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How much money to trade for a living?

I decided to take a second part time job to raise capital.

At first, I planned using loans (and I did it and took two business loans to use them for investing and trading) but the loans put a lot of pressure on my trading.

Our accounts do not have large enough capital to generate enough income, sustain loan payments, and grow the account.

The recent sell off of US Steel (X) basically put the account growth at a halt. I had to roll the trades and now all I can do is sit on it and wait.

And sitting and waiting brings no more cash which can be used to pay off the loan.

 

Because of this movement in our trades and waiting period we expect this month to be low in income. In previous months we could generate nice $2,000 to $3,000 monthly income but this month it will be way below this limit. As of now, we have made around $327 dollars only and I do not expect any significant improvement by the end of the month. I have simply no more cash available to trade and most of the open trades are sitting ducks.

This is a thing I was thinking about recently: “What it would look like when trading for a living”?

What if I get into a situation that our account will not be able to generate enough cash as a salary which would pay the bills? The current situation poses this issue as of now!

I asked this question to an experience trader from our group who trades for a living and he confirmed me what I began to suspect:

 
I am still too under financed to trade and generate sustainable income.
 

 

 · How much money do I need to trade for a living?

 

This is a question which bothers many people and I have seen it asked again and again. How much money a trader needs to trade for a living?

This all depends on every one’s individual needs but it can be calculated using the reverse process starting with what you really need.

 
So here is my way:
 

According to my needs, all bills, debt, mortgage, etc. I will need $7,000 dollars monthly income to live comfortably.

I have a 50% withdrawal rule. That means that I can withdraw only 50% of the entire monthly income. If I make $3,000 dollars, I can take out $1,500 only.

If I want to take out $7,000 dollars, thus I must make at least $14,000 dollars that month (or more).

Currently, our trading delivers average income which equals to 8.44% of the net liquidation value.

See below table indicating all account metrics such as Net-Liq growth, income growth, equity, and inventory growth:

 
Account metrics
(click to enlarge)
 

It is really great to make 8% to 10% monthly on net-liq amount but it is too aggressive and stretching the account. What if the next month I will not make it? What if I make only 1.5% as might be the case this month?

To be on the safe side I need to plan for the ultra low income!

If I make more, it is OK and I will be happy but if I make little I will have problems to pay the bills.

If we set our monthly income to an ultra-conservative 1.5% number I can be sure that that is a number I can make even when “doing nothing”. OK, not nothing but trading a little.

 
The rest of calculation is simple:
 

$7,000 dollars to take out (50% of monthly income)
$14,000 dollars needed (this would be 1.5% monthly income to net-liq)
14,000 / 1.5 x 100 = 934,000
 

This means, I will need $934,000 dollars in my account to trade for a living. It is a scary number and many people will disagree with me. But we are not done here. I plan on trading using margin. In this case a portfolio margin.

I also do not use nor advocate using all your margin. I typically trade 45% of the entire available buying power (margin).

Thus the number above, the $934,000 net-liq is only 45% of the entire buying power. Thus my account needs to be:

 
934,000 / 45 x 100 = 2,075,560 dollars
 

This looks even scarier than before, but bear with me, we are not done yet. A portfolio margin typically allows you to trade 6 times your own money (depends on the broker).

Taking this horrible number of $2,075,560 divide it by 6 and the result will be $345,926 dollars.

 
Here is my target number I need to have in my account to trade for a living comfortably! $345,926
 

 

 · Second job

 

You may get a different number. You may settle with a smaller number because you want to be more aggressive. But I want some security in my income too. I trade aggressively and I will be trading aggressive as long as my brain, overall health and mental conditions, and TIME allow it.

But if there will be time when our trades get busted or I will not have enough time to trade, I want to have reserves. I believe, this calculation and the resulted number will provide that.

If not, I will adjust this number accordingly.

As of now though, I decided to take a second, part time job.

It is killing me as now I work from 8:30 am until 10:00 pm every day (that means my full time + part time job) and I have little to no time to post on this blog.

But all additional money I make I pay off my debt and the rest is saved to our trading account. And that is what makes me happy because I am now getting even closer to my goal although it will take longer than I wished for.

 
What do you think? Is this realistic?
 
 





6 responses to “How much money to trade for a living?”

  1. easydividend says:

    Hey Martin,

    Really interesting!

    Every time I am impressed by your average yield.

    I am trading short puts on dividend stocks i want to own, without the additional call side as your strangles.

    For me there will be also something between 200-300k portfolio value to trade for a living.

    I calculate my conservative trading income at 1-2 percent per month.

    for a living i will not need that much like you. I think 5000 euro each month would be very nice, but I will not use everything from it. my withdraw will be something between 2000-3000 euro each month, maybe less.

    I am working on some additional sources of income. :)

    keep up the great work!

    best regards

    Chri

    • Martin says:

      Chri, thanks for the kind words. Your strategy is perfectly OK. Sometimes I wish I only had put side on but it works both ways. You can get busted on any side anytime. The key is to know what to do with it.
      I wish I could do more with my account but this is what it is and I have to deal with it.
      Thanks for stopping by.

  2. That’s an interesting analysis. You seem to know what you’re doing. Well done. Do you really think something like this is viable?

  3. Chris says:

    Your definition of part-time is 13.5 hour days? wow

    • Martin says:

      No, the time I posted includes my full time + part time job. So Nowadays I work from 8:30 am to 5:30 pm (full time) and from 5:45 pm to 10:00 pm (part time). Total 60+ hours a week (because in the part time job I have a few overtimes).

      I thought that the context “by adding a second, part time job” to my regular job and thus “working from 8:30 am to 10:00 pm every day” was somewhat clear… I will correct it to make it clearer.

      Thanks for stopping by.

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