Every trader dreams of shattering the chains of 9 to 5 employment and living life on his or her own terms. Don't you?
Trading for a living can absolutely be a dream life, but it can also become a nightmare very quickly.
From my experience, and the experience of others, I bring you this short guide on the smartest way to do this.
To keep this brief, I'll focus on the most important ground rule:
Never trade without a source of income that is completely independent of trading.
We'll cover what this means, why it's crucial, and the best ways to make this work for you.
This isn't coming from some book I read. This is coming from 6 years on a trading desk, 5 years trading client money, and countless hours of trading on my own. It also comes from the experience of traders far more successful whom I've sat next to. From success, and failure, mentoring others, and learning from mistakes.
Why You Should Never Trade Without an Unrelated Income Source
- You have bills to pay. Whether you're solo or have a family to support, your personal financial obligations come first.
If you have a family, the stakes are so much higher. Don't risk your family.
With no exceptions, you have to make sure your money obligations are always covered. In order to do that, the needed income has to be there regardless of how your trading went that month.
You will have great months, ok months, bad months, even awful months...or years. The money has to be there even when your trading is losing money. - Depending solely on trading as a source of income puts a huge but sometimes sneaky level of pressure on your trading performance. Even if you don't notice it consciously, it's there.
Unless you're a stone-cold assassin, and also a trading prodigy, this will affect your ability to make good trading decisions.
The chances that you're the tiger woods of trading is nearly zero. And even ice in your veins will only get you so far.
Pressure will affect you, so you need to reduce pressure, not add to it. Depending on trading income cranks it way up. - Lastly, traders typically have money-driven, performance-driven personalities.
As one of those people, I know that I'm driven to make money every month, and if I don't make money, that affects me.
Even if I have enough savings for years, and a solid mental game, I will still feel it.
When more money goes out than what is coming in, it tests my mental armor. If that mental armor is already damaged from months of losses, doubt/stress/fear can chip away at trading discipline.
In other words, the added stress of negative cash flow greatly increases the odds a trader will make mental mistakes, enter a slump, or prolong an existing slump.
Ways to Trade For a Living Without Losing Your Living
Every person's situation is different, but at least one of the following plans will work for most people.
Option 1: Work a Job While Trading
If you already have a job, you're halfway there. Now you just need to make it work so that you can block off some time each day for trading and for learning.
I recommend trading the first two hours of the US retail session (9:30 - 11:30 am ET). If you work during those hours, you have some options:
- Trade during different hours (not recommended, but some people love trading futures in the overnight (Globex) session).
- Work with your employer to change your schedule to open up that time for trading.
- Find a job with hours more conducive to trading each morning
If you don't have large financial obligations, you have a lot more flexibility in how you adapt to make this work. Part-time jobs like the ones I took may be your best friend.
Of course, general financial advice still applies here. i.e., have an emergency fund, make sure you're paying your taxes, etc. Consider seeking advice from a flat-fee financial planner before making any big financial decisions.
But Why Listen to Me?
I'm not just saying this. I've worked hourly jobs while trading. I still work on additional sources of income, like this site.
When I joined a prop firm for the first time, I busted my ass all day and all night. I was on the trading desk 7am - 3:30pm CT each day, then went to work.
I waited tables and ran valet at a local hotel. It was hard, and at times it really sucked, but it was worth it. My shifts were usually something like 4pm-11pm or 6pm - 1am.
I was "overqualified" for both of those jobs, but I did them anyway. Sometimes I got treated like shit by bad customers. Even the good customers had no idea I was on the tail end of a 14-hour day. I did it anyway, because I needed steady income. And after a day of trading, I needed something that didn't require a lot of deep thought.
Never let your pride get in the way of your dream. If you decide to go for it, do [ethically] whatever it takes.
Option 2: Living Purely On Investment Income
Obviously, this one applies to fewer people. The majority of people don't have enough assets to make this work.
But, I hear stories about guys blowing their investment accounts trading, so it's important to make this distinction.
Living on investment income while you trade is so much better than liquidating those investments to use for trading.
