How to Become a Full-Time Trader
By Dale Gillham |
Some time ago, I received an all too familiar phone call. It was a gentleman who had been trading the stock market. Having made some money, he told me he was going to take six months long service leave and trade options to become a full-time trader so he would not have to go back to work.
Other than reading a couple of books, he had no education in the stock market and had simply made money in a very bullish market. This is a common theme among traders who believe they are invincible after taking profits from the stock market over a short period of time, particularly when the market is bullish. But his behaviour does explain why most traders fail when it comes to trading the stock market. So what do you think his chances were of becoming a successful full-time trader if he took his long service leave and did nothing more to educate himself?
Statistically, anyone trading options has less than a 5 per cent chance of being successful in the long term, but that aside, even if he were to trade stocks, what do you think his chances would have been? At best guess, I would have said less than 50 per cent, although, if I am truly honest, I believe it would have been less than 30 per cent.
If you intend to create a lifestyle from trading full-time, you need to follow the “Be, Do, Have” principle. You need to BE a full-time trader, DO what a full-time trader does, and then you will HAVE what a full-time trader has.
The journey to becoming a full-time trader
Embarking on a journey to becoming a full-time trader can be both exciting and challenging. The prospect of financial independence, flexibility, and the thrill of navigating the markets can be a powerful motivator. However, it's important to recognise that successful trading requires dedication, education, and a well-defined strategy.
Unfortunately, I know most people who want to trade the stock market for a living would prefer not to hear this, but it can take up to two years for anyone to become a full-time trader, if not longer.
Knowledge is everything in the context of trading. The streets are littered with wanna-be traders and, in a bull market, many are profitable through sheer luck rather than sound knowledge.
To be a full-time trader, you need to combine a high level of knowledge with experience; without this, your probability of success over the long term is very low. When you leave work to trade full-time, you no longer have the security of a regular income. This means your attention is often focused on making profits from every trade to pay the bills.
This need for survival often results in the trader trying to trade more to make up for any trading losses or because they are unable to meet their day-to-day financial needs. Consequently, a spiral of increased pressure begins, resulting in the trader taking higher risks to get back on top. Unfortunately, because of their lack of knowledge and experience, many end up back at work.
Being a full-time trader does not mean you work every day. It simply means that your trading is paying for your lifestyle. This is a very important distinction and one I recommend you ponder on if your goal is to trade full-time. Trading is about creating a lifestyle, not making it your lifestyle.
Hence, if your goal is to replace your income of $100,000 a year, it does not mean you have to make around $2,000 a week from trading. It just means your total trading profits over one year need to equate to $100,000. Looking at it like that, rather than the micro-view of generating $2,000 a week, will make a dramatic difference to your trading psychology and how you trade the market.
Managing risk: capital and percentage return
Another very important point is that you should only subject yourself to the amount of risk you need to achieve your goal(s). For example, if you have $500,000 to invest and you need an income of $50,000 a year, you only need a return of 10 per cent. Just buying the top blue chip shares over the medium to longer term should deliver this income in a reasonable market.
If you only have $100,000 to invest and you still require $50,000 in income a year, you will need to generate a 50 per cent return on your capital. Therefore, you will need to trade shares that assist you in producing this return or use leverage in your trading plan.
If your goal is to trade full-time, I highly recommend you prove to yourself that you can not only trade but also make the sort of income you want from trading while still working. And you should do this for an absolute minimum of six months although 12 months is preferable.
Now, I can hear some of you saying, “But if I give up work, I will have more time to trade and, therefore, I will naturally get better returns.” My response to this is: prove it. It simply does not work that way.
If you can replace your income from trading while still in a full-time job, not only will your confidence increase but you will have built up a sum of money to draw on when you do finally go on to be a full-time trader. Having this “safety" margin is one of the smartest plans you can have, as well as being one of the main strategies for building wealth.
Set up a safety margin
What exactly is a "safety" margin? It is simply a fail-safe plan in case things go wrong. For example, if you use leverage to invest, you could avoid using all of the available funds that the lender provides.
