I agree in part with the bit about having the emergency fund. The point I would make, though, is that generally you wouldn’t want to think of that as a back-up in case you don’t make your trading income quota.

I say that for two reasons.

1) That might mean you take more risk than you should in the first place. And what happens when you have to dip in to that savings? You’re going to want to put the money back eventually, right? That too could lead to too much risk taking as you try to make it back.

2) Really an emergency fund should be for proper emergencies – unexpected things that happen. Home repair costs, medical expenses, etc.

If you’re trading for a living and your living expenses equal X% of your trading equity, then your system had better generate long-term compounding above and beyond X% + some reasonable cost of living adjustment (COLA). If it doesn’t, then you’re not trading for a living, you’re taking a leave of absence from a J-O-B. On the other hand, if you’re trading to grow wealth, your primary concern is that the system returns gains above COLA and the pressure to generate extremely high returns is lower.

The stress on consistency of returns can be ameliorated by having an emergency fund, not to be traded, of several months’ worth of living expenses, stored in CDs or money market accounts.