Can you trade for a living? Don’t you need a lot of money? Isn’t it dangerous? Listen to your gut — yes, you can do it.
Like taking on any other new business, as an entrepreneur you need to make the decision to commit to it as a career and lifestyle choice. If you’re working now, realize that you can’t be truly successful in trading without making it your full-time job. Markets move too fast for you to be doing something else at another job or in a meeting. While you are at lunch, your portfolio could drop $10,000. Attending a company training session with no smartphone access? A terrorist incident happens and you just lost 15% of your portfolio. What’s your strategy?
When I was working full time as a developer I often made poor trading decisions because I didn’t research enough or I panicked because I didn’t have time for formulate strategies for capital recovery.
Full-time Trading Life Overview
I have created a list of must haves / tips for full-time trading that I personally have needed and used:
The Transition to Full-time Trading
- Prep your finances for the exciting journey
- Living on 25% of the Income That You Think You Need
- Get trading income goals
The Trade Setup
- A set aside amount of capital for trading that can be completely lost – minimum $50,000 USD
- Savings for 6 months of living expenses while learning trading and get your sea-legs for trading in the groove
- Figure out a bare-bones budget and use Mint.com to see where your money is going and where you can make large cuts.
- A brokerage account with margin and futures trading privileges
- An IRA with margin / option and spread trading (for retirement income — you won’t have a 401k plan with employer matching)
Making the Trades
- A full understanding of major technical trading indicators
- A trade overview page with watch lists for major indices
- An alert system to notify you of extreme market conditions or your price targets
Early Morning / After Hours Life
- Tools to get you mentally fit for the stress of trading – supplements, exercise equipment, coffee, spiritual nourishment
- Some kind of side business to occupy you during trading down time and provide extra income
Weekly Trading Tasks
- Alerts, trading income spreadsheets
The Transition to Full-time Trading
If you’re like me, you’re thinking of trading full-time but wondering if you should leave your job and jump to a profession many would consider extremely risky. I would say that you need to get yourself financially prepared before you make the transition. If you can, pay off your house, pay off your cars, and have no debt. It will make it much easier to live off of trading income because your expenses will be low to start with.
Realize that when you have no commute, virtually no office expenses, and virtually no overhead, living off of trading income is VERY possible. In fact, I’ll say it’s the best job anyone can have. Think of the freedom that comes with trading full-time:
- Hours are very flexible – in many cases markets are open 24/5.
- You can be location independent – you can trade from anywhere in the world.
- You have no supervisor. You literally call the shots.
- In some cases all you need is a smartphone.
- You can estimate weekly income (but realize there will be large fluctuations).
- Work as little as 8 hours a month.
- Have the opportunity to have additional side businesses for the security of multiple streams of income.
- Possibly lower tax rates (1256 contracts – Any gain or loss from a 1256 Contract is treated for tax purposes as 40% short-term gain and 60% long-term gain.), Long Term Capital Gains, and Dividend income all get special, potentially lower tax treatment.
- Pay no social security tax on passive investment income (You should have some social security funds from your previous positions when the time comes for you to retire).
- Have massive amounts of time to spend with your kids, spouse, or significant other.
- THERE IS NO CAP ON HOW MUCH MONEY YOU CAN MAKE.
I don’t know many jobs where you can have truly unlimited income. And also realize you can trade smaller amounts and take less risk. If your expenses are low there is nothing wrong with that. You don’t need to knock it out of the park. Just make a living, right? But living on your own terms and doing whatever you want is knocking it out of the park, no matter the income.
Living on 25% of the Income That You Think You Need
When I transitioned to trading full-time I always suspected, but came to realize that you don’t need nearly the amount of money you think you do make a living.
When you have a flexible schedule, many of life’s essentials are actually half the cost.
Here are some things I’ve found:
- Airline tickets are half when you are flexible and particular dates don’t matter.
- When you work at home you don’t go out to restaurants as much – you can eat healthier, pay half, and save money on gas (without the stress of driving).
- Health insurance is a big cost, but the Affordable Care Act subsidizes the cost of health insurance – I have a comparable HMO plan to my previous employer subsidized plan for half the cost of the full PPO plan. You just need to be ok with using an HMO plan. In all honesty, even my best employer-subsidized plans didn’t pay for a lot and I still had to plan a lot out of my own pocket for the plan. As health care grows more expensive, employers are paying less.