If you want to be a full-time trader and trade for a lifestyle, then 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 attempting to trade full-time without enough cash to support themselves end up trading short term and taking higher risks. But this only results in making trading decisions based on the need to derive an income rather than on good trading techniques. Consequently, they exit trades when they should hold or enter trades in the hope of a quick profit. However, you should never place yourself in the position of relying on emotional decisions, as this is a trader’s greatest downfall.
One of the biggest misconceptions about becoming a full-time trader is that you need to trade short term. If your capital limits you to trading this timeframe, I recommend 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 regardless.
Setting up your portfolio
The best way to set yourself up if you want to trade full-time is to follow my four golden rules to investing. This involves allocating 90 per cent of your capital to a medium to long-term portfolio that will perform year in and year out, and allocating the remaining 10 per cent to short-term trading to generate cash flow. This ensures you are protecting your capital by not subjecting the majority of it to high-risk trades.
For example, if you have $200,000 in capital and you need to make $50,000 in income, your asset allocation would be $180,000 in a safe, medium-term portfolio, with the average trade length between seven and eighteen months. If you averaged a 12 per cent return on this portfolio each year including dividends, you would receive $21,600, which means you only need to make $28,400 from your short-term trading account. Therefore, the $20,000 in capital allocated to your short-term trading needs to generate, on average, just over $2,366 per month.
Now let’s assume you decide to use leveraging to trade short term, which in some markets allows you to leverage ten times your capital. This means you would have $200,000 to invest. Therefore, if you trade a stock using leverage, it only has to rise around 1.5 per cent in a month for you to make around $2,366 per month, assuming you only invest 80 per cent of your available capital ($160,000) for short-term trading in four leveraged positions to minimise your risk.
This strategy is not only very achievable but, more importantly, very repeatable for someone who has acquired the knowledge and skill and has the experience.
Some instruments, such as Forex, allow you to trade on a margin of 1 or 2 per cent, although this is not recommended unless you are extremely proficient as a trader and have the time and knowledge to manage this risk. That said, if you allocated $20,000 to trade on a margin of 1 per cent, you would have $2 million in your short-term trading account. To achieve the same return trading on a margin of 10:1, all you would need to do is move the decimal point by one place, which means the trade only needs to rise around 0.15 per cent in a month for you to make around $2,366 per month. This assumes you have only invested 80 per cent of your available capital for short-term trading in four leveraged positions.
Consider going part-time before deciding to trade full-time
People often want to start trading the stock market because they are sick of working full-time and desire a change in their lifestyle. Getting up at 6 a.m. is not exactly exciting, especially when working for a company that does not pay well or appreciates your efforts. If you desire to have the profits from your trading pay for your lifestyle, I recommend you transition to trading full-time by working part-time rather than giving up work entirely. This has huge benefits, as your psychology will slowly adjust to being less dependent on a steady income stream.
Working part-time will also allow you to transition to a life of deriving your income from trading. Funnily enough, people find they crave work again after they leave.
At a recent Art of Trading workshop, a client shared how he was in the process of decluttering his life while transitioning to trading for a lifestyle. He had reduced his hours at work, and on his days off he was honing his trading skills to enable him to replace his income in its entirety. He also shared that in the process he was selling things he did not need and downsizing his living arrangements so he could travel and enjoy the benefits of his new lifestyle.
It’s worth mentioning, however, that trading for a lifestyle is not for everyone; it can be lonely—you are home alone while your friends are at work, and this can lead to boredom. Some people I know have taken up hobbies or charity work to keep themselves occupied, while others have gone back to work even though they were successful in generating sufficient income from their trading to maintain their lifestyle. Before you leap, it is important to consider the changes that will occur in your lifestyle.
The transition to trading for a lifestyle is a journey; it is not something that happens overnight. Some people find when they get there that it is the best thing they have ever done, while others find it is not for them. Whether you ultimately decide to trade for a lifestyle or not, the most important point is that you enjoy and profit from the journey.
