Trading for a living: how much do you need?

pile of money clipartThe idea of “trading for a living” has, no doubt, motivated an army of new and developing traders over the years. Perhaps people look at their current jobs, and think that trading would be less work. Perhaps it is simply love of the markets and trading, and the idea of making a living from your passion is always exciting. Trading for a living is a real possibility, but, to be perfectly blunt, it’s a lot harder than most new traders realize (even if they have been subjected to a constant litany, reminding them how difficult trading is and how long the learning curve is.) In fact, it’s possible that many traders shouldn’t focus on this idea at all. Let me share a few of my thoughts and experiences.

I used to work a lot mentoring and coaching developing traders. It was interesting, of those who planned to quit their jobs and focus entirely on trading, how few of them had really thought through this question: “how much do you need to make as a trader?” There is an answer to that question, but it’s different for everyone. It’s hard to talk about numbers because what might be a pittance in some parts of the world might be a fortune in others, just, before we begin, come up with a solid number for your situation/region–a number that is comfortable, shows success and security, but does not mean automatic wealth.

Got that number? It’s a salary that most people would be comfortable making, especially if they had quite a bit of control over their lives and work situation, right? Ok, now I would argue if you are going to be a trader that number needs to be higher. How much higher? Maybe triple, or even higher; your target “salary” probably needs to be a lot higher than you might think for one reason: trading income is highly uncertain.

A salary, in most careers, is the ideal example of a predictable cash flow: you make the same amount of money at regular time intervals, and it often increases for inflation and cost of living. Great, but that’s not how trading works; instead, think classic “feast or famine”, and realize that in the famine periods you very well may be writing a check. In trading, unlike most jobs, you can lose money and have a negative paycheck. Your best defense is to shoot for a higher number than you would if it were a “normal”, paying job. Again, there’s no firm number, but three times higher is a good place to start.

The issue of unpredictability of trading income is something that few beginning traders think about. I’ve known many traders who were successful for years, decades even, who said that they could not have done what they did unless they had some, much smaller but steady income stream. It might seem odd to see someone who makes a 7 figure income who also runs, or how has a spouse run, a little business that makes a relatively meager income, but that’s pretty common. (It’s also the answer, in many cases, to why would trader XYZ sell this, or run this service, etc.)

I think there’s wisdom there, and it certainly is a message I heard from many traders for whom I had great respect. Do you have to have another income stream? Maybe not, but it certainly is a warning that the plan some new traders have–to fund an account and then to, rather immediately, make a living off of that account–is probably not going to work. Trading success, especially in the early stages, requires increasing size as your account grows, so withdrawals work against you. Later, withdrawals are a critical part of managing your “whole being” risk, but that’s another story.

As I’ve written before in so many places, it’s hard to appreciate the uncertainty and variability of trading results until you’ve experienced them firsthand. Even when you have some success under your belt, the future will hold surprises. Plan for that uncertainty, and, if you’re thinking about a career as a trader or trading for a living, plan well.

AdamHGrimes

Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 10 Comments

  1. Tariq Malik

    One thing i can never understand how come prop traders make ( i have been led to believe but i am not sold on the idea) 50,80, 200% returns by risking very little and with relatively small trading account like $50 to 100K. Talent like Bill Ackman, Dan Loeb etc are happy with 20% annualized returns. Why don’t you and i just hire day traders from prop firms give each one $500K with 20% loss limit and make 60% returns. A firm with couple of dozens of these traders essentially will have higher ROI than Drug lords. In your experience a B+ trader at prop firm as a day trader how much risk capital he gets ( not leverage) to trade. Per my math- if a trader clears $200,000 on a million $ trading account with 20% as RISK capital , he is good. But i keep hearing that with $1 million trading account after being at a firm for 4 years, one better be clearing $2-4 million / year with $200,000 of risk capital. This sounds INSANE to me. Actually prop firms will give as much leverage as one want but RISK capital does not seem to have any relationship with equity in the account. A firm told me i can put $200,000 of risk capital and firm will give $6 million of leverage. To me if i use $6 million of leverage against $200,000 of risk capital, i will be out and done in a month. But the gentleman kept insisting that firm has traders with similar structures and they make $6, 10 Million. I said THANKS but no THANKS.

