Trading is one of the few career choices on which you can spend your time on and make no money or even lose money.
You’ve seen the movies, the Instagram pictures, and the greats living the fabulous life as a full-time trader. They drive around in their Lamborghinis and Ferraris while you slave away at your 9-5 job.
They make videos showing off their mansions and huge computer setups with 10 screens.
It is a sight for sure.
Who wouldn’t want to live that life?
Before you quit your 9-5 job, there are some things you need to consider first. Do you have the training and experience to trade consistently day in and day out?
Not all days are going to be gold. Are you prepared both mentally and financially for the down days?
And hey, there is nothing wrong with not wanting to peruse a full-time trading job. Trading is a perfectly fine side hustle or hobby.
Be Prepared To Be A Full-Time Trader
Being a full-time trader requires you to be prepared both mentally and financially. You must be able to withstand the bad times so you can prosper during the good times.
Your first step in trading is preparing financially. Without money, you are not going to do much trading.
How much money do you need in your portfolio before you go full-time?
The answer to that question is not cut and dry. It requires you to look at your situation and needs and make a judgement call.
First, you need to figure out how much money you need to really live. Forget the fancy cars and high-end toys for now. What are the bills that need to be paid? What type of lifestyle can you live with right now? You may be used to a $100,000 lifestyle thanks to your 9-5 job, but could you live with less if you were your own boss?
Rolf at Tradeciety suggests, “if you want to really quit your job sooner and start living off your trading, you should audit your spending behavior”.
Cutting your expenses is a great idea to help get you started. This will keep the bar low and manageable as you transition off a steady income. What you don’t want to do is be unrealistic with your cuts. It may be easy to say you won’t go out to eat or spend any money on entertainment, but we both know that is not true.
Deciding how much you need to live is only the first step. Now you need to look at your performance history. What are your annual returns, and are they consistent?
If you return 20% a year, and you need $50,000 to live on, you need a $250,000 portfolio. At a minimum.
Have you ever heard the saying, “Don’t confuse brains for a bull market”?
Don’t lean on your abilities and past returns 100% if the market has been favorable. If you’ve had 3 great years of returns, but the market has gone in your favor in those 3 years, you need to account for that. What happens when you become a full-time trader and the market atmosphere changes? Before, you were making money hand over fist, but now you can’t buy a win. Make sure you play it safe when it comes to your returns. Exceptional years need to be discounted and recognized as exceptional.
You also need to account for starting the year with a loss, because you are now in a hole. You must return above your annual average to get back to the level on which you need to live.
That accounts for if you have a loss. What happens if you need to withdraw during the year to cover an expense?
Knowing your minimum is good but you should aim for a level above your minimum portfolio size to make sure you always have enough cash on hand.
When talking about your finances we can’t stop at your portfolio.
We also need to discuss your savings.
Unfortunately, in this business, nothing is guaranteed.
Nathan Michaud of InvestorsLive, a full-time trader, said it best, “Leaving your job means leaving your guaranteed income stream. You should save up enough money to cover your expenses for 2 years.”
2 years of expenses may seem like a lot but with no guaranteed income, it should be your minimum.
With a large savings account, there will be less pressure on you to perform. Trying to trade for a living, beat the market, and make sure you make enough money to put food on the table is high-stress. Trading may be easy now, but you add in the extra stress of trying to feed your family, and it is a completely different game.
Do You Have The Skills To Trade Full-Time
In his book, “Outliers”, Malcom Gladwell wrote, “Ten thousand hours is the magic number of greatness”.
Gladwell believed it took deliberate practice, for at least 10,000 hours before you could be great. People are not born great, they get there through effort.
Have you put in your time?
If you traded from market open to market close, or at least practiced, it would take you 5 years to generate 10,000 hours.
That is A LOT of trading.
Luckily, you don’t need to trade that long. Practice, paper trading, and studying all count toward deliberate practice, and all will make you a better trader and get you prepared for trading full-time.
The Next Step
Okay. You have all your ducks in a row in terms of being financially ready. That means you have a portfolio that is worth trading and that will make you enough money on which to live off. That also means you have put money away in your savings to pay for your expenses.
Your portfolio does not equal your savings account. These two must be separate and kept that way.
We’ve said this before, but this time we really mean it. You need a solid trading plan. Not having a trading plan is one of the major mistakes of most option traders. Not only do you need a plan for your positions, which at this point, you should have, but you also need a plan for your portfolio.
When your portfolio is your lifeline, you should have a failsafe in place. This will help protect your portfolio from a few losing trades. Know how much you are going to risk on each position, and how much you are going to risk each day.
You are not going to win every day. It just won’t happen. How much of your portfolio are you going to lose before you call it quits that day?
A lot of traders are willing to risk 1% of their portfolio on every position and 2-3% of their portfolio every day. If they hit those limits they will call it quits for the day because it just isn’t working out.
With your trading plan in place, you need to try and trade as much as you can before you call it quits at your job. Take no breaks and miss days. Act like you are now trading for real money. Make sure this is something you want to do every day, all day.
If you have some vacation days, this would be the time to use them. Use these days off like real work days and make trades.
Trading is high stress. You need to be mentally prepared to sit in front of the computer all day, by yourself, and lose money. Taking these days off from your 9-5 to put yourself through the paces will give you good experience into the life of a full-time trader.
The idea is not to completely scare you away from becoming a full-time trader. It is quite the opposite. We want to make sure you are setup for success. Becoming a full-time trader gives you a world of possibilities.
Forget the joys of not having a boss standing over you, telling you what you need to do every second of every day. How about the pleasure of working from wherever you want? Trade from the home office, the poolside, the balcony overlooking the beach, or at a café under the Eiffel tower. The world is yours to explore and trade.
When you become a full-time trader, you are only limited by yourself. Make enough money to cover your cost of living this month? Take the rest of the month off. Want a new car? Trade more. It’s that simple.
Being a full-time trader is not meant for everyone. You are your own boss. It is you that must drag yourself out of bed and onto the computer. If the times get tough, there will be no one there to lend a hand.
There is nothing wrong with trading as a secondary income or hobby. The stress is less, and you are free to quit whenever you want.
Whatever decision you make, make sure you are prepared.
Are you a full-time trader or want to be a full-time trader? Let us know in the comments...