The Formula for Trading for a Living

The Formula for Trading for a Living

Many new traders enter into trading with the goal to trade full time for a living and quit their full time job. Trading is a professional endeavor that requires the same amount of effort that any professional career takes. The low barrier to entry is what lures people into trading thinking it is easy. Most people in the markets, even professionals that manage money, trade for long term compounding of capital not to buy weekly groceries.

Before considering attempting to trade for a living here are ten things that are needed:

  1. A trader has already mastered their personal finances and have no issues with budgeting or debt. 
  2. Minimal debt and minimal monthly bills. 
  3. Six months emergency fund in addition to trading capital to get through any system drawdown periods. 
  4. A large amount of capital to start with to make percentage returns meaningful in dollar terms. 
  5. Understanding the basics of trading like backtesting, creating a watchlist, and trading like a business. 
  6. The discipline and self control to follow the process. 
  7. Experience trading successfully having already gone through the beginners learning curve. 
  8. A quantified trading system with an edge. 
  9. The ability to manage uncertainty and stress. 
  10. Understanding that trading is irregular income and to budget appropriately. 

New traders can have the impression that successful traders are able to predict the future and see what will happen next. They can have the wrong impression about win rates and don’t understand the downside of losing money along the way to making it. Traders don’t just make money on every trade, their paycheck is based on whether their winning trades are bigger than their losing trades at the end of every month. 

A full time traders income is like a salesman on commision or an entrepreneur, they eat what they kill and sometimes they pay just to play the game. A trader can work for 8 hours just to lose money. A trader must be mental strong enough to deal with the realities of both losing and winning over time. 

When you start trading full time the market price action is your new boss. Full time traders trade the certainty of a weekly paycheck with the possibility of a bigger pay day. 

Trading for a living is less about hope, desire, and a dream and more of a math problem. Going into this pursuit where the math doesn’t work will lead to eventual financial and potentially mental ruin. Not having enough trading capital from the start that leads to chasing high returns is a formula for ruin as a trader risks too much trying to turn a little capital into a lot of returns. 

The formula for trading for a living is to calculate your total trading capital multiplied by your average monthly trading returns to see if it is equal to or greater than your monthly expenses.

Total Trading Capital x Monthly Return% ≥ Monthly Bills.

Also be aware that part of your monthly expenses will be taxes. 

Give yourself a chance before you ever try to launch into full time trading for a living. The majority of people will likely be better off trading for capital gains on their capital and compounding it.