Considerations When Thinking About Trading as a Career

When you start learning how to trade, or even when you’re just considering it, one of the questions that will most likely be in the forefront of your mind is, “Can I trade for a living?” I’ve heard many traders ask this and I asked it myself when I started. I know it would be much easier if I could just give you a yes or no answer, but it’s not that simple. There are many considerations that go into determining whether or not this may be feasible for you. So let’s look at some of these considerations.

First of all, you have to realize that trading isn’t like having a regular job. You don’t just perform some tasks and get a paycheck every week or so. Even when you work really hard and do your best you might actually have a losing week or month, or even a losing year! Just imagine your employer saying, “You worked really hard this month but I’m actually going to need you to pay me instead.”

So you can set profit goals for each week or month or year, but there’s no guarantee you’ll reach them and there’s always a possibility that you’ll actually end up losing money instead. 

This means you can’t just use a specified amount of risk capital every month, like $10,000, to make $2,000 and hope to pay your bills and buy your food this way. If you lose $3,000 in the current month you now have only $7,000 to make that target of $2,000 for the next month. So instead of shooting for an already lofty 20% net gain the next month you’re now having to shoot for an even loftier net gain of almost 29% just to get the amount you need and to be back at $7,000 for the subsequent month. But in order to get back to $10,000 in risk capital, you’d need to make $5,000, which would force you to shoot for a ludicrous net monthly gain of 71% against that $7,000. Good luck with that.

It’s just not the same thing as having a regular job, which means you have to approach the idea of trading for a living differently.

Earning consistent money in trading has to be figured over a period of time, particularly when trading your own money. In other words, being a consistently profitable trader really means you’re making more money than you lose on average over a period of time. If you rely more on an annual profit target and you know how much you need to live on every year, you can put aside that amount (let’s say $60,000) for the next year and then use personal risk capital to make it up the next year or to make even more for the purposes of capital growth.

So, for instance, if you have $500,000 in risk capital and you need $60,000 ($5,000 per month) to live on for the following year, you put aside that $60,000 and use the remaining $440,000 to make it back or to make even more that year. But you have to figure in taxes too. If your taxation rate is 25%, let’s say, then in order to shoot for net returns of $60,000 you’d have to make a gross annual amount of $80,000 with that $440,000 that year. That’s an 18% annual return.

But if $440,000 is your total amount of risk capital, or (god forbid) your total net worth, under this scenario you’re actually trading with all of your money. That’s a terrible idea because you always need extra cash for larger losses than planned or just for capital flexibility in case of position adjustments. And putting all of your money at risk is just irresponsible.

The most you want to trade with, depending on your trading style, is up to half of your total risk capital, and that’s still very high. The more prudent amount would be 20%-30% just to be safe, especially if you’re trading riskier strategies that tend to be high risk-high reward or strategies with a large amount of tail risk, like market-neutral options.

So making $80,000 that year with half of your risk capital ($220,000) would mean you’d have to make 36%. That’s pretty high. It’s not unattainable but it’s pretty high, and you have to remember that you can’t expect to even make that much money every year, or even make any money every year. 

It has to be an average amount over time. Some years you might make 15%, some years 40%, some years 20% and some years (god forbid) -10%. Even if you can average 36% per year, since you’re not making it every year your risk capital fluctuates a great deal and can make the percentage go up. Last of all, let’s not forget that 36% is just to make up what you’re using. You’re not even shooting for capital growth. Do you see how complicated this can get?

If your plan is to trade for a living with your own money you’ll have to have a very large amount of savings so that you can use a small percentage of it to make, at the very least, what you need to live on each year (plus any unforeseen expenses, of course) on average. And that amount should be a small percentage of the capital you’re using to trade so that it doesn’t negatively affect your total savings if you lose money or don’t make very much in one year. You’ll have to determine that amount because everyone’s capital situation is different. 

There are other ways to make a living in the trading industry, though. You can earn fees and a percentage of profits by managing other peoples’ money. Or you can become an investment advisor solely to advise people on how to invest or trade their capital and work either independently or for a company. You could also become a broker or work for a brokerage firm, like in sales or customer assistance. Some of these options require licensing and registration with the appropriate regulatory agencies.

Another option is trading prop, but some firms will ask you to put up a certain percentage of your risk capital from your own pocket. Even if you’re trading mostly with the firm’s capital you’re still dependent on your performance. There may be some “prop shops” or capital trading firms that pay traders a salary but these may be very difficult jobs to get unless you have a very strong track record over time. And, again, trading prop might require licensing and registration with the appropriate regulatory agencies depending on the structure of the firm.

You could set up your own brand and sell your strategies or offer a trading service on a web site. In order to make good money in these kinds of endeavors, though, you have to establish a high degree of name and brand recognition so that you have enough followers to make sales and memberships profitable for your business. I know lots of people who do this but it takes time away from their trading and demands a lot of ongoing hard work. It also takes a certain amount of natural flair and magnetism that not all of us have. So just keep that in mind.

When the question of trading for a living comes up, and it will very likely come up and keep coming up as you get farther along with your trading and get sick of having a boss and relying on other people for your livelihood, just make sure you don’t get carried away with fantasies of making huge returns every month. Sit down and really think about the reality of what it would take to do this for a living. It is definitely possible but it takes a lot of planning and understanding your own personal capital situation and needs, as well as what particular path would best fit your personality and lifestyle.