Capitalization and Trading for a Living

[Mr. Charts]

techst@,
Yes it can be done - but it isn't as easy a road as some think - enjoying it helps though
Rizwanuk,
You have email explaining more

Richard

 

[Chagi]

I think that this is a very difficult question to answer, but here are my thoughts.

Personally my current situation and future plans are as follows. Right now I'm finishing up my commerce undergrad degree, have another 1.5 years or so to go, trading fairly lightly over the past few months since I opened up my first trading account in August. I'm going to be switching brokerages in the new year to a much cheaper alternative, the new account will also be a margin account instead of a cash account.

I plan to continue trading part-time with relatively small amounts of funds until I'm finished school, at which point I have a few alternatives:

- work full time, trade very little for the purpose of investing
- work part-time, focus on trading while still maintaining a dependable level of income
- focus exclusively on trading

I currently think that the most realistic option if I wish to focus on trading will be to continue working part-time, since my working hours do not interfere with the North American equity market hours. This would take some of the pressure off trading, since I would earn enough part-time to take care of the basic necessities. I think that I would need/want a back-up fund of at least one year's expenses before I would feel comfortable migrating to full-time trading.

As for dollar amounts necessary, I think that $50K or so in USD would probably be necessary as a minimum to utilize for full-time trading. I think I need more trading experience though before I can make capital requirement estimations, since this obviously depends a great deal on what I view as realistic monthly ROI for a trading account.

 

[starspacer]

Just to add some extra thoughts to these excellent posts....

I started trading (whilst working) about 10 years ago. I didn't want to give up the job at that time since I had negligible savings and it didn't seem feasible. Also, emotionally, losses didn't really seem to matter as I could always tighten the belt and save up enough to start over again. What I gained though was significant experience in actual 'money-on-the-line' trading. The only way I have been able to learn (unfortunately) is through trading with actual money and feeling all the emotions that go with it. My biggest breakthroughs have been through dissecting my (many) mistakes and tightening up on money management, specifically letting profits run and cutting losses quickly.

I then decided to ditch the job about a year ago to trade full time. Having read hundreds of books and probably thousands of articles on trading, I got the firm impression that you needed above 100k to really 'make it'.

After having paid all the bills, living expenses, foreign holidays etc, I have NEVER needed to draw on more than £20k so I think whilst it's nice to have a good cushion, with good discipline, it is possible to do and make a very good living.

 

[Chagi]

Just to add some extra thoughts to these excellent posts....

I started trading (whilst working) about 10 years ago. I didn't want to give up the job at that time since I had negligible savings and it didn't seem feasible. Also, emotionally, losses didn't really seem to matter as I could always tighten the belt and save up enough to start over again. What I gained though was significant experience in actual 'money-on-the-line' trading. The only way I have been able to learn (unfortunately) is through trading with actual money and feeling all the emotions that go with it. My biggest breakthroughs have been through dissecting my (many) mistakes and tightening up on money management, specifically letting profits run and cutting losses quickly.

I then decided to ditch the job about a year ago to trade full time. Having read hundreds of books and probably thousands of articles on trading, I got the firm impression that you needed above 100k to really 'make it'.

After having paid all the bills, living expenses, foreign holidays etc, I have NEVER needed to draw on more than £20k so I think whilst it's nice to have a good cushion, with good discipline, it is possible to do and make a very good living.

I agree with your post completely, I have already learned some very valuable lessons over a few short months of trading, quite glad that I'm currently only trading with small amounts of money.

Having spent a great deal of time learning as much as possible on the Internet, I'm now focusing on reading some of the published literature during my spare time (I'm a University student). The best I have read so far is amazingly enough roughly 80 years old - Reminiscenses of a Stock Operator, it contains some very good advice regarding trading psychology.

If I may ask, did you mean that you trade with an account of roughly 20K (in pounds)? I definately agree that risk management is crucial, there is no reason to let losing trades run, or (worse yet) add to them.

 

[starspacer]

Having spent a great deal of time learning as much as possible on the Internet, I'm now focusing on reading some of the published literature during my spare time (I'm a University student). The best I have read so far is amazingly enough roughly 80 years old - Reminiscenses of a Stock Operator, it contains some very good advice regarding trading psychology.

If I may ask, did you mean that you trade with an account of roughly 20K (in pounds)? I definately agree that risk management is crucial, there is no reason to let losing trades run, or (worse yet) add to them.

