I first started trading, I asked trader extraordinaire, Gary B. Smith,
what I needed to succeed in trading? After a few e-mails concerning
trading methodology and money management, he gave me The Answer. To
succeed and give yourself enough time to “learn how to trade”, you
source of income.
A large nest egg
that can handle the kids' college education and other big outlays.
spouse, friend, partner or significant other.
And twice the
amount of starting equity you think is necessary.
Before getting to the real stuff, let me digress here. For those few
of you who do not know of Mr. Smith, columnist for TheStreet.com, a
regular on Fox TV’s Bulls & Bears, and all time nice guy, you are
either new to trading or just landed on the Earth from another planet.
If you want to succeed in this business, I would suggest that you get
and subscribe to his daily columns and his newsletter at
how much money do you need to trade successfully?
There is no magic number. There are many factors to consider, not the
least of which is your own personal discipline and ability to stick
with a system.
way of determining how much money you need to trade with is to decide
how much money you need to stop trading. Would you stop trading if you
had a million dollars, two, or ten? If that’s the case, you could use
one of those financial calculators and figure that if you need “X”
amount of money in the future and you will trade for 15 years at an
annual percentage return of “Y”, you will need to start with “Z”
amount of money. Simple.
reminded of a line from Alice in Wonderland:
"Would you tell
me please which way I have to go from here?"
"That depends a good deal on where you want to go,' said the cat." Lewis Carroll
much money you need depends on where you want to go. There is no
dollar amount too little or no dollar amount too much. If your trading
method has a positive return (and why would you would use a method
with a negative return?) and if you trade long enough, you can retire
with more money than you can even imagine.
also reminded of another line, this time from the British economist
“In the long run, we are all dead”.
enough quotes. Not to sound morbid, as traders we have to remember
that we do not have an infinite amount of time to compound our money.
We pay our bills every month.
I started to trade, I was concerned with how much money I needed to
replace my income from my now previous job.
Let's assume that your current income is $8,000 thousand dollars a
month or $96,000 a year, and your goal is to replace that by trading.
As a trader, you now have expenses related to your new profession, not
the least of which includes computers, software, stock quotes,
magazines, seminars, books and a lot more. Suppose this come to $400
per month, or about $4,800 per year. You need to bring home $100,800
thousand in trading income.
Now you need to estimate your return on your equity. Think you can
generate 40 to 60% per year? Think again. The major Masters of the
Universe such as Paul Tudor Jones and George Soros don’t do that on a
regular basis. Some of the mortal traders such as Warren Buffet or
Peter Lynch (O.K. they call themselves investors) only average a mere
29 to 31% a year. I personally eked out 8% my first year of trading.
Let's make your mother proud and say that you're better than most new
traders and you can net 20% in your first year of trading. That means
you need at least a grub stake of $480,000. Ouch! Much more than you
thought…much more than you have. That brings us back to the above Gary
B. Smith Rules. First, no one said you had to quit your day job. Keep
you regular income until you are more proficient at trading and until
you have more money saved. Second, even when you have the trading
experience it pays to have a supportive spouse, both emotionally and
So, hopefully sometime in the future you are at the point where you
can pay your bills. If you are like me, you would like to save some
money and have your trading equity increase every year. Hmmm,
inflation, vacations, and I hate to think about college expenses.
Let’s add $15,000 to those yearly expenses. That makes your needed
income $115,800, and with a 20% return, your initial stake goes to
$579,000 thousand. Double Ouch.
But what if you are not as good as you thought or don’t have all
those “beginner mistakes” out of your system? Let's say that 20% turns
into 16%. Now you need $718,000 to get to your goal of $115,000.
If you can do
better than 20%, great. That will definitely make your trading life
easier. But remember, that's 20% year in, year out. A 60% up year,
followed by a 25% down year only averages out to be 20% per year.
However, on a compounded basis, that still only works out to a mere
Remember, it can
be done. There are thousands of traders working part time and full
time from home and making a good living. Don't get discouraged, work
hard and study.