Reality Check: Full Time Trading

trading-reality-check
In 2015-2017 A lot of people wanted to become Full-Time Investors via Smallcaps seeing Multi baggers shown by Advisers Investors.
In 2018-2019 a lot of people want to become Full-Time Traders via OptionWriting, Futures seeing M2M shown by Trainers Traders.
We used to earlier get influenced by people succeeding in your social circle where you would know people over the years but now we get influenced by social media successes that may or may not be true. Tweetstorm on questions on approach to FullTime Trading.

trading-reality-check

In 2018 we got a crash in Smallcaps and portfolios are down 10-50%. This will test out people who became fulltime investors without thinking or preparation. Now in 2019 if you want to be a FullTime Trader this tweetstorm gives you only questions to help you think!.
Do you want to be a FullTime Trader? Lets go step by step
Step 1) What you need to know !!
  1. Your current salary post-tax and expected growth rate of salary.
  2. Your absolute living expenses, inflation, and contingency fund.
  3.  The savings you have for trading capital.
  4. How much of your savings can you risk if it’s not working out?
  5.  Will you be borrowing capital and if yes what is the cost. (What consequences if you lose the capital?)
  6. Do you have any other investments for an emergency/contingency fund?
Step 2 ) Annual Expected Returns ( Post Taxes ) Think over a long 3-5 year cycle average.
  1. -> 10%
  2. -> 20%
  3. -> 30%
  4. -> 40%
  5. -> 50%
  6. -> 60% ……………………. ( Stop !! Please manage my money and let me raise money for you and let me retire !! )
Step 3)
A Sample Calculation. ( Put your own nos)
Annual Income – 12 lakhs post-tax.
Living Expense – 8 lakhs

How much capital do you need to make 12 lakhs p.a?

Earnings % Return Capital
Expected Annual IncomeExpected Annual ReturnCapital Required
12 lakhs101.2 cr
12 lakhs20 60 lakhs
12 lakhs30 40 lakhs
12 lakhs40 30 lakhs
12 lakhs50 24 lakhs

(Skipping Appraisal and Salary Growth for Now.)

Step 4) If 5% Earnings Growth?

Earnings % Return Capital

  1. 12 lakhs 30 40 lakhs
  2. 12.6 lakhs 30 42 lakhs
  3. 13.2 lakhs 30 44.1 lakhs
  4. 13.9 lakhs 30 46.3 lakhs
  5. 14.6 lakhs 30 48.6 lakhs
You need to increase capital or re-deploy your profits of the year.
If you need more than 5% earnings growth every year you may need to increase starting capital or reduce living expenses.

Step 5)  The Reality

A 15-30% drawdown is normal in most trading strategies.
Do you have a contingency fund for living expenses at such times?
Even if you can make 20-40% post taxes. The minimum requirement is 3-5 times your expected earnings.

Adjusting for drawdowns, trading breaks, Vacation expenses, extra expenses, No PF, No Leaves, etc.
One can think of 7-10 times your expected earnings as a good number.

Step 6)  Some questions.

  1. If you want to make 12 lakhs per annum do you have 1 crore capital.
  2. Even if you have a strategy which can make 20-30% return over a long 3-5-10 year cycle. Do you have the risk appetite?
  3. Will you be able to sleep after losing 30% capital?
Most people think Point 2 is easy. If it was so easy why do people go to College – Just go to the TradingCoach, Trainer, Adviser, Broker– Start Trading!!!
Dream – Trade with a laptop anywhere in the world.
Reality – ???
Some Weird justifications people have.
  1. If I am Full Time I would definitely find a way to make money.
    (Just because you do good office politics why not shift to politics and you could be a Prime Minister, Chief Minister or a successful Politician)
  2.  I get scared because I have a small capital base. If I had a few crores I would make a killing.
( I know how to play cricket. Give me a steel bat which is 20 inches wide, will make India win the World Cup.)
Spend a few years learning about Trading, Analysis, Psychology and yourself. Maybe you will have better answers to the approach to FullTime Trading. Not all professions or businesses are a good fit for everyone.
About Author
Nooresh Merani

Nooresh Merani

A dynamic stock picker. He is a famous trader, blogger, educator, and SEBI registered investment advisor. He is regularly seen as a Guest analyst on CNBC, ET Now & Bloomberg.

    Write a comment