How much to start trading?

Petri RedelinghuysLatest, TraderPetri

How much do you need to start trading?

From time to time people ask me how much money they need to start trading full time. The follow up question is what kind of return full time traders make on a monthly or annual basis. These are really difficult questions to answer because there are just so many variables. The amount of money you would need, and the return you’d need to make, would be different for everyone depending on their monthly expenses and capital base.

The internet has sold this idea that trading is some magical money machine and that once you figure out how it works, it just prints money. Nothing could be further from the truth. So, how much money do you need to quit your job and start trading full-time? I don’t know. Although, I think you should consider the following before taking the plunge.

Trading takes a long time to master

It takes YEARS to reach a level of trading where you are consistently making money every month. Really, years. I’ve been at this for eight years and I am not anywhere close to being able to make money every day or every month. During this period, you will lose money, and make money, and lose money, and make money. This will continue until eventually you break through and make money every month. In other words, it will take years before you can start to actually accumulate money, and even longer before you know that you can make money every single month.

Cash flow from trading is not stable

Eventually you will have been trading for years and would have learned that no matter how good you are, and how big your biggest month was, there are times that the market conditions and/ or you own internal mental conditions do not allow you to make money. During these times, you often don’t just not make any money, but you also lose money.

During these times, you will still need to pay the bills. So you have to plan and save and make sure that you can survive the times of drought. Now, ironically, is such a dry time. Full-time traders are literally just trying to survive the illiquid market and wait it out until liquidity and volatility returns. (OK, the really good guys are still making some money.) They make sure that when that time comes they still have plenty of capital to trade with. On the other hand, as dit pap reen moet jy step!

In essence, during the good times when you are making a lot of money, you must put some aside for the bad times. What a lot of traders do is start to make a lot of money and quickly go out and buy cars and upgrade their lifestyles. Then a six to nine-month dry spell hits and they are out the game and looking for jobs.

I would say that you would have to be in a position to pay your bills for at least a year, preferably two, without having to dip into the capital base that you use for trading. You also need to be able to take a relatively big hit on that capital base, before you can consider giving up your job to trade full-time.

Multiple income streams are a good idea

I have said this before and I will probably say it a great many times more. Traders are essentially entrepreneurs. When the times are good, they use the money they make to buy assets, properties or businesses which can earn them a second, third or fourth income. Knowing that you will be able to live through the difficult times, makes it a lot easier not to worry when the market gets difficult.

So, in essence, there is no magical amount or monthly return percentage that determines when it becomes viable to trade full-time. It really depends on the individual and the prevailing market conditions. During a solid bull market, or even a market crash, professional traders have the ability to make millions in a very short period of time. However, during the difficult times when the market has been going sideways for three years and liquidity has been drying up at an increasing rate… well that’s when the money they made during the good times is needed.

It is a job and a lifestyle unlike any other, but before you give up your day job, make sure that you are in control of your finances and able to go for long periods of time without income. Safety first. It is the first principle of trading.

Happy trading!

Petri


Simon did a JSE Direct on how much money you need to start.

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