Is It Possible to Make a Living Trading Stocks?
What You Need to Know About Trading for a Living
Stock enthusiasts commonly wonder whether it's possible to make a living trading stocks. The idea that you could quit your job and support yourself just by trading stocks is fascinating. To some, it seems like an impossible fantasy, but it is possible to make a living trading stocks—the real question is if it's probable.
Novice investors, buoyed by their success with paper trading simulations, may take the leap of faith and decide that they're going to earn their living from the stock market. Some find success, feeding fantasies of sitting on a tropical beach, making a killing with nothing more than a laptop and an internet connection. However, many people who independently trade for a living use day trading strategies, and studies have shown that the majority of day traders lose money over the long-term.
That, of course, doesn't diminish the allure of trading for a living: freedom. Freedom to be your own boss, to work where and when you want, and to be financially secure.
The reality is that trading for a living is a tough job, one that requires a very specific skillset and risk tolerance that most people don’t possess.
Trading Requires Discipline
Being able to successfully trade for a living means achieving a level of focus and discipline that most people will never achieve, no matter what career they choose. This is as opposed to traditional investors, who buy relatively safe products and let their equity grow over decades. You can think of it as the difference between being a movie extra and an Oscar-winning actor.
The point here isn't to discourage someone from pursuing their dream. If you want to pursue day trading for a living, it’s important to go into it with your eyes wide open.
Day traders who work from home may not have a "boss," but this isn't a good career choice for those who want flexible, low-key workdays. Day traders live and die by their trading schedules and plans. They diligently take notes on their watchlist stocks at predetermined times throughout the day.
When a profit target on a trade is reached, a successful trader closes the position without hesitation or temptation to hold on in hopes of even more profit. On the other hand, when a trade turns bad, professional traders calmly cut their losses and close the position.
Get Educated About Trading
Before you quit your day job, spend some serious time educating yourself about everything related to trading. You should be familiar with just about every type of trading that goes on in the markets, but as a day trader, you should emphasize short-term strategies and the securities that work best with those strategies.
The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Internal Revenue Service (IRS) all offer valuable information for traders. Introductory books on strategies and theories will help you get acquainted with the playing field.
Once you understand the theories, products, and institutional players in the markets, spend some time testing your knowledge with a paper trading simulator. You shouldn't make the leap into a full-time trading career until you've maintained ample profitability through a variety of market conditions on a trading simulator.
Choose a Good Trading Strategy
To get started trading, you'll need to develop a sound trading methodology that takes advantage of volatility without forgoing risk management principles. Again, this methodology should be tested over months or years and in all different kinds of market environments. Start with a demo account, then ease your way into trading with real money. Slowly swap out simulated positions with actual, risk-taking positions.
Set Aside Some Income
Trading for a living does not lend itself to a "rags to riches" story. Whether you plan on day trading or not, you'll need a significant amount of capital just to get started as a professional trader.
Many experienced traders suggest having at least one year’s worth of income set aside before you start. This is not the bankroll that you will trade with—you'll need separate capital for that. These funds should be set aside purely for your living expenses like housing, insurance, and food. Having this financial cushion will give you peace of mind, allowing you to begin your new career without the pressure of having to trade to “make the rent.”
Even when it comes to capital for your brokerage account, day traders need significant capital to trade in earnest. FINRA has special requirements for "pattern day traders," who are defined as those who open and close a position on the same day at least four times per week. In other words, if you want to day trade every day, you're a pattern day trader.
FINRA mandates that pattern day traders must maintain a brokerage account balance of $25,000. That's $25,000 on top of the year's worth of income you've set aside. In addition, you'll have to do your day trading in a margin account, though it isn't difficult for most traders to open this kind of brokerage account.
If you don't plan on day trading, but you still want to make a living trading, you'll need to make every trade worth more. Since you won't be able to execute as many trades, each trade needs to be for a significant sum—and the more money you put into a trade the more you expose your portfolio to risk.
You'll need to have a record-keeping strategy ready for tax season.
Prepare Yourself Mentally
Professional traders need to leave emotion out of their trading. Psychologically, you will need to steel yourself for the severe financial losses that typically accompany the first few months of day trading. The only way you can move past those losses is to approach them with calculating reason, rather than emotion. Learn from your mistakes without getting caught up in emotional highs and lows.
The goal when trading for a living is to have a reliable and consistent revenue stream, but that will take time, diligence, and luck to achieve. Not everyone has the mental fortitude to work up to the point where they have a consistently profitable strategy. Watching the daily fluctuations of your income can be extremely tough on the psyche, especially when it's a sustained experience that lasts months.
The combination of speed, volatility, adrenaline, and losses can make day trading a jarring experience for newcomers. You'll need patience and cool-headedness in the face of repeated losses; otherwise, the stress of day trading can wreak havoc on your emotional well-being.
The Bottom Line
These are some of the basic things to be aware of if you are going to try to make a living trading stocks. To be blunt, the odds are against your success, but diligence, discipline, and capital can tilt the odds a little more in your favor. If you're one of the few who can master this art, you'll enjoy the excitement, independence, and financial rewards.