- Do you need a car? If you work at home and live not too far from a downtown area you use Uber and public transportation and get rid of a car. Average car ownership costs are over $8,000/year. Even if you decide to keep your car, with gas rising quite a bit you will save a lot on commuting costs. Plus, you can lower your insurance premiums by reducing coverage. Personally, I much prefer taking an Uber or even public transportation compared to driving.
- Have you checked your mailbox? Quality restaurants are sending direct mail coupons. The deal? Usually 50% off. Say you save $40/month, compounded over 10 years is $5300.
- Costco! Buying in bulk from Costco lowers the cost for most household supplies. I would say you can save 50-70% off in most cases. Costco is great for single people too. I would estimate I save $2,000 -$3,000 buying from Costco. Get their credit card and join their higher-tier Executive membership.
- Do you like to use Amazon.com? Add essentials to your wishlist and check it throughout the day. Items will randomly go on sale for up to 50% off. You just need to be available to purchase at the right time.
- eBay – sell some items around the house. If you’re like me, you have a lot of items around the the house you no longer use. eBay is a large marketplace where you can get fair prices for your items. Aside from the extra money you’ll make selling items, it feels great to clear your space. Also, you’ll feel good knowing your items will find a good home. Many people on eBay need discounted items and will be grateful to receive them.
Trading Income Goals
When starting out, what are some trading income goals to shoot for? What about some key areas:
– U.S. minimum wage: $15,080/year ($1,257/month)
– U.S. average individual wage: $44,564/year ($3,714/month)
– U.S. household average: $59,055/year ($4,921/month)
The Trade Setup
Before you can start trading full time, you need capital. How much? My recommendation is $50,000. If your income goals are low, like U.S. minimum wage or thereabouts, $25,000 might do. You’ll need to set aside living expenses while you learn to trade professionally. 6 months is ideal. If your expenses are really low, 3 months might be ok. The last thing you want on your mind when trading professionally is to think about living expenses when trading can place tremendous stress on you.
Before you can know where you want to be with trading, you need to know where you are. Know your net worth and figure the kinds of losses you can sustain. The best tool for net worth calculation is use Mint.com. You can link your brokerage accounts and keep track of trading progress, but I’ll explain how to create your own trading income spreadsheet later.
Brokerage Account Privileges
What really catapulted me to making real income from trading was three things: futures, options on futures, and option rolling strategies. Futures provide great liquidity in the marketplace so you get fair pricing. Trading stocks usually carries higher commission fees because you’ll need to trade more stock and stock options because the product size is a little too small for professional trading.
What to trade? As a beginner trader you want to trade products that won’t scare the daylights out of you. What products are those? Major stock indexes, bonds, and possibly REITs. Individual stocks CAN GO TO ZERO. Remember, bad things can happen to companies. Their products could poison people. A car company could have a defect that suddenly comes up and brakes no longer function. Self driving features can steer people into concrete barriers. ANYTHING CAN HAPPEN. With stock indexes, you completely take that risk off the table. Volatility is much lower with stock indexes. You won’t find 10% moves in a single day. You’ll often have time to adjust trades that go against you.
To trade large products like futures, you’ll need margin, option, and futures privileges. Apply for these privileges with your broker. They may want to see that you have a net worth that can sustain some losses.
What About My Retirement Account?
Being a professional trader means you will need to fund your own IRA. Hopefully, you have some money to fund your IRA already. The great thing about IRA accounts is that you purchase nearly any stock product and sell options against your stock positions.
What’s great to buy for an IRA account? SPY. It’s what Warren Buffett recommends and for good reason. It’s a set it and forget type of stock, as it represents the S&P 500. Over the long term the S&P 500 has never lost money, and in fast averages around 8%/year.
Your retirement account can grow on its own without any transfers.
So, how do you juice your IRA account while staying conservative? Sell call options on your stock positions. Sell them every 30-45 days. What can this do you for you? It should generate additional retirement income to the tune of about an extra 20% of your entire portfolio amount. What does this mean? It means if you have an IRA account size that is significant, you’ll never need to transfer money into the account. It can grow on its own. Plus, with SPY, you’ll get a 2% dividend.
