraton Newport, and living with four guys down by the beach in Newport.  One night while at a local watering hole I spotted a beautiful girl who looked like she didn’t belong there.  Since I was already drunk, I ambled on over to her, ran my mouth, and for some reason ended up with a phone number and a date for the following night.

In the sober light of the next morning I panicked for a moment as I realized that this girl would expect something a little bit “higher class” on our date that evening. Unfortunately, I had about thirty dollars to my name until my next bell shift.

Let me be clear on this, not only thirty dollar in cash….thirty dollars to my name. There was no ATM card, no credit card, no parents to call on for extra funds, thirty bucks was it. Fortunately, I had a place just for situations like this; The Ocean View Bar & Grill.

The move with this place was that even though they served bar food (read: cheap food), this hidden gem was situated outside the back of the Hotel Laguna right on the sand, with one of the most picturesque views in all of Southern California.  Once your date saw the view as you emerged onto the patio, they could have served corn dogs and Twinkies and she would have still thought she was at the best five-star restaurant in town.

I figured I could easily bring the whole evening in, with drinks, for under twenty bucks (remember this was almost twenty-five years ago), so I headed out to pick her up in my 67′ Mustang, rocking my Member’s Only jacket, and blaring Flock of Seagulls from the speakers.  “This is going to be my night tonight,” I thought to myself.

We pulled up to the hotel, parked the car, and headed inside.  Being the gentleman I am, I let her go ahead of me down the hallway that led to the entrance for The Ocean View Bar & Grill, at the end, on the left.

The left.  It’s on the left.  Did I mention that the entrance to the Ocean View Bar & Grill was on the left? But not knowing where we were going, she went straight, instead of left.  Straight.  Straight into Claes……their fine dining restaurant.

You know how when you get that gap down before the open on unexpected news in that large position you have been massaging for weeks and a cold shiver goes down your spine?  You immediately think to yourself “can I pull myself out of this, or do I just cut the cord and bail?”  That was my thought at that exact moment.

But what was I going to do, try to wave her out and try to explain, in front of the maitre d’ and customers, that I didn’t have enough money for THAT restaurant?

Fortunately, she didn’t drink alcohol, and in order to not make her feel self conscious, I drank (free) water too.  She ordered the chicken, and I “having had a late lunch” chose the small house salad and the complimentary bread.  I got out of there for $29.50, including tip.  The valet got the other fifty cents and we ended up dating for two years until she moved to Canada.

At that point in my life, thirty bucks could sustain me fine, as long as there were no unexpected expenses, but nowadays that won’t even cover a Pokemon DSi game for my daughter.  I am at a different stage in my life.

I was reminded of this story by a question I got in response to my recent post “9 Reasons Everyone (Yes Even You) Should Learn To Trade.”  The question was, “how much money do you need to trade full-time?”

Even though my post was referring to part-time trading, it is a good question to ask. The answer however varies depending on what stage you are at in life.

There are considerations based on what time and financial stages you are at.  If you are a young person or with minimal expenses, you can afford to start with much less than if you are a forty-five years old, with a house, car payments, kids, etc.

You also have to factor in what psychological stage you are at when deciding how much of a grub stake you will need.  In periods of no profits, or horror of horrors, actual losses, how much money will you need in the bank so you don’t get nervous and rattled, something that will only hamper your trading success.

And what about your style?  What stage is that at?  Will you be day trading or swing trading?  If you are day trading you will get more leverage on your position which can theoretically make you more with less, but you will need at least 25K (or in reality 30K) to be classified a pattern day trader.

Swing trading requires less money to fund an account, but there will me more periods of “waiting” for a move where your money will not be working for you at all.

So here is my best starting place, which you should modify based upon your own personal stages in terms of time, finances, psychology, style, etc.

If you are somebody with little or no overhead I think you need to have enough money set aside to cover at least six months of your living expenses NOT INCLUDING YOUR TRADING MONEY.

If you have higher monthly expenses I suggest you have at least one year’s money set aside NOT INCLUDING YOUR TRADING MONEY, because you have a larger burden to support and there is more of a chance you will need that extra cushion.