Yes, Reminiscences is one of my all time favourites. I recommend getting Smitten's recent book: "Trade Like Jesse Livermore". This has more pearls of wisdom than any other book I know of.

Livermore did shoot himself with a balance of $10,000 in his will (he had however, previously placed some millions in what we would call irrevocable annuities for his wife and children). Unfortunately, he suffered from severe clinical depression which was not treatable in his day. So, in my view, the fact that Livermore died 'broke' does not detract from his amazing trading ability. He also had, at one stage accumulated a reputed fortune of $100m (and this back in the 1920s/30s)!

The £20k I mentioned is usually split into two trading accounts, 1 earning interest, the other not. Now that I think of it, I believe that over Christmas I had 25k in 1 trading account as I had some big (for me) positions on, however the margin requirement , as I recall was far less than this. I also have credit accounts with a number of SB firms and occasionally trade there but without depositing funds.

Strangely enough, I found that the single toughest thing to do was to sit on a large profit and resist the temptation to close my position. This, above all else, changed me from a 'go nowhere trader' to a profitable one.

 

[henry766]

i believe frugi is halfway there , the answer isn't in the question , the answer is to trade profitably , surprisingly rare , like frugi says if you win and you know how to, you can gear up, day trade , beg borrow or steal , trust me , you win 3 out of 4 you'll find a way to make it work , conversely i bet there are many inherited fortunes , millions , of hard earned dollers frittered indulgently on the vanity of future generations, tim nice but dim has apparently started his very own hedge fund!!

 

[Chagi]

Yes, Reminiscences is one of my all time favourites. I recommend getting Smitten's recent book: "Trade Like Jesse Livermore". This has more pearls of wisdom than any other book I know of.

Livermore did shoot himself with a balance of $10,000 in his will (he had however, previously placed some millions in what we would call irrevocable annuities for his wife and children). Unfortunately, he suffered from severe clinical depression which was not treatable in his day. So, in my view, the fact that Livermore died 'broke' does not detract from his amazing trading ability. He also had, at one stage accumulated a reputed fortune of $100m (and this back in the 1920s/30s)!

The £20k I mentioned is usually split into two trading accounts, 1 earning interest, the other not. Now that I think of it, I believe that over Christmas I had 25k in 1 trading account as I had some big (for me) positions on, however the margin requirement , as I recall was far less than this. I also have credit accounts with a number of SB firms and occasionally trade there but without depositing funds.

Strangely enough, I found that the single toughest thing to do was to sit on a large profit and resist the temptation to close my position. This, above all else, changed me from a 'go nowhere trader' to a profitable one.

Thanks for your answer on that, and I will definately write down that book for future reading. I'm currently reading "The Market Maker's Edge" by Josh Lukeman. I'm finding that the book is somewhat redundant so far, since it covers a lot of material that I already found elsewhere on the Internet. For example, the book covers candlestick charting and trend recognition (i.e. Dojis and such). I also found the business section to be a little boring, I already knew most of the material since I'm a business student, things like measuring ROA, ROE, etc. for a company. The above said, this book will likely make a good trading reference for me to refer to from time to time, and it has an excellent section on risk management.

I suppose that in the long-term it might be nice to have two or three separate trading accounts - one for daytrading, a second for back-up/extra income (with the money invested in "stable" high dividend yield stocks), and a third for tax sheltered retirement purposes. This is somewhat "pie in the sky" though, since it would take quite a bit of money to generate a significant annual return through dividends, somewhere in the range of $200,000 to $300,000.

 

[starspacer]

I suppose that in the long-term it might be nice to have two or three separate trading accounts - one for daytrading, a second for back-up/extra income (with the money invested in "stable" high dividend yield stocks), and a third for tax sheltered retirement purposes. This is somewhat "pie in the sky" though, since it would take quite a bit of money to generate a significant annual return through dividends, somewhere in the range of $200,000 to $300,000.

Gary Smith (who I am a big fan of) started off with $2,000. He traded S&P futures to build his capital up and now trades primarily mutual funds. Last September, his account was approaching $1m and may have exceeded that now as he was long on some junk bond funds (which I believe have done very well).

Once again, I believe it is a myth that someone needs vast sums of money to do well in trading. Having said that, even Smith acknowledges that he would have preferred a much higher capital base.

 

[Chagi]

Gary Smith (who I am a big fan of) started off with $2,000. He traded S&P futures to build his capital up and now trades primarily mutual funds. Last September, his account was approaching $1m and may have exceeded that now as he was long on some junk bond funds (which I believe have done very well).

