I have been involved in an email exchange with someone from my mailing list over about the last week. He initially asked me some questions, which I answered. Then he reported that he would be giving notice to his employer that he’d be quitting. I wasn’t sure if he meant to take up trading as full-time to replace the income, but I sensed he was thinking that way. Since I believe this individual isn’t exactly an experienced trader I was concerned and asked the question. He confirmed that his intent was indeed to quit the job to pursue trading for a living.
Now granted, I don’t know a great deal about this person. I’m only going off the impression of him being relatively new to trading, which is based on the questions he had previously asked me. But let’s start with a basic discussion of the implications of trading for a living before taking on the topic of whether one is ready to do so or not.
1) Income and benefit replacement: When you trade for a living it’s not just about making up your take home pay. It’s also about making enough to cover the required taxes as well as any benefits your employer provides. That includes things like health coverage, retirement benefits, life insurance, day care, and all that stuff. And make sure your completely understand that tax implications.
2) Generate savings: One of the things that cannot be forgotten when one is making plans to trade for a living is to consider not just income, but also generating excess profits to continue improving your overall financial situation. If you worked and traded on the side the objective of the trading would be to create wealth. Don’t forget to factor in continuing doing that.
3) Consistent income generation: One of the keys when trading for a living is generating steady income. That means having a system which is aimed at doing so. Having one which is very erratic and/or goes through long periods of drawdown can put a lot of stress on one’s finances, not to mention one’s psyche.
4) Starting stake: In order to succeed when trading for a living you need to have enough of aÂ starting account balance to produce the required income – and the excess to grow your assets – and to protect from any potential rough patches. What that amount needs to be will be based on how much income (and and extra for savings) you require and the rate of return your system can reasonably be expected to make on a consistent basis. For example, if you require an average weekly profit of $1000 and you are comfortable with your system providing a 1% weekly return, then you need at least $100,000 as your starting stake ($1000/0.01). And yes, you should be very, very conservative with your return estimates.
5) Creating your own job and burn out: Something very important to realize when contemplating trading for a living is that you may find yourself in a rather unpleasant situation of having traded one job for another – and potentially for a job you don’t really enjoy. This depends a lot on your trading style and methodology, of course. If you’re a day or short-term trader, trading can become a major grind. There aren’t a great many traders who last many years in that kind of situation. Just look at the trading desks of Wall Street shops to see what the burn out rate does there. If something like that happens to you, where do you go afterwards. That’s something to ponder.
OK. Now let’s talk about when you should start thinking that you could trade for a living. Here are the criteria I think you need to meet to even think about making the switch.
- You’ve been trading live for some time
- You’ve been profitable on a consistent basis for a while (the longer the better)
- The system/methodology you use can be applied more frequently than you currently do without performance degradation.
- The system/methodology you use will generateÂ relatively predictable returns
- You have more than enough capital to generate the income you require
Of course I’m not speaking here of someone with a million dollar portfolio who could potentially make a year’s worth of income off one or two trades a year. I’m talking about someone who actually needs the money to live on. My inclination is definitely to be very conservative in this kind of potentially life-altering decision.
To my mind the biggest question of all has to be: Will quitting my job and living off a trading income make me better or worse off financially. I think for a lot of people the answer will be worse.