I was listening to one of my lessons from thinkorswim when one of the instructors suggested something unusual. He said, in a nutshell, to overtrade. In other words, experiment with different derivatives, invest in small quantities, and trade, trade, trade until you learn how things work. That made some sense which then got me to thinking. Everyone always touts paper trading as practice before taking on the real thing. But paper trading’s the same as Monopoly. Everyone does silly things because at the end of the day, it’s a game. Well what if I were to take a stance against paper trading and tell you that the best way to learn isn’t paper trading but actually blowing up a real cash account?

Here’s my question to you. Assuming you’re entering the market for the first time, what’s the best way to make sure you pay attention to how things work? Do you pull up a website with $100k in paper money or do you jump right in (after doing your research of course) with a few thousand with the understanding that you may lose it all? What’s going to force someone to pay attention to how the markets work? Now, I’ve been in the markets since June of this year. While paper trading is nice, I very rarely pay attention to my papertrading account. I’m always following, adjusting, and learning from my cash account. If I were to lose everything in my cash account tomorrow, at the very least I’d know why. There is no reset button.

Overtrade and blow up an account. I think that’s the best way to learn how to invest in the stock market. Not only are you getting the experience from trying different strategies on a small scale but you’re forced to follow with due diligence since your money is actually at risk.

Before Christmas I had the bright idea of quickly calculating how much it would take to go from a typical 9 to 5 job to trading full time. I admit, I was grossly conservative in my calculations. So much for doing things on the back of an envelope as your professors tell you to do at a dinner party, eh? In any event, I decided to revisit the full time trader idea but this time armed with what I think are real life parameters and a couple of assumptions that I would consider if I were a full time trader.

Here’s the parameter list for the updated calculations:

• My future financial status will have me earning roughly $100,000 per year as described by salary surveys in my current field as an average starting point.
• The short term capital gains tax can range from your tax bracket to 35%. This model uses a 35% tax rate for conservative purposes although at the levels of capital being worked with, it may be a fair assumption.
• Monthly expenses consist of the 9 to 5 yearly salary divided into 12 months; in this case, monthly expenses are capped at $8,333.33. Living the American dream requires living paycheck to paycheck for some unknown reason so the monthly expenses above are conservative for those with more financial sense than the average public.
• The rate of return will be calculated monthly, i.e. investments will compound monthly instead of yearly. This is the major difference between the initial calculations and the current ones. Ideally, calculations should be done with a daily or weekly basis to account for day trading, etc. but for now the assumption is that most holdings are in the short term / swing trader investment style category.
• Any amounts owed for taxes will be removed at the end of each calendar quarter (March, June, September, December). Initially, calculations were done with taxes being removed at the end of each month; however, my current platform provides tax information at the end of each quarter making it much easier to calculate the capital gains tax. This also results in a higher rate of return since additional capital is not removed at the end of each month with the monthly expenses withdrawal. The calculations also assume all capital gains taxes are paid (no deductions or any of the more complex tax calculations - see your tax specialist if needed).
• Investments are profitable and consistent each month. This is highly important. No matter how great of an investor someone is, there will be a month where their monthly returns will be less (or if they’re doing well greater) than the calculations take into account or even suffer a loss. However, in order to keep the calculations as relatively simple as possible, each month will have an assumed return rate of 10%. This is the ideal situation so please keep that in mind.
• Trade commissions were not taken into account. Commissions vary both in price and the number of trades so modeling it would have been a nightmare. If I were to use my own commissions ($1.25 per option contract), a short term or swing trader could easily burn through 500 contracts a month I could assume. Fees would then run about $625 per month which is minor compared to the amount of capital in the calculations.

I believe the model is a bit more realistic this time around. Although not perfect, I believe it gives a better picture as to what is truly required in order to trade full time and break the bonds of job hood.

The first calculation compared the “double your living expenses” advice I received from my friends over on Option Addict dot net. There appears to be a good reason why you need a bit more capital invested as compared to your monthly expenses.

If you’re serious about trading full time, I think you definitely need more than matching your living expenses in an investment portfolio. Even assuming a generous, but highly attainable 10% rate of return per month, starting off with $100,000, assuming the exact same amount is needed to live each year, is insufficient to convert into a full time trader. Starting off with $200,000 in an investment portfolio, which is much less than I initially calculated and the readers pointed out (thanks Franklin / Dave), the returns on investment using the same generous monthly percentage do allow you to live off of your investments without needing supplemental income. However, it would appear that starting off with $200,000 at a 10% monthly return would be cutting things close. Remember that the calculations are using a constant monthly return. If that monthly return were to fluctuate downward, the results would not be as kind.

Since I’ve proven to myself at least that $200,000 is a decent target for attempting to live as a full time trader, what would happen if the monthly returns were different? Here are some calculations using a 5% and 15% monthly return.

Hopefully as a full time trader you’re pulling in more than 5% per month! From experience, I’ve been able to return a profit of about 15-20% of my portfolio in a month; however, I was more lucky than good. What I’d like to know is some of the more experienced traders’ track records in terms of return rates per month. Percentage wise, a 15% return per month doesn’t seem out of reach. Even 20% might be attainable. For some of the more experienced folks out there, what sorts of returns do you all average per month?

So there you have it, I think. Yes, the amount of capital required is much much less than the initial millions I thought. Never trust the back of an envelope. Most traders can easily obtain $200-300k as an initial starting point for a portfolio. My plans? After running these more realistic calculations, once I reach a portfolio of about $200k, I may look to throttle back in terms of working a day job. I wouldn’t feel comfortable the second I hit an investment portfolio of $200k leaving whatever job I may in the future outright. Although as Franklin pointed out, if you’re serious about trading, it’s best to start now. Leaving the 9 to 5ers behind in 3 to 5 years does seem like a reasonable target. And until that time comes, hopefully I’ll have many years of serious market experience under my belt.

If I missed anything or if the calculations are still a bit on the odd side, let me know so that I can correct and update. It’s always exciting to see what it really takes in order to get what you want!

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Over on Option Addict dot net, there’s a forum post regarding trading for a living. What would the goal be for a full time trader to survive without working a 9 to 5?

I’m currently a PhD student. Potentially, my job, upon graduation, would bring in about 100k conservatively. Assuming my family and I can survive comfortably on 100k a year, what would I need to bring in as a full time trader to survive? Well the folks on OA state you need to bring in about twice your comfortable living income. So what would it take for someone such as myself to quit a job I have yet to find to become a full time trader?

Profits from trading: $200,000

Assuming a conservative 10% rate of return, my initial starting investment would need to be $2,000,000. That would require my entire salary invested over the course of about 20 years in order to attempt to become a full time trader.

What if you can consistently bring in a 20% rate of return? Now we’re talking about 10 years before I can take the thought of full time trading seriously with starting capital of $1,000,000.

How about a 25% rate of return (which I’ve seen in short bursts this year)? Starting capital becomes $800,000.

30% ROR? $600,000+. 40%? $500,000. How about a simply starshattering 50% ROR? Now we’re talking about a $400,000 initial investment.

These are very simple calculations assuming a few things. First, every penny I make goes into an investment account. No emergency fund, no 401K/IRA, no bills!  Second, the money saved wouldn’t compound in any way either via interest or gains on investments, etc.

In short, for the average person, it may take a while before thinking about taking trading up as a full time job.  Sure, some folks such as Timothy Sykes did it and with a relatively small amount of capital as well.  It’s still a difficult process for the average person but it’s something I know I’ve been considering for quite some time.  And who knows.  If I end up trading full time, I could afford to blog 24/7!

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