Is It Possible to Make a Living Trading Stocks?
What You Need to Know About Trading for a Living
One of the questions I get asked on a regular basis is, “Can you make a living trading stocks?”
The idea that you could quit your job and support yourself just by trading stocks is fascinating. It seems like an impossible fantasy. So you can imagine their shock when I tell them that it is possible to make a living trading stocks. But is it probable? That's the real question.
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 make it, but the vast majority just blow their accounts up. Studies on day trader performance have shown that most lose money over the long term.
Still, I know people who make a good living trading stocks and who have done it successfully for years. I’ve seen people literally sit on a tropical beach, or in a mansion high up in the Hollywood Hills, armed with only a laptop and an internet connection, who can carve out a living from the market. And that, of course, it the allure of trading for a living: freedom.
Freedom to be your own boss, 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 skill set and risk tolerance that most people just don’t possess.
Being able to day trade for a living successfully means reaching a level of excellence that most people will never achieve, no matter what career they choose. It’s the difference between being a movie extra and an Oscar-winning actor. Between playing in a pick-up football game in the park and being the Superbowl MVP. Between a weekend musician and a rock star.
What I'm saying is that it is more of a dream for most people than a reality, and though I would never discourage someone from pursuing their dream, it’s important, if you want to pursue day trading for a living, to go into it with your eyes wide open.
Getting Ready to Trade
First, you want to spend some serious time educating yourself about everything you can related to trading. You want to be a day trader look for short-term gains, not an investor seeking long-term profits, so put in the hours necessary to give yourself a strong understanding of the world you're about to enter. The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Internal Revenue Service (IRS) all offer valuable information for day traders. Introductory books on strategies and theories will help you get acquainted with the playing field.
Then, you'll need to have a sound trading methodology, one that takes advantage of volatility, yet always keeps risk management as its core principle. Ideally, this methodology should be tested over months or years, in all different market environments, first with a demo account and then with real money.
Financially, I always 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, in amounts that vary depending on the kind of day trading you'll do – but money that you will use to pay your living expenses, including for 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.” You'll also need to have a record-keeping strategy ready for tax season.
Psychologically, you will need to steel yourself for the income inconsistency that will likely accompany your trading.
The goal when trading for a living is of course to have a reliable and consistent revenue stream, but that will take time, diligence, and luck to achieve. Having to bear the daily fluctuations of your income can be tough on the psyche.
The speed, fluctuations, adrenaline, and comparatively high loss ratio relative to investing can be jarring for new day traders. This runs against our basic human impulse to “win” as much as possible. You'll need patience and cool-headedness; otherwise, the stress of day trading can wreak havoc on your emotional well-being.
These are just some of the things you have to be aware of if you are going to try to make a living trading stocks. And though the odds are against your success, if you're one of the few who can master this art, you'll enjoy excitement, independence, and financial rewards.