As far as how much trading capital you will need, it will depend on your style and what you trade.  Sure you can day trade with only 25K but one loss and you will be below the minimum.  And what if you want to trade $AAPL or $GOOG?  25K is only going to get you 100K of buying power which is only about one hundred and thirty shares of $GOOG.

Ideally it would be best to have enough day trading capital to trade 250-500 shares of the most expensive stock you plan to trade.  If you are going to swing trade you will need more capital because you will only get 2x overnight buying power, and though you may get larger moves than in day trading, they will be fewer and will take a longer time to play out.

In the end you have to figure out how much money you need in the bank and how much money you need in your trading account to give you the piece of mind that will allow you to focus on your trading.  Then I would add another 20% to each.

You also need to determine what a “reasonable” annual return would be on your trading capital, and make sure your account equity is enough so that the return can not only sustain you, but grow your account balance.

Finally, I am a big believer that if you can’t trade well with a small account size, having a larger account size won’t help.  The best way to find out if you can trade well before you make the jump to “trading for a living” is to first successfully master trading part-time, over an extended period of time, in all different market conditions.  Then if your trading skills are proven out, the size of your account will be less important.

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  • greyhound bus

    the CPA i take my taxes to wrights off my losses as a tax wright off. i put $500 in tradeking and trying to learn as i go by reading books. i seen old people trading online for retirement at the italian resturant by pittsburgh paint and glass.

  • Marquis Pott
  • Phạm Đình Nguyên

    Thanks, I am actually doing this right now with a small account (30k) but I consistence making $20-30 per trade and avg. 120 per day. I am actually picking stones instead of carry a heavy rock.

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  • Edward H. Tran

    Brian, you have a great sense of humor. I love the story you told. It’s so hilarious, and a perfect introduction to the more serious messages in the remainder of this post. I’m a fan of you, man!

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  • Just got to read this and it’s right on. I would say trade monopoly money for 6 months at least, or until you have a nice profit. Use the monopoly money to try different strategies. Make sure you attach meaning to the fake currency so that losses mean something, like if I hit this goal profit this week I will get myself a big steak on Sunday or something. And then start as small as you can with a real currency and build from there.

  • The key to sucess is to spend time and effort to learn the skill. Many dream of one kinda auto system based on one formula or the other. No mechanical formula exists. Many actually fail to spend time to really “feel” the market. Until one “feels” the market ones capital is not important. be it Millions or a few hundreds. If you are skilled you can utilize leverage to make ungodly $$$. But it is hard work and takes time.

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  • olio

    I trade for a living – 50 yrs old, house + kids + etc.

    Honestly, you need either:
    1. “multiple streams of income” so that you don’t entirely depend on trading, OR
    2. enough to live on indefinitely (ie, interest income or other ‘passive income’.

    Reasons being, you WON’T be able to trade properly without fear & emotion if you NEED the money you’re trading.

    I am part of a broad community of real traders who trade real money for a living. Many of these guys suggest anything less than $.5-1 million and you’ll lose it all. No new traders EVER want to hear this of course. Do the math (simple ROA) – how good are your trading strats, HONESTLY?

    FWIW… and I already know folks will vehemently disagree…that’s ok – that’s what makes a market.

    Good trading to all 🙂

    • Jeff Watson

      I would say a minimum of 5 Million in cash or cash equivalents. If you make 20% on 5 million, you are still only getting $500K after taxes depending on where you live.You need to plow some of that $500 K back into your business, so the number would be less. Then there’s those pesky losing years, those years where you not only don’t make money, but your account gets a haircut. Those make it even harder.

  • I think there is something that has been totally overlooked in this article. Bruce, now that you are married, do you have to beat off women with a stick? I’m am 100% anti-marriage right now, but this would make me think 😉

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  • When I started in futures, a guy backed me, Roger Carlsson. http://www.youtube.com/watch?v=a3c_jSt16a0 After trading for him (and splitting the money) I went on my own. Roger said to always keep at least 200k in a lock box (not your account) so if something happened, you could keep trading or do something else. A cushion. I was a spreader, and position and day traded. As you grow in “size”, you need to keep more in reserve.

