If you can replace your income from trading while at a full time job, your confidence will not only increase but you will have built a sum of money to draw upon when you do finally go on to be a full time trader. This ‘safety’ margin is one of the smartest plans you can have as well as one of the main strategies for building wealth.

Fail Safe
What exactly is this ‘safety’ margin? It is simply a ‘fail safe’ plan in case things go wrong. For example, if you use leveraging to invest, you may avoid using all of the available funds that the lender provides. To be a full time trader, having a safety margin means having enough cash in the bank to sustain your lifestyle for at least 6 to 12 months. This will give you more options when something does go wrong.  

All too often I see traders who attempt to trade full time, without enough cash to support themselves, trading short term and taking higher risks. This only results in making trading decisions based on the need to derive an income rather than on good trading techniques. Consequently, they end up exiting trades when they should hold or entering trades in the hope of a quick profit.

One of the biggest misconceptions about becoming a full time trader is that you need to trade short term. If your capital only limits you to trading short term, I suggest you revert to my original proposed strategy of trading while working full time. Failure to do so will place you at high risk of losing your capital and ending up back at work.

Portfolio Set Up
The best way to set yourself up if you want to trade full time is to have a portfolio of good ‘medium to long term’ shares that will perform year in year out. If you then want to trade short term, I recommend you only use 10% of your total capital. This ensures you are protecting your capital by not subjecting the majority of it to high risk trades. Remember that the amount that is allocated to short term trading does not have to replace your income but rather supplement your total portfolio.

For example, if you have $100,000 in capital and you need to make $50,000 in income, your asset allocation could be $90,000 in a safe medium term share portfolio with the average trade length between seven and eighteen months. If you averaged a 25% return on this portfolio each year including dividends, then you would receive $22,500, which means you only need to make $27,500 out of your short term trading account. Therefore, the $10,000 capital in your short term trading account needs to generate on average just under $2,300 per month or slightly under 25% of your capital each month.

Now let’s assume you decide to use CFDs to trade short term, which allows you to leverage 10 times your capital. This means when you trade a share using CFDs, it only has to rise 2.5% in one month for you to make 25% on your capital. This is very achievable, and more importantly, very repeatable for someone who has acquired the knowledge and has the experience.

Part-Timer
People often want to trade the market because they are sick of working full time and want a change in their lifestyle. Of course getting up at 7.00am is not exactly wonderful especially when working for a company that does not pay well or appreciate your efforts. Thus, l suggest that as you transit to be a full time trader, move into part time work instead of giving up work entirely. This has huge benefits as your ‘psychology’ will slowly adjust to be less dependent on a steady income stream.

Working part time will also help you transit into the life of a trader, and many people find they actually crave work again after they leave. Being a full time trader can be lonely–you are ‘home alone’ while your friends are at work and this can lead to boredom. Some I know have taken up hobbies or charity work to keep them occupied, while others have gone back to work even though they were successful trading full time. Therefore, before the leap, it is important to consider the changes to your lifestyle as well.

Becoming a successful full time trader is definitely a journey and not something that happens overnight. Some people find that when they get there, it is the best thing that they have ever done and yet others find it is not for them. Whether you take up full time trading or not, the main thing is you enjoy and profit from the journey.   

This entry was posted on Monday, January 21st, 2008 at 12:14 pm under Articles.

Related posts:

• So You Want to Be a Share Trader. Part 1
• Selling Shares for Profit or Just Selling Out, Part 2.
• Selling Shares for Profit or Just Selling Out. Part 1

Print This Post
EMail This Post