Once again, I believe it is a myth that someone needs vast sums of money to do well in trading. Having said that, even Smith acknowledges that he would have preferred a much higher capital base.

I would tend to agree. I wish I had higher capitalization, but I still think that I will be able to viably trade once I open an account with a new/better broker (my current one stinks for a variety of reasons).

 

[henry766]

well there you are , said it yourselves , this gary smith you say started with $2000, the object isn't to have a large tradeing account just a larger one!!!

 

[roberk]

Gary Smith (who I am a big fan of) started off with $2,000. He traded S&P futures to build his capital up and now trades primarily mutual funds. Last September, his account was approaching $1m and may have exceeded that now as he was long on some junk bond funds (which I believe have done very well).

Once again, I believe it is a myth that someone needs vast sums of money to do well in trading. Having said that, even Smith acknowledges that he would have preferred a much higher capital base.

Gary Smith sometimes posts on ET - he traded only part-time for the first 7 years while working various jobs such as night watchman . He had to build a lot more than $2000 before he went full-time.

 

[starspacer]

Gary Smith sometimes posts on ET - he traded only part-time for the first 7 years while working various jobs such as night watchman . He had to build a lot more than $2000 before he went full-time.

True enough. His method was to never trade more than 1 S&P contract at a time as he was (and still is) a very cautious trader.

What is particularly impressive about GS is that he has lodged documentary evidence of his trading record with the publisher (John Wiley & Sons) and a 3rd party, Courtney Smith.

I can't think of one other 'real' trader who has done this.

Excuse my ignorance roberk, what is ET?

 

[henry766]

being cautouse isn't a virtue , being profitable is , but it's like i said before , you start winning and you find a way to make it work , you don't give it up when you win , how much you need is not important because nearly all of us have missed this first point.( like that old joke making a million in futures by starting with 10)( whats more when you start winning reliably you don't give caution much thought)

 

[starspacer]

On the contrary henry766, Smith is not a vendor and gave up all royalties on his previous book in exchange for a reduction in price.

If you read his book (which you clearly haven't), you will also note that his record of annualised returns exceeds that of Soros, but with virtually no drawdowns. Admittedly Smith has a tiny amount of capital compared to Soros, but that is not his fault and doesn't detract from his trading record. In addition, it could be argued that Soros just got lucky with his huge trade and £1bn+ profit from the Sterling Exchange Range Mechanism farce.

If you believe that risk control does not matter, then clearly you will 'bust out' at some stage and your money will be taken by the pros, of which Smith is one of the best.

 

[rossored]

Starspacer -

ET is www.elitetrader.com

 

[TWI]

Admittedly Smith has a tiny amount of capital compared to Soros

That small statement makes so much difference when it comes to returns, there can be no comparison with a trader trading only $1m and a trader trading $1bln+.

 

[ERA]

That small statement makes so much difference when it comes to returns, there can be no comparison with a trader trading only $1m and a trader trading $1bln+.

Twalker in what way?

Do you mean it is harder to make a bigger return percentage wise with a smaller sum or visa verse?

From what I have read of exceptional traders they all say they could make much better returns with a smaller sum, when they get into the billions it gets harder to make the same kinds of returns due to position limits and the ability to change direction quicker.

 

[starspacer]

Thanks Rossored.

ERA

twalker is correct in that it does make a difference. When you are trading billions as in Soros's case, your very actions may move the market and result in higher prices paid, thus diminishing returns. The 'Law of Big Numbers' means that the bigger your trading capital, the harder it is to maintain above average returns. Soros's annualized average return is approximately 30%, which is an incredible achievement for someone managing many billions and is why he is rightly acclaimed as a legend.

However, as I said, that is not GS's fault. Also, GS is a 'home trader' like many of us, whereas Soros has access to the best data, equipment and information sources that money can buy. I think a home trader would find it impossible to replicate Soros's methods, whereas they can readily follow GS's strategies.

 

[ERA]

I agree with Twalker and yourself with regard to the above, I share the same point of view, I was just looking for some clarity on his statement earlier, it could be interpreted 2 ways.

 

[henry766]

i still don't buy it ( sensor this), besides anysort of decent return compounded over the 7 years or so is big money , money may not be a your goal , but it's certainly prrof of the pudding , and another thing very profitable traders arn't looking to enlighten all and sundry!!!( so this will be my last post) so there!!!( p.s. it ain't got nothing to do with data and equipment , soros is just plain smart ( er).