Navigating the path to becoming a full-time trader
Before we finish up, let me share the steps you need to take to help you navigate the path of how you can become a full-time trader:
Step 1: Undertake a self-assessment
Begin by evaluating your current knowledge and experience in trading the stock market and identify the financial goals you want to achieve. You also need to assess your risk tolerance, time horizon, and capital available for trading. It's critical to have a clear understanding of your objectives and limitations before diving into trading.
Step 2: Gain an education
Invest time in gaining an education. If you are serious about trading full-time, you will need to develop your skills in technical and fundamental analysis, as well as money and risk management, and how to manage your trading psychology. Look for valuable resources like a professional trading course that will support your learning journey and above all check if they have case studies of students who have transitioned to full-time trading.
Step 3: Choose your trading style
Based on your goals, time commitment, and risk tolerance, select a trading style that aligns with your preferences. The majority of those who trade the stock market rely on traditional technical analysis tools that are computer-generated. However, I can say from experience that these tools are lagging indicators because they confirm a move in the market (or stock) after it has already taken place.
As the market is an emotional barometer, you require tools that alert you to a change in the market before it happens, which is why I prefer to use classical technical analysis. These tools have been around for over 100 years and are tried, and tested. It includes the classical techniques of Dow Theory, Gann Theory, and trend lines, among others.
Step 4: Develop a trading strategy
Identify your trading edge and create a strategy that incorporates your entry and exit rules, risk management, and position sizing. A well-defined trading plan will help you stay disciplined and make more informed decisions.
Step 5: Master your risk management techniques
Managing risk in the stock market is critical to your long-term success. Therefore, it's important to implement sound risk management practices, such as using stop-loss orders and maintaining a healthy risk-to-reward ratio, to protect your trading capital and minimise losses. The more you protect your capital, the more money you have to compound your returns.
Step 6: Start with a small trading account
It's better to start with a small trading account than to go into the stock market with guns blazing. You can gradually increase your trading capital as you gain experience and confidence. The benefit of this approach is that it will help you manage your risk and prevent significant losses as you develop your strategy.
Step 7: Practice and refine your techniques
Before committing to real capital, practice your strategy using a demo account or by paper trading. I know some of you will say that you can’t test your trading strategy unless you put money in the stock market, but this is simply not true. You wouldn’t jump out of an aeroplane if you didn’t know your parachute wasn’t going to open. The same analogy applies – don’t jump into the stock market unless you know your trading strategy is going to work on a consistent basis. Use this opportunity to identify any weaknesses in your strategy and refine your approach.
Step 8. Keep a trading journal
A trading journal can help to keep your psychology in check. You should use it each time you trade to record your entry and exit points, your stop loss and the reasoning behind the trade including your emotions, and the outcome of the trade. It's a good idea to regularly review your journal to identify any patterns, to learn from your mistakes, and as a guide to improve your decision-making processes.
Step 9: Transition to full-time trading
Once you have built a consistent track record, you can start gradually increasing your trading capital and transitioning to full-time trading. Remember, you need to ensure you have set a safety margin in case something goes wrong. While the process may take some time, be patient and focus on the progress you are making.
Step 10: Refine your trading strategy
Trading successfully requires ongoing learning and the ability to adapt as the markets change. That’s why it’s important to keep abreast of market developments and ensure you review your trading performance regularly to refine your strategy as needed.
Remember, becoming a full-time trader is a marathon, not a sprint. Stay committed to learning, maintain discipline, and be prepared to face the inevitable ups and downs of your trading journey. With persistence and the right approach, you can achieve your goals and enjoy the rewards of a full-time trading career.
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- How to Identify and Trade Market Trends
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- Trading Strategies that Work in Bull and Bear Markets
- How to Sack Your Boss and Trade Full Time
To learn some simple but powerful strategies to support you profit from the stock market, purchase my latest award-winning book Accelerate Your Wealth, It's Your Money, Your Choice.