    In the type of markets we have today I also advise never spending money. If you make 25g in a month, don’t buy a Porsche. Live like Bclund did as a bellman.
    The other part of this question is “what is your out number?”. At what point do you quit? How much do you need? Is it 4M? 10M? 1M? No one knows but you.

    • Stories like this remind of two things….

      1. You HAVE to write a book.
      2. You are annoying me by not being able to go to Stocktoberfest 🙂

    • Jeff Watson

      Spreading is the only real way to have longevity, to make a career, especially in the commodities. It seems that all the guys I knew in the 70’s who were spread traders are still in the business whereas I know a lot of broke scalpers and position traders. As far as “out” number……I exceeded my original “Out number” about 15 years ago. However, prices go up, and my dependents are demanding more and more money all the time.

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  • How would you trade part time with a day job? I can pretty much trade the US Session in the afternoon from Europe here, but would you suggest trading the Asian / European markets if you have a day job in an US time zone?

    • You would have to swing trade only….

  • markdman579

    you must have 30k or higher to avoid the “mental breakdown” mkt gives u at daytrader status and stops ur trades if u loose 5k, u cant scale into a trade(for safer trades) without margin, u need leverage to make any “real” money and u must have rules that provide a higher return than loss based on multiple trades.(u need to b right more than wrong)

  • markdman579

    if your a really good trader, you only need 30k with a margin account….u can easily make 100 a day which is 500wk, 26k before taxes a year..still above min wage…and 200or so a day becomes dbl that, (if u suck, u wont care in a yr and b broke)..lol

    • But do you really wanna make 26k before taxes? Is it worth it? How will you build capital like that. Of course some prop firms will give you 10:1 margin…

  • dave

    Using margin is a bad idea

    • markdman579

      if u have no skills, i agree, i bleed my account “because i use full margin” it makes me take only proper setups with stops and at precise areas instead of “it cant go higher, or its worth xyz earnings, u must trade what u see not what u think”

    • Especially if you don’t know what you are doing.

  • thetradingwife

    Two years worth of living expenses to sustain you, because if one year takes you down or your spouse gets laid off and the world is in financial crisis, you need another year to recover. I speak from experience. :~)

    • Good points. Let’s go with two years now 🙂

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  • The life stage idea is spot on. I’ll suggest a much larger grubstake is necessary than hinted around. Randomness is underestimated. When losses meet living expense the SHTF. No one trades for a living indefinately; capital which can wait for the fat pitch tends to take advantage of the speculative money. Speculative money grows until it’s investement capital or is lost. Always.

    • That is actually a great explanation of the progression of a successful trader.

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  • A trading account should not affect the rest of your funds… the rest of your life. I found swing trading more profitable than day trading – using Margin, is out of the question… I’m sure that “Margin Users are bigger losers!” than the average.What’s the statistic – 1 out of 10 that begin being a trader – make it… the rest find “Pain” along the way.

    • Sure it should not, but the fact is it does. Hard to overcome the psychological aspects.

  • i love this paragraph:

    “The left. It’s on the left. Did I mention that the entrance to the
    Ocean View Bar & Grill was on the left? But not knowing where we
    were going, she went straight, instead of left. Straight. Straight
    into Claes……their fine dining restaurant.”

  • Connie

    My husband did everything in here you suggest, we’ll be paying off debts for the rest of our lives. 🙁

    • Sorry to hear that Connie. Perhaps you should have been the one doing the trading 🙂

      • markdman579

        ha, emotion and risk mgmt is most impt skill, and u must trade w an edge (setups) or not at all and dont quit ur day job till consistant, and turn off that stupid news and the guy that yells u shoud buy xyz…

      • thetradingwife

        Agree with all of that mark!

      • OC in the house…..

      • Jeff Watson

        Nobody should pay any attention to the financial press unless it’s prices or government reports. Opinions will kill you.

      • Nice to see you here Jeff. You have more trading wisdom in your pinkie finger that most of us will ever have in our whole lives.

        Like the avatar as well 🙂

        -B

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Brian C. Lund

Brian C. Lund

Great father. Good friend. Decent trader/writer. Lacking husband. Solid drummer. Sometimes funny. Often A-hole. Terrible poker player. Too smart. Punk rock. Work in an ice cream shop.

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