    Bottom line RISK capital is important and not the trading capital to me. Any thoughts?

    1. Adam Grimes

      I think you make a lot of sense… I think there was a time when prop traders could exploit inefficiencies and generate ridiculous returns, but I am not sure that time is still with us. I hear reports of some HFTs generating ridiculous monthly returns reliably… and I suspect the edge has gone from much of the prop trader world.

      The prop traders’ results that I’ve seen are more in-line with realistic expectations as you lay them out. Of course, there’s a constant flow of claims of great returns (again… huge grain of salt here because maybe they happen)… but I’ve never seen them.

      There’s no free lunch. If there was everyone would eat it and then there’d be no free lunch.

      And yes, risk capital is a critical measure.

      Thanks for the great comment and good perspective.

  2. pierre

    Agreed Adam.
    Whatever way one wishes to turn this around, regular cash flow is what matters as far as life outside of hell is concerned.
    Personally, I have approached the trading game this way :
    1) I have capital I can risk (but will not for now). I ‘ve been learning (3Y, not much) and practicing on a fraction of my capital.
    2) Being a programmer, I found a niche market for my own “job” which is programming for traders (it would be more exact to say “for people who claim they’re traders, certainly make some money, but not necessarily from trading). This allows me to take a measure of how skilled (or unskilled) my clients are in various areas (probabilities, methods, …), see a ton of things which **don’t work** – but are used / sold nonetheless – and find a few genuinely talented people.

    3) be ready to work a lot of extra hours, and fit that in a healthy schedule.

    4) have a (wonderful) wife with a meager but very safe/stable income stream.
    5) (not sexy but fits me) get the hell out of any sort of bad debt, whatever the amount. Live frugally, and find joy in that. Be ok with doing some gardening (process) & riding a bike with kids (process) during holidays instead of that trip to the Bahamas (outcome). On this subject of finding satisfaction in actual processes rather than outcomes, your blog and Leo Babauta’s are probably the best places I found for a healthy, weekly dose of zen.

    1. Markus Fernandez-Kennedy

      Wow. AGREED. Adam and Leo’s blogs are my number one sources of inspiration and counsel.

    2. Adam Grimes

      Thank you for that thoughtful reply… and all your points make a lot of sense. The “not sexy” stuff is so critical to success. Everyone focuses on finding the best entries, but staying the game long enough to figure it out and managing your cash flow is probably more important.

      Leo’s blog is absolutely fantastic. One of my favorites.

  3. matjaz

    Hello adam,

    I am a little behind the scaduale for your podcasts. I am at podcast 10 at the momemnt but in a few month I will listenn of it all because I like it. Listening the podcast I have two questions or more wishes:

    1. Can you write in your blog (let say 10) of pullback trading, exacly were you enter and where you exit, where do you put stops, whot kind of order do you use, how do you scale in and/or out. so in principle the hole proces. In principle I would prefere to put let say 6 wining trades and 4 lossing.

    2. I listen the podcast 10 abot a media and I asking you to write which media do you look and how much time do you spend looking for the media.

    Thanks

    MatjaĆŸ

    1. Adam Grimes

      Hi,

      1) I’ve done this many times in many different ways. The trading course includes a lot of material on this, and this blog also includes many examples, both written and video. There’s also a slightly different perspective in the book, and I’ve talked a lot about the exact entry point not mattering that much. So, I think I’ve covered this… start with the pullback category on this blog, perhaps.

      2) I spend very little time looking at / reading media… only enough to know what people are talking about and where the focus is. I think many traders would do better if they could insulate themselves entirely from media (social included lol).

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