This is one of those blog posts that I am writing as much for myself as much as for anyone who might be interested in reading it. It is basically a breakdown of what to realistically expect from day trading and what comes with job, experience brought to you by someone who has literally been through the worst & the best in the markets.
First of all let me start with something very important: There is no holy grail in trading and you shouldn’t expect to find one or even look for one. There is no magical strategy that will always be right or one that won’t produce false signals. Whatever you choose as a trading strategy be realistic about what you should expect as drawdowns and realise that good strategies only work when you follow their rules consistently. Making a huge winning trade that is against your strategy will open the pandora box and its a matter of time before that type of trading results in your downfall. Thus, realise that the only way to be in this game in the long-run is to stick to your guns and be disciplined.
There is a good poker saying that is often applied to trading “Poker is a hard way to make an easy living”. This summery applies perfectly to trading. Forget all the ads with Ferrari’s and bullshit like that. It doesn’t work like that. Let me break down the hard facts for anyone interested in day trading for a living:
One important caveat the below applies only if you plan to make a living out of trading your own money. In case you have a way to trade for a firm or prop trading that is a different story.
- If you expect to open a 10k EUR or USD trading account and live off of it – forget it. With the average standard of living pretty high in most Western countries to just not starve you would need to be making around 2k a month. That is 20% return every single month or 240%+ return (including compounding will end up more) a year. This isn’t going to happen. While I am not calling it impossible, as anything is possible, such traders are 1 in 10 million if not more rare. Don’t dilute yourself that you will be one of those. First of all, to produce 20% return on an account like that in a month means you will be over leveraging a lot and in 99.99% of the cases that will eventually lead to you blowing up. Secondly, most trading strategies fair well in specific market conditions, a prolonged period of bad conditions for your strategy can go for more than a year and you need to be able to survive that. Remember the most important job of a trader is not to make money but to preserve capital.
- What you can realistically expect out of that account if you are a really really good trader is 20-25% a year on an average of several years. Thus a small 10k account at best will take 10-20 years to actually produce real benefit to you. Therefore, you need to be very realistic about your expectations. If you plan to quit your full time job to trade 10k, don’t do it, the outlook doesn’t look good for you. To be able to day trade for a living comfortably a minimum of 100,000K is required so you don’t do stupid shit and that is very much on the low end of the requirements.
- Never trade to make money. Always trade when your strategy has a signal. I cannot over stress this point and it goes along with the prior points I have made. To really be comfortable as a day trader you need to fulfil the following requirements:
- Have a decent cash cushion in your bank account so you can stick to trading only when there is an actual setup. You never want to be trading because you have to put food on the table. I usually say that if you plan to be day trading with a 100,000k account you need to make sure that you have at least 6 months worth of monthly expenses in your bank account as cash. That money should never be used for topping up your trading account (I have borrowed the 6 m. minimum as a recommendation from Mark Cuban). So for example, if on average you spend 2k a month you would need at least 12k as cash in your bank to cover your monthly expenses and to avoid withdraw of funds from your trading account under the worst possible circumstances. Ideally you need 1 years worth of saving or more, but 6months is the absolute minimum. In the past I have fallen victim to not following this rule which has led to me taking excessively high risk bets just to put food on the table and I have paid a huge price for that.
- Realise that markets don’t have to open tomorrow. That means that you never want to be trading using borrowed money and going back to the prior point, it means that you need to have sufficient money in your bank account so if the markets don’t open tomorrow you don’t starve to death and will have sufficient time /if worst comes/ to find a job and continue with your life.
- It is probably not a great idea to be trading for a living if you have mortgage to pay or if you are renting. However, that only applies if you don’t have a large savings account to cover those expenses for a long period of time. If you have sufficient assets both in cash and non-cash terms to cover those expenses it is okay.
- All of the points above can be summarised in one sentence: before you decide to trade for a living you need to already be financially independent or you risk falling pray to your own psychology and loosing it all.
- Realise that the job of a trader isn’t being a prophet but being a risk manager. It doesn’t matter if you are right or wrong, what matters is how much you make when you are right and how much you loose when you are wrong. My prior post outlines some of that :
- Realise what a traders daily time allocation is like: 99% of the time you need to sit still and only 1% of the time to act. 50% of the time sitting still will be doing your homework, analysing various setups on various asset classes and whatever is left you should be reading and waiting for a setup to pop up. If you aren’t the reading type and the type that wants to learn more you will likely die of boredom or blow up from overtrading.
- Make a clear minimum re-investment plan that you will follow to the spot. I usually am flexible with this depending on if I need money in my savings account or not. Sometimes I will re-invest more as a percentage than I earn. However, I will urge at least 30% re-investment of profit so you have a cash cushion to fall on when you are into a draw down. My usual preference is for a minimum of 50% re-investment and 50% in the pocket, scheduled on a monthly basis usually at the start of the month. However, I have opted for 100% reinvestment when I have had several consecutive months of big winnings (thus I didn’t need more money on hand) and I often stick to 70-30 in very good months. You need to realize that the only way for your profits to grow without risking more is for your account value to grow so if you take out everything you have earned you will never increase your equity.
- I do want to add one caveat if you are just getting into trading, after your first big winner you can make an exception and withdraw a bit more just so you can enjoy your results because in due time you will be on the receiving end of trading.
- Choose your broker wisely. Bad brokers can literally eat up all of your profit. Pick a broker that fits your trading strategy. There are certain brokers that are better at longer term trading despite higher commission fees because they offer a wide range of instruments or partnerships with equity research firms and there are brokers that are extremely cheap but offer very few instruments and are suited for scalping. The amount of brokers around is huge so you need to make sure you check very carefully for hidden fees such as custody fees for holding shares, if the broker pays the appropriate rollover fees or they are robbing you blind and others. One of the safest brokers that is basically world renowned is Interactive Brokers. They are the cheapest all around with one of the best execution in the world. However, the minus with them is that their platform isn’t particularly user friendly.
- I have actually made it a habit once in a while to try out new brokers that offer some interesting features. I usually go around by opening a small 5 to max 10k account and test them until I feel I have sufficient knowledge about them.
- One of the big tests on a brokers quality is how they deal with events like NFP. Check the Highs & Lows on your chart with other brokers and make sure you aren’t getting stop hunted. If you are getting stop hunted there is a good chance that the broker has a B-Book and is trading against you.
Now this may all sound harsh but it is the unfiltered truth for 99.9% of all market participants. I also don’t mean to imply that if you have 10,000 USD lined up for trading you shouldn’t be trading. On the contrary I highly encourage at least some form of market participation. What I am getting at is putting realistic goals ahead of yourself so you don’t end up being bitterly disappointed. It is easy to get lost in the world of well marketed ads with people driving Ferrari’s with just 1 click a day, however, this is a dream presented to you by brokers.
The real truth is trading is a very emotionally draining job and it requires the ability to remain cool under pressure and to make tough, often painful decisions. It is also a long grind. Getting stupid rich out of trading your own funds is probably impossible, to achieve that you need to start a fund. However, there are many good traders earning between 200,000 to 1mill +. It’s just that they all had sufficient capital and preparation when they got in the game.
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