So, You Want to Trade for a Living? Getting Started

The longer the bull market ran, the more often I was asked about trading for a living. The first thing everyone wants to know is, “Is it possible?” Of course, fewer folks may be asking the same thing after August's market washout, but the big questions about trading for a living are best asked in sobering markets.

Can you quit your job, work from home, and make a living by trading the stock markets? The answer is a big, fat “maybe.” There are a lot of things you need to consider before turning in your keycard and telling your boss you’re quitting to become a full-time trader.

It should go without saying that you should have already tested the waters by trading actively and successfully, and for more than just a few months. The longer you’ve been consistently profitable, the better the odds are that you’ll be able to support yourself financially. It's also a good idea to make sure your methodology is sound and will work in different types of markets—bull markets, unfortunately, don’t last forever. You'll need some track record of market adaptation, recognizing that sometimes you'll need to be patient with your strategies and at other times, proactive.

Next you need to think about the actual nuts and bolts of your new endeavor—all the non-trading aspects—that can mess with you mentally, affecting your profitability. For example, are you willing to give up the security of a regular paycheck? The market gives, and the market takes. Part of trading for a living is understanding that dynamic and being at peace with it. 

Set Boundaries

Here’s something else to ponder: should you trade from home? Will the distractions of daily life—kids, spouses, deliverymen, phone calls, neighbors—or even the temptation to catch a quick nap on your favorite sofa cause you to lose focus? Would it be better to rent a small office nearby to make sure all your attention is on the market when the opening bell rings? You'll likely need the time to practice, do your homework, and connect with online trading communities.

Then there’s this big question: how much money do you need to trade for a living? You’ll put yourself at a big disadvantage if you try to trade without enough capital, so put some serious thought into this one. Fortunately, there is a way to reverse engineer the question to get a fairly accurate answer.

First, figure out your current average yearly return from trading. Then determine how much money you need each year to live comfortably. At this point it becomes a simple math equation: the amount of money you need to live comfortably each year, divided by your average return, equals the amount of money you need to trade for a living. You'll need to factor in commissions, margin debt, and other trading costs.

Let’s look at a real-life example. In order to earn the median household income in the U.S.—which is about $50,000—someone averaging a 20% return over the last few years would have to start with $250,000 in their account ($50,000 divided by 20% [0.20] equals $250,000). How do those numbers compare with your current income and trading returns?

Next, just to make sure you have some cushion and can pay the bills if your transition isn’t so smooth, I suggest adding one extra year's worth of salary to your account. That bumps up the starting account to $300,000. Of course, the more frugal your lifestyle, or the higher your annual return, the less money you need to start with.

Don’t even think about trading on margin until you’ve put a few years of profitable full-time trading under your belt.

Finally, consider: are you going to generate money purely from your trading, or do you want to monetize your efforts in other ways? Trading full-time requires a lot of preparation and analysis. Some traders take the work that they are already doing and repackage it into a product such as a subscription service or newsletter. The additional income can come in handy during rough patches in your trading and could help to smooth out your equity curve.

It’s a Business

Trading for a living is hard, but it can be done. I have done it, and I talk to traders every day who are trading for a living successfully and have done so for a long time. The key trait they all share is the knowledge that there’s more to being a successful full-time trader than just buying and selling stocks.

These traders understand that what they’re ultimately doing is running a business—a business that, like any other, is most successful when it follows a well-thought-out strategy, plans for unexpected contingencies, and diversifies its income streams as much as possible.