If you have non-retirement (non-qualified) assets, you might be able to optimize them for income and support your living expenses that way.
Whether you use REITS, stocks, bonds, preferred stock, or tangible real estate, the idea is the same - Set yourself up so your inflows are greater than your outflows.
With this method, keep in mind:
- Investment income can fluctuate (or stop), so be sure to leave some cushion between income and expense amounts each month.
- Investment distributions don't usually have taxes withheld, but you'll still owe them, so make sure you set that amount aside from each check.
Don't forget to consult with a fee-only financial planner and CPA. At the very least they can check your numbers and your inputs and make sure you have a solid plan, one that will survive the unexpected.
Increase Your Chances of Trading Success with These Tactics
Regardless of your situation, these tactics will make your life easier in general while also increasing your chances of trading success.
1. Shrink Your Lifestyle
Personal finance nerds have written countless books on this, but I'll keep it simple. Adopt a minimalist lifestyle. Determine the minimum you need and live with that.
Reduce your spending each month, now, and keep it low even as your profits and income increase.
Spending falls into three main categories:
Obligations or fixed expenses: Mortgage, rent, utilities, car payments, insurance, etc. In almost all situations, these costs can be lowered in some way without changing anything.
If you need to make more drastic changes here, you might have to make bigger sacrifices, like downsizing, moving, trading down cars, etc.
Consumer staples: Food and other groceries, restaurants, gas, etc.. I've worked with dozens of families who could reduce these drastically.
People who eat at most of their meals at restaurants, for example, can usually reduce their food bill by 80% just by cooking most of their meals at home.
Discretionary spending: The meaning is in the definition. This is all the shit you want but don't need. Cut it out. Either you want that fancy pair of shoes, or you want to succeed. Either is fine, but that's your choice.
2. Save as Much as Possible
If you have discretionary income (money left over after you cover your needs each month), don't spend it. Save it.
- Build up your emergency fund and retirement accounts.
- Spend it on required home/car/health maintenance that will save you more money in the long run.
3. Become Self-Employed First
A profitable business can give you a "job" that has flexible hours and allows you to make your own schedule.
If you create a successful business, you may be able to replace your employment income with it and make it your full-time work.
Then, you can schedule your trading and your work in the business as you see fit.
Of course, starting any business takes hard work and involves risk. Again, I recommend staying employed until your business can easily replace employment.
What Business to Start?
Options are limitless, but the quickest way to profitability is usually freelance work or consulting. Take a skill you have that people are willing to pay for, and offer it as a service.
It's possible to get something like that running quickly and cash-flowing in as little as a few months.
Not everyone has the skills for this, but you may be more capable than you know.
Starting a business also requires a similar level of dedication as trading, so it will test whether you have the drive needed to succeed.
4. Negotiate a Flexible Remote Work Schedule
Similar to becoming self-employed, this will allow you to choose what hours you spend trading vs working in your job.
In 2024, many employers who have allowed remote work are pushing for a return to office. But there are still plenty of companies with remote jobs.
Even if your employer doesn't explicitly offer remote jobs, you might be able to negotiate a remote schedule for yourself. The key is being able to prove that you're valuable to the company and will be equally (or more) valuable working from home.
Avoid These in Trying to Trade For a Living
We covered the trading-for-a-living best practices, so we might as well go through what not to do, as well.
If you fall into these traps, you'll hurt your chances of success. You may also destroy your relationships, your personal finances, or lose everything you have.
1. Borrowing Money to Pay Living Expenses or Trade
Never do this. Full stop.
I do have to make a distinction here between borrowing and margin accounts. On margin, you are trading with borrowed buying power. You have to understand margin, how it works, and the risks involved. You also need to make sure you don't allow yourself to lose more than your cash balance.
That said, margin isn't what we're talking about here.
We're talking about...
- Pulling out home equity to trade with
- Borrowing from friends and family
- Using credit cards to buy stocks or fund your trading account
- Taking a personal loan to fund a trading account
If you need reasons not to do this, there are many. We'll cover just a few.
