Last Updated on June 19, 2022 by Quantified Trading
Many traders want to take the leap and go full time. Being a full-time employee while your real passion is trading, can drain your energy. It’s frustrating because your mind is elsewhere: the dream of freedom, independence, and becoming wealthy while you are working from wherever you like. No commuting, no boss, no 9-5 stress.
But is this really doable, and if so, how likely is it?
This article covers things to consider before trading full-time. Unfortunately, very few make it as full-time traders. Even though your passion is trading, you should trade part-time for many years before you quit your job. Most traders fail to make any money at all, and the pressure of having to make money easily becomes a burden.
Below are some aspects you need to consider:
How much money do you need to trade full-time?
First things first. You most likely need a considerable amount of capital. Not only do you need capital for your daily trading, but you need capital to cover your living expenses for many months. Why? You must prepare for having long periods where you have no trading income, even prepare for losses.
Most money managers get money thrown at them if they manage 12-20% annual returns. Warren Buffett has become one of the richest men on this planet with a 19% annual return. This puts things in perspective. If you manage 15% per year you can calculate yourself how much capital you need to cover living expenses and profits.
Of course, you can use leverage and increase the returns, but this can just as well backfire. Leverage requires caution and a good business plan. All strategies have drawdowns, and you might risk never coming back if leverage magnifies the loss.
Why do you need 25k to day trade?
If you have a retail account and want to day trade you need to have at least 25k in your account. Why?
The US markets are the biggest in the world, by a wide margin. In order to limit financial damages and risky speculation, the US authorities have implemented a rule stating that you need to have 25 000 USD in the account at all times to day trade.
The rules are called “pattern day trader” (PDT). The SEC states this:
FINRA rules define a pattern day trader as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period. Customers should note that this rule is a minimum requirement, and that some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.” We recommend that customers contact their brokerage firms to determine whether a broader definition applies to their trading activities.
A broker-dealer may also designate a customer as a pattern day trader if it “knows or has a reasonable basis to believe” that a customer will engage in pattern day trading. For example, if a customer’s broker-dealer provid-ed day trading training to such customer before opening the account, the broker-dealer could designate that customer as a pattern day trader.
If the above apply to your account, you will be flagged as a day trader.
How to day trade with less than 25k
You can potentially circumvent the rule by trading prop – proprietary trading. This means you are trading someone else’s money. We at Quantified Strategies have done this from 2001 until 2018, reasonably successfully.
What is prop trading?
In most cases it means you sign up with a group of traders or a company that lets you trade some of their’s money. In order to safeguard their capital, you will be required to deposit a “risk deposit” to cover your losses. This typically is from 5 000 up to 25 000. The bigger the amount, the more leverage you get. Typically you get 10-50 times the risk deposit in leverage.
Moreover, the prop payout ratio is not 100%, usually negotiable. The payout is normally between 50-90%. A decade ago you could get a 100% payout but the SEC outlawed the business as it was “a retail business in disguise”.
The commission is usually pretty low if you do a lot of volume.
Are you currently consistently profitable?
If not, why do you think it will be better if you work full time? Chances are it will only get worse. Why? Because you NEED to make money. You will overthink, second guess, etc.
And do you have any experience in trading? You need several years to learn. We have been trading for 20 years and we still learn something new every day.
How many hours does a trader work?
A full-time trader puts in a lot of work. How much? That varies from trader to trader. But you can be pretty darn certain the best ones spend a lot of time in front of the screen, much more than a 9-5 job.
Can you get rich trading?
Of course, you can. But is it likely? No! Most traders fail:
Trading is a very lonely job
Are you able to work completely on your own? Trading is a VERY lonely job. Not only do you physically work alone, but you are also alone in making money. You have no team to back you up when the going gets tough, you have to rely on yourself and your own skills.
We recommend linking up or finding traders in similar positions as yourself.
Trading requires good work ethics
You need good work ethics to work on your own, especially if work from your home. There are many distractions: pets, wife/husband, TV, radio, internet surfing, cleaning etc.
Are you disciplined? You need to have some rules one way or another.
Trading needs to be treated like a business
Are you business-minded? You have to treat it like a business. Trading is just like any other business.
Connect with successful traders
Do you know any successful traders? If so, can you learn from them? This is an invaluable asset. Two or more people always think better than one.
Make sure you have a lifeline
Do you have savings to live on? And do you want to risk your savings just to cover living expenses? No matter what you do, make sure you don’t blow-up your life savings. Leverage can backfire, and you never know where or when the next black swan pops up.
Make sure you don’t have any significant debt.
Keep overheads as low as possible
How big are your fixed costs? Do you live in for example New York or Singapore? Find a cheap place where to live. If you have big overheads, you are more likely to get stressed. Having multiple sources of income relieve stress.
You need a higher income than from a regular job
In order to make trading worthwhile, you need to make MORE than in a regular job. You lose relevant work experience by trading, and you get a gap in your CV. If you spend your best years from age 25 to 35 trading with mediocre financial results, I would say you are wasting your time. You have to make good money to cover the lost opportunities.
Imagine yourself applying for jobs at the age of 35 and can only show mediocre results as a trader. This is not going to make you attractive to potential employers.
A viable option: Can you trade while being in a full-time job?
Of course, that is a very viable option and one that most likely is the best for most traders. You can’t day trade if you work full-time, but you can swing trade. If you manage to develop some good swing-systems, you can link your software to your broker and start running the systems automatically.
Last: Should you trade or invest?
At the end of the day you should evaluate your trading results against the alternative of investing for the long-term:
You should seriously consider getting a well-paid job and invest in stocks for long-term appreciation while you are still young. The effect of compounding can make you a wealthy man by 50. The odds are simply much better than for trading. Of course, 50 years sound like light years ahead when you are 25, but time flies.
If you have read so far, then you might be interested in our main trading lessons after 20 years in the market. We let the trading lessons sum up our main takeaways.