Trading For A Living?

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davkell

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Post Number: 525
Registered: 07-2004

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Votes: 0


Monday, August 13, 2007 - 01:34 am:

I am seeking your thoughts on how much capital you think is a minimum to successful trading? The books can mention anything from $1000 to $100, 000!!!

To trade for a living, I think one would reasonably expect a minimum of $50K per annum (Gross!) to be able to pay bills, eat and live reasonably OK! To raise this kind of cash through trading, assuming you can earn a 2% per month return (24%pa using rudimentary maths not factoring anything else in!!!), you would need: $208,333 in capital! A lot of money considering most of us are in the game because we don't have that money!

Curious as to your thoughts on this.

Cheers.

"Trade Your Way To Financial Freedom" - Van K Tharp

"Manage the downside; the upside will take care of itself" - Donald Trump

ohkoolnutz

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Post Number: 642
Registered: 10-2005

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Votes: 0


Monday, August 13, 2007 - 09:07 am:

I have been thinking about this for months. There are three sides to this cube.

1. It is not economical to trade for a living until you have $300,000 due to brokerage costs. The average economies of scale for brokerage cuts in at $30,000 per trade. To maintain proper diversification in such a case you need ten positions. 10 * $30,000 requires you to have a minimum of $300,000 in the bank.

Summary Result:

The more funds you have the more profitable you will be.

2. You have a day job which pays $60,000/year before taxes. You are a saver and use your savings to increase your trading account. You trade and work full-time for a period of years. It's a double load you hope pays off eventually. You have increased your trading account from $70,000 to $140,000 over two years through additional savings and profits. The following problem appears:

Two Years Ago:
Average Monthly Wage: $3500.00
Average Trade Size: $7000.00 (out of $70,000)
Maximum Drawdown Per Trade: $700.00
Brokerage Economies: BAD
Maximum Drawdown Per Trade-Wage Ratio: 20%
1% Daily Fluctuation Of Bank: $700
Daily Fluctuation-Wage Ratio: 20%

Now:
Average Monthly Wage: $3500.00
Average Trade Size: $14000.00 (out of $140,000)
Maximum Drawdown Per Trade: $1400.00
Brokerage Economies: Fair
Maximum Drawdown Per Trade-Wage Ratio: 40%
1% Daily Fluctuation Of Bank: $1400
Daily Fluctuation-Wage Ratio: 40%

You are better off in terms of financial backing you have but each losing trade is cutting heavily into your psyche. You have the feeling you can't risk $14,000 on a trade because if it turns out to be a loser you just cost yourself 40% of a months wage.

In Two Years:
Average Monthly Wage: $3500.00
Average Trade Size: $28000.00 (out of $280,000)
Maximum Drawdown Per Trade: $2800.00
Brokerage Economies: Good
Maximum Drawdown Per Trade-Wage Ratio: 80%
1% Daily Fluctuation Of Bank: $2800
Daily Fluctuation-Wage Ratio: 80%

The day job seems to become a deterrent to your psychological balance because you still value a trade in terms of how much it costs you in wages. Can you watch your daily trading account fluctuate by as much as you make in your day job in a month?

If you give up the day job you lose the assurance of a paycheck which increases pressure to perform in your trading.

Summary Result:

The bigger the bank the more problematic it becomes to keep a day job and trade at the same time. A non-profitable system will be exposed at this time. Perform now or stop trading. Money to fund trading is no problem. The real questions are: Are you a good trader? Do you have the guts to walk out on your job and put it all on the line?

3. Imagine you do not suffer from the first or second problem. You have $280,000 and a psychological capability to trade profitably. Brokerage costs and taxes are considered an unavoidable evil.

You still have a problem. The market can't take your money.

It was so easy to put $7000 to work. You picked a small stock. It rose 30% in a couple months. Lather, rinse, repeat. You now face the dilemma:

Option 1:
Bank: $280,000
Positions: 10
Position Size: $28,000
Stock Choices: 200
Trading Signals: Few

Option 2:
Bank: $280,000
Positions: 28
Position Size: $10,000
Stock Choices: 1000
Trading Signals: Many

Small stocks with large price increases allowed you to increase your bank from $70,000 to $280,000. You have now so many funds but so little time to manage a small caps portfolio to continue trading the way you traded so far. The fewer stocks you can chose from the less signals you get to trade.

Summary Result:

You have a profitable system but problems to put the money to work due to the time limitations to monitor a lot of positions and due the small amount of stocks which can handle large position sizes. Your trading system becomes less profitable the more funds you have. The trading time frame changes as well as you move from small caps to large caps. Percentage gains are reduced and holding times become longer. You are less of a trader but more of a long-term investor. Is your trading system still beating a long-term dollar-cost-average approach into tax-advantaged super fund? Should you keep the job until you have accumulated $1M in super to protect you if full-time trading does not work out?

---
ohk

Lies, Damn Lies and Technical Analysis

ken

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Post Number: 462
Registered: 04-2003

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Votes: 0


Monday, August 13, 2007 - 12:20 pm:

Ohkoolnutz,

Your analysis assumes a certain characteristic of the system you would use, that being a hold time of a couple of months, making maybe 30% in that time. I agree that's appropriate if you are working full time as you can't watch the market or spend much time in working hours.

For me the lack of work allowed me to trade and develop systems with a backtester. The first systems I developed were only good for about 40% per annum (theoretically).

Over a couple of years I have learnt some tricks and now have systems that are theoretically capable of 300-2000 per cent per annum. Volume is often a problem with some of these, as are slippage and errors in execution. Nevertheless, a year ago I had $77K in the market and that has doubled on that base. What matters is not the efficiency of the brokerage but the gain of the system you use.

Now I admit I don't have to compare my daily loss with my day job wage because I don't have one - but learning to trust your system and take the losses it dishes up is easier if you start with smaller positions and work up. A year ago I used $5k positions and now I use $10k, and have made a good living this year. If you save up to start trading till you have $300k and use $30k positions, you will freak yourself out whan you lose $3000 per losing trade.

In my backtesting I have found that the longer the trade length you use, the less you will make per annum. This is because you don't get as much benefit from compounding, which gets serious if you compound 50 times a year.

Just some thoughts to hopefully help you on your way.

Ken

junkone

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Post Number: 2
Registered: 08-2007

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Votes: 0


Tuesday, August 21, 2007 - 12:02 am:

it all depends on ur that u are following and market that u are trading in. in forex, u need just 10k and do woodies zlr. in stocks, to daytrade u need roughtly 50k with margin.