Making the Trades
What does a trader need to make educated trades? A few technical tools available from trading software is a great start.
- MACD (Moving average convergence divergence) is an important one. It lets you know if prices have generally been trending up or down over a period of time. It’s a slow indicator that gives you sentiment and price action. When the indicator moves from red to green, prices are trending higher and probably likely to stay that way. Conversely, if the indicator moves from green to red prices are moving down and will probably stay that way for a while.
- MFI (Money Flow Index) – an oscillator that moves between 0 and 100. Above 50 and money is flowing into a stock. Lower than 50 money is flowing out. 20 and 80 and key points, with 10 and 90 having real weight for imminent change.
What’s the market doing?
You’ll need some watch lists to see where the market is going. What’s on the watchlist? Major stock indices, oil, bonds. Most trading software platforms allow you to create a watchlist. Some recommendations: SPY, IWM, QQQ, USO, IEF, TLT.
Everyone Needs Alerts
Since most of your days probably won’t be trading because your positions won’t need 24 hour maintenance, you’ll want some piece of mind. How? Alerts. Set alerts to notify you of key price points for levels of support and resistance for stocks. When they break, have the trading platform send the alert to your phone so you can take action. Markets move fast, so you want alerts. Realize that a lot of trading is done by computers are stocks can quickly move up or down. Make sure to have a strategy when the alert fires, but be suspicious in case it is just algorithm trading. Volume can be a good indicator to see if moves are real. If it’s summer or a holiday week have healthy skepticism.
Early Morning / After Hours Life
Trading is stressful, so you’ll need to manage the stress. Supplements keep your mind sharp and body healthy. Multivitamins, Vitamin D, and Ginseng are worthwhile investments. Ginseng will keep you alert and very focused. It keeps you alert like caffeine but gives you more brainpower. Speaking of caffeine, I love K-cups, and the Keriug brewer. For a while I thought it would only make weak coffee, but certain brands like Peet’s changed my mind. Also, the newer brewers allow you to brew stronger cups through strength settings.
Chances are you’ll spend a lot of time at home since you live in your office. I use Bowflex free weights to work out at home. You can do so many exercises with them and they are compact and well designed.
I will say there is some amount of luck in trading, but more so than luck I would suggest having some kind of spirituality. There is an uncanny rhythm to the market that suggest something supernatural is in place. Having some prayer / mediation / mindfulness time will help you focus and look at your positions from a distance you wouldn’t normally see.
Since trading gives you so much flexibility with time, it’s a good idea to create a side business that is also flexible. The reason you want a flexible side business is that markets can change quickly and you need to be able to react if you need to. Since you will have a lot of money tied up in your investments and trades your trading business must take priority. Many times I have lost tens of thousands of dollars simply because I was doing something else while markets moved. I delayed making necessary adjustments. Don’t delay!
So what kind of side business is best? Whatever you are interested in. Whatever your interests are, I’m sure you could create a blog about that interest. Blogging is a great side business and is the perfect compliment to trading. Flexibility is key.
Weekly Trading Tasks
You’ll need some preparation for the week ahead. I usually do my trading tasks on Friday afternoon.
Like I mentioned before, alerts are key. If an alert doesn’t fire, everything is going smoothly. Just relax. Since your alerts are likely to fire during the week, you can recreate them when they fire, or recreate them during your Friday strategy session.
Weekly Strategy Session
I like to plan a weekly strategy session on Fridays where I can review charts and get ideas for the week ahead. I read news and deeper articles about indices and stocks. I gauge sentiment on social networks and forums.
Trading Income Spreadsheet
You need to measure how you’re doing. That’s where spreadsheets come in handy. For my spreadsheet, I measure each week – where I started, where I ended, any deposits, and any withdrawals.
As the weeks go by, you’ll see that you are making money or losing it, but having some organization will make you feel more comfortable with the risks you are taking.
It’s important to look at your trading income over several weeks, not each week at a time.
Some weeks will be huge – up or down, but when you look at the average income you’ll start to feel that trading for a living is possible. It just takes belief in yourself and trading discipline!
Go forth and trade!
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