After the article in the last Newsletter, I received some
interesting questions on the blog. One full time trader asked a couple
of questions I frequently hear from both full time and part time
traders. The first question is how much money does a full time trader
need to trade? I should add that this question is also an important one
for part time traders as well. As with so many issues in trading, there
is no general definitive answer. It is a question I often address in
the one-on-one coaching sessions in conjunction with money management
and expectation issues. Since we are all different, the question can
only be answered for the individual.
For example, if an individual is
wealthy and has no need for additional income, his answer is likely to
differ substantially from the full time trader who is actually trading
for his livelihood and needs regular income to pay the bills. For the
full time trader who is earning his livelihood through trading, there
are several issues he must confront. One way to look at it is to
determine how much money he actually requires for living expenses each
month or each year and then make a reasonable and conservative
approximation of the return he expects taking into account that some
positions will, undoubtedly, be losers. If the trader needs $40,000 a
year as a minimum for living expenses and predicts that he can
reasonably generate a 10% net return a year, he will need a $400,000
trading account just to fulfill his cost of living requirements. Great
care must be taken in evaluating potential return and there is a great
danger that a trader may overestimate the returns he will generate. In
most cases, a belief that he can achieve a return much greater than the
S&P, for example, is probably not realistic. The trader must also be
aware that he could break even or lose money trading over the course of
any given period of time so some cushion should also be maintained.
Recently, a friend who is approaching retirement told me he was
quitting his job and going to trade for a living. He was earning about
$65,000 a year at his job and has no pension. I asked him how much
money he had to trade and when he told me around $250,000, I encouraged
him to keep the day job. In order to equal the $65K a year, he would
have to achieve better than a 25% a year return and while that is
possible, it is highly unlikely in my estimation, especially for an
inexperienced trader. Thankfully, he took my advice and is trading on
the side.
The part time trader who has another job also needs to consider how
much trading money he needs. Under funding can be a big problem because
too large a percentage of the trading capital may be needed to enter a
given trade. Consideration must also be given to the strategies being
utilized since it is likely that someone who just trades stock may need
a lot more in the account than someone who is trading options. In my
book, "Trade Your Way to Wealth", I emphasize that trading is a business
and I devote a great deal of time to the specific and detailed
considerations an individual must make in setting up their personal
trading business plan. Formulating that plan is as critical to good
successful trading as is a foundation to a good house. Remember the
childhood story about the pigs who built houses of various materials
from straw to brick and what happened to each when the wind came?
Spending serious time creating your plan as outlined in "Trade Your Way to Wealth" can assist (though it is no guarantee) in the effort to build
a solid trading business. Failure to expend the time and effort to
create that plan almost certainly will lead to a "straw house" business
that is much less likely to weather the storms of trading.
The other question the trader asked me to address was
diversification and "how many issues are a good mix." I'll try to take
a look at that next week.
Both of these questions are quite commonly addressed in my coaching sessions and I have seen that some traders tend to gloss over them. I
suggest each is worthy of your study, consideration, and incorporation
in your trading plan if you are serious about trying to improve your
trading results.
You can comment on this article on my blog!
Good Trading!
Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader
"Trade Your Way to Wealth" by Bill Kraft is an Amazon.com best seller!
Mr. Kraft's past articles are posted on our website for your review.
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Feel free to sign-up for a free 30-day trial. During such time you can review our Trade Table and see the type of stocks we are buying. You will also receive all the new investing alerts we send during your trial period. Again, many of the stocks that we will be buying in our Dividend Investor service raise their dividends almost every year. Year after year! This is powerful. Don't miss out on this service!
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Success Trading Group Trade the same stocks over and over. 340 trades with only 9 losses on our Main Trade Table!
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Covered Calls Conservative option writing -- Allowed in your IRA!
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