How to Trade for a Living

Some variation of the following pops up periodically:

  • How can I trade for a living?
  • How much money do I need to start trading for a living?
  • What’s the easiest strategy to use to trade for a living?
  • How long does it take to learn to trade for a living?

A lot of the answers I’ll see in response are hilarious. “My account size is $40,000 and I make $10,000 per month” or “I was profitable the first month I started trading.” It makes you smile. The problem is that the person who is asking the question, who obviously has no idea how to trade let alone how to trade for a living, are often left with this amazingly skewed view and too much hope for their own budding trading career. They don’t realize that the answers they received are blatant lies or they somehow stumbled across a unicorn trader that can somehow generate 25 percent monthly returns month in and month out. Mere mortals can’t do that. So they plop down their $5,000 with Robinhood and promptly start bleeding their account dry.

Trading for a Living

How to trade for a living is one of those ironic questions that every successful trader looks back on and chuckles about. By the time a trader has the skills and wealth to trade for a living he realizes that the answer is different for every trader. Each trader has their own personality that informs what type of trade strategy can be successful for that individual trader. Each trader has their own lifestyle and the corresponding income need. A trader living in Mexico by himself with no family to support needs a heck of a lot less income and a correspondingly smaller trading account than a trader living in NYC with two kids in private school and a wife who is heavily involved in high society.

Trading for a living is a grind

Emotional fortitude is the hardest part about being a full-time trader. Your livelihood is reliant on the success of the trades you make. When you’re just an investor who works at a different job and has the luxury of 20+ years of dollar cost averaging then any single mistake has significantly less meaning. So for a trader to maximize his emotional fortitude he needs the following:

  1. A strategy that matches his personality and actually generates a consistent profit. If you need constant action then a short-term mean-reversion strategy would be a good fit. If you quickly get decision fatigue then a momentum or core trading strategy is a likely better approach.
  2. One year’s worth of living expenses set aside separate from the trading account. The trading account should be considered “permanent capital” much like the money you’d invest in a small business that you run. If you take that money out then you don’t have a business. The only way it’s possible to not take the capital out is if you have a year’s worth of living expenses set aside in a separate account and know how to prudently budget. Each year the earnings from your trading are evaluated. Some should be reinvested in your “business” while the remainder can be taken out to pay for taxes and the following year’s living expenses.

Set your expectations lower

The most important part about figuring out if you can trade for a living is to understand that you need to set your expectations lower. You need to trade for a couple of years to understand if your strategy is robust enough to deliver consistent returns. Ideally you need to go through an economic cycle to know what will happen with your strategy and your emotional state when the economy tanks. Every would-be trader thinks he can generate 20+ percent returns every year with nary a down year. Every year most would-be traders are disappointed.

Where should you calibrate your reality? Strive for high single-digit consistent returns per year with managed drawdowns. For someone who is new to trading it’s very surprising how hard this is to achieve. But once you have a couple of years under your belt where you’ve generated those high single digit consistent returns then, and only then, can you start thinking about whether you truly can trade for a living.

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