- If you're paying interest, you have to overcome the cost of that interest, every month, just to break even.
- If you lose even a little, you have to come up with that money from somewhere else in order to pay the debt. Most people then try to "make it back" and end up losing more.
- If you borrow from friends and family, they're likely to put pressure on you, even if they mean well. If it goes poorly, you can ruin your relationships with those people, and I'm guessing you don't want that.
- If you pull out home equity, you're essentially gambling your house on trading. Does that sound like a good idea to you?
- Even if you have a low-interest loan, you will still feel the pressure of having to make that nut every month just to break even. Any negative performance will increase that pressure. As we've discussed, pressure tends to negatively affect trading performance.
2. Living on a Spouse's Income While Trading
Even when you're not depending on your spouse financially, the ebbs and flows of a trading career can challenge the harmony of a relationship. I've been there, I've lived it. It takes extra work and a very secure partner.
So, I'm not a marriage counselor, but trust me. In my own experience and that of others, I've why you shouldn't add additional friction to that. And relying on your partner's income will add a lot of friction.
That friction can break a relationship, seriously inhibit your trading, or both.
Sure, your partner may be amazing. They're your solid teammate in life. There are wives/husbands/girlfriends/boyfriends who are truly saints, who love unconditionally and support your every dream.
Even those saints will have a limit. If you're relying on their income while you pursue your trading, you'll find that limit. It could take days, weeks, months, or years, but you will reach that limit.
Until then, it will loom over your head as you trade. That indirect pressure will affect your trading psychology. It will probably cause some bad trading decisions, but even if it doesn't, it will slow your growth.
In addition, you'll likely experience a lot of direct pressure. Even if your significant other isn't trying to put pressure on you, you'll feel it.
Even a simple question like "How was trading today?" can and will have a subconscious effect on you. Especially if "trading today" was shit. And there will be other questions, because you're not yet successful, or not currently at least.
Every day, every week, for the length of your trading career.
This brings us to a universal fact: Only traders understand what it's like to be a trader. Most people are skeptical of it as a career choice, and even if they aren't, they have no way to know the mental challenges involved. They don't know the work that goes into it, or the emotional fortitude required. They can't appreciate the level of dedication it takes to perform well daily, because they haven't done it.
Even if they truly care and are interested in understanding you and what you do, that will only get you to a certain level.
So, to most significant others, the only thing that will matter is financial security, and that will be a constant source of pressure. When things are good, you won't feel it as much as when they slow down. But when they slow down, and they will, look out above.
In conclusion...Unless you built your relationship on the expectation that you would contribute nothing financially to the relationship, ever, stay off this path.
3. Cashing Out Investments to Fund Trading.
Picture your investment account. Maybe it's your 401k, IRA, or just a post-tax piggy bank.
Picture the balance, and think about how much work it took you to get it to where it is.
Now, close your eyes and visualize yourself losing that entire balance in a day.
Once your heart rate returns to normal, figure out a better way to pursue your trading career - Like one of the ones mentioned above.
I'm being a little cheeky here, but I'm not being outlandish. Countless people have decided to cash out their investments to try and become a daytrader. And most of those people lose all, or at least a large chunk, of their nest egg by doing that.
All the psychological factors that plague the borrowing strategy and the "spousal support" strategy will hurt you here. But there's more...
Sitting on a big account when you haven't traded for a living is a recipe for disaster. Most traders in that situation make these mistakes:
- Sizing incorrectly (trading too big)
- Overtrading
- Tilting and going to the extremes with size and trading frequency.
- Doubling down, and down, and down, and down...aaand it's gone.
The last two are usually how people end up blowing their entire nest egg. Don't be one of those people.
Conclusion
Trading for a living is a risk no matter how you approach it. But, this overview of do's and don'ts should help you approach it as a calculated risk.
The pursuit of trading is an ultra marathon, not a sprint. And you wouldn't start an ultra without knowing you have a dependable source of water and calories to complete the race.
In the same way, planning out your trading career should allow you the freedom, funds, and time to see it through properly.