When Can I Become a Full Time Trader?

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One question that constantly comes up, and understandably so is, When Can I Become a Full Time Trader? Being a trader is like running a business. You are the manager / owner / operator of "You, Inc." How much capital does it take to run your business? What's your monthly P&L? How much money do you need to have in "float" in case of emergencies (like, oh, I don't know, a global pandemic that sends the price of everyday items skyrocketing?)

If your goal is to become a full time trader, where trading is your primary source of income and provides you with all of your material needs for now AND the foreseeable future, do you have a PLAN on how to get there? Do you know how much capital you need and / or what rate of return you need from your trading system and / or how many trades on average you need to generate your income target?

Let's figure out how much Monthly income you need. First, take your monthly expenses. Include things like rent or a mortgage, a car payment, utilities, gas expenses for your car, etc. and total them up. Second, take all expenses that might be annual or irregular and put an amortized amount each month into a separate checking account for when they come up.

For instance, HOA fees may be billed semi-annually. You may plan on a vacation every year. You may have to replace a major appliance every 3 years. Factor all those expenses and what it may cost as a monthly savings plan and put them into that account. These expenses would come out of that account without touching your monthly income. For example, it's easier to pay 69/month in expectation you will have to replace your fridge, stove, or set of tires every 3 years than to have to come up with an unexpected $2,500 when the fridge dies on you.

With these initial stats, you know how much you need to make a living trading... just to break even. So, what does the responsible business owner (trader) need to do? DOUBLE that number so you are putting an equal amount in savings (for a rainy day / a down month / or the "nest egg") and factor in taxes, say an additional $35% in the United States - the top tax bracket. This final number is what you should comfortably want to make to consider yourself financially free – not dependent on ANY source of income except for your efforts in trading.

Now, given how much money you want / need to live on, what type of trading performance against what amount of capital do you need to achieve this monthly desired income?  How much capital do you have in your trading account? What is the Win Rate of your current trading system? How much money do you earn on each winning trade and how much do you give back to the market on every losing trade? Finally, how many trades on average does your trading system find for you each day given the hours you work your trading business?

Let's assume you have a 20K trading account, and you trade using the 1% Rule of Risk Management and the 3R rule of expectation – your Reward-to-Risk Ratio. Let's also say that your trading system is able to locate two trades per day during the timeframe that you are "working" the markets and your Win Rate is 50%. So, if you you win one trade and lose one trade each day, winning $600 and losing $200, you are netting $400 for the day. Multiply this by 20 (the average number of trading days in a month) and you will have an estimate of what monthly income you can generate from your trading account.

An important question is then, "How many trades might you take per day?" For example, during one backtesting period I found that my trading system, Sabre, generates an average of 11.7 trades per day in the Futures Market on the 1-hour timeframe. If you decided that you would be trading Sabre for four hours per day, say from 5-7 in the morning and 8-10 at night, it would pull up an average of 2 trades per day. 

Once you are armed with all this information: Your trading account size, your trading system win rate, your trading hours and trade frequency, you can calculate how much income you may be able to generate from your trading system given that all things go according to plan. And as Hannibal Smith liked to say, "I love it when a plan comes together!"

Once you run the calculations, if you run short of what you would like to earn, you can now determine what action(s) you might want to take to get you closer to your goal in a quicker timeframe. For example, if your win rate is 30% with your current trading system what would it take to get it up to 60%? Do you need to check your psychology? Are you constantly leaving money on the table? Are you fearful of entering trades that you should have logically had no problem getting into? Should you join a trading group that is experiencing a level of success you want to achieve to help you overcome any technical or psychological hurdles?

Mechanically, if your trading system is not giving you the number of trades necessary to reach your income goals, what can you do? Perhaps you can go down a timeframe. Theoretically, if you are finding 2 opportunities per day on the 60 minute timeframe, you may be able to find as many as 8 opportunities per day by going down to the 15 minute timeframe. Maybe it's about capital: If you have a $5,000 account you might find a way to  put another $10,000 in there and instead of having a $50/$150 Risk:Reward ratio with a $5,000 account you could have a $150/$450 Risk:Reward ratio with a $15,000 account.  One way to grow your account is to never 'withdraw' by keeping all profits until your account reaches the 'critical mass' necessary to generate the required income. That's the beauty of exponential growth!

Additionally, perhaps you can add a second trade strategy to your mix. If you are a Supply-and-Demand trader maybe you can find a breakout strategy to take advantage of additional opportunities. After developing Sabre, my trend-trading strategy, I developed what we call the Clubhaul: a counter-trend strategy. Now I had 2 different strategies, increasing my daily number of opportunities to find successful trades. Having access to multiple trading strategies is like the handyman with three different hammers or multiple sets of screwdrivers: They each do a specific job under specific conditions, and it's not always the case that "one size fits all." What goes for the handyman's toolbox, is also applicable for your trading toolbox.

To get to where you want to go you need to know where you are starting from. As G.I. Joe says, "Knowing is half the battle." So hopefully you can create yourself a spreadsheet and crunch the numbers and you can see (1) where you currently are in your trading journey (how viable is my trading plan, how much capital do I have, what hours will I be working the markets) (2) where you want to be ultimately (how much income do I want to generate on a monthly basis, how much capital do I need to consistently generate that income, and which strategy(ies) will get me there? and (3) what I need to DO to get from where I am to where I want to be.

Trade Well!