As I have progressed through the world of trading advice, stock picking and technical and fundamental analysis, it has seemed to me that there has been an “elephant in the room” question that goes largely unaddressed. That question is one of capital, and how much money it takes to break free from job and salary constraints to embark on trading as a full-time avocation? While this capital question has many variables relating to the Trader’s personal situation and income goals, it is still worthy of a broader discussion and evaluation. It is this “capital question” that today’s article will begin to explore and evaluate.
Trading is a numbers game, pure and simple. The market is a remorseless punisher of rash decision-making and poor risk management. It punishes the poorly capitalized and emotionally stressed Trader even more severely by preying on latent weaknesses and event driven stress levels of the full time Trader who lacks either sufficient financial capital or emotional grounding when subjected to the travails of market volatility or bad fortune in trade selection. This market pressure often results in a capital drawdown over a period of time, and ultimately an exit from the market.
It is my experience, when studying the requisite capital levels necessary to seriously consider full-time trading, that the financial resources required to trade full time constitute a serious hurdle to realistically embarking upon a full-time trading path as a primary source of income and support. Several of the most important variables to consider are the existence of a spouse, partner or other family member who may provide a primary source of income and benefits, the number of children and dependents relying upon the Trader’s income, the level of personal and household debt serviced by the Trader or the Trader’s household, and the financial ability of the Trader to emotionally withstand the inevitable draws during lean trading times. The variables are endless.
For purposes of this article, we will assume a simple baseline equation involving these personal variables, and work from that baseline. We will assume a single Trader with no dependents, little or no appreciable household debt and a low-cost lifestyle selected purposefully in order to maximize the capital available for use in the Trading account. We will also assume median to below median housing expenses, a paid for used vehicle, eating meals prepared in the home, a high deductible insurance plan, and other moderate lifestyle choices that allow for annual living expenses of $40,000. We can certainly debate, cut or inflate this number, but for the time being, let us work from this baseline annual living expense assumption.
As a full-time trader, the prudent first step would be to accumulate one year’s worth of expenses, and set this money aside, apart from trading capital. This money offers not only a financial reservoir, but also an emotional buffer against the need to draw from trading assets to meet living expenses. It separates, at least for an annual period, the assets required to live from those required to trade. We can now focus on the capital needs of the trading business.
Trading capital needs will necessarily fluctuate with the Trader’s assumptions regarding returns and the Trader’s financial goals from trading. However, let’s work from the initial assumption that the Trader’s goal for an annual period would be, at minimum, to replace the one year living expense pool at the end of the trading year. In other words, the fictional Trader must replace $40,000 in annual living expenses by the end of the trading year. Also, as this is the Trader’s primary income source, the Trader must also factor in taxes and expenses generated by trading when considering the capital required to fund this annual living expense pool via trading.
We begin by factoring in a reasonable after tax return metric for our baseline Trader. I will start with an assumption that income, self-employment, Medicare, state, local and other various taxes and levies make up approximately 30% of the Trader’s income, and that direct Trading expenses tack on another 5%. Let’s assume the Trader returns a net 15% on his or her capital after all taxes and expenses. This equates back to a to a 23-24% gross annual return. No small feat, and one that puts the Trader in fairly elite annual return company. For example, Warren Buffett’s annual compounded Book Value after tax gain since 1965 has averaged 20.3% (from his 2009 annual Letter to Letter to Shareholders found at http://www.berkshirehathaway.com)
Simple math then tells us that to replace the Trader’s $40,000 stock of annual living expenses, factoring in net returns of 15% after taxes and expenses, the Trader will need an initial capital stock of approximately $270,000 (merely divide $40,000 by 15%). Therefore, the combined capital needs of our baseline, single Trader with no dependents and a moderate standard of living is the $40,000 annual expense pool plus $270,000 in trading capital, or a baseline beginning capital number of $310,000. Given the statistics that show the financial net worth of the average American household, excluding net worth in a primary residence (who has much of that these days?) and excluding retirement savings at something less than $50,000, you have a relatively small pool of potential full time traders in society.
Unfortunately, these raw numbers do not lie and can actually be more daunting when considering other factors, but can also be alleviated somewhat if you have a second steady income and benefit source to support the full time Trader, few dependents in the household, modest lifestyle/debt requirements to furnish, or even more optimistic trading return assumptions. Since the Trader will require both living and trading capital in this model, the Trader clearly needs a wealth and capital accumulation plan before embarking on a full time trading career. Such a wealth plan is a topic for future article discussion, but is likely as important to a Trader’s success and viability as sheer trading prowess.
So you want to be a full Trader? Bravo. Having come this far as a Tickerville subscriber, you clearly have a passion for Trading. That passion can drive the planning, sacrifice and commitment needed to meet these capital and return goals critical to full time trading success. I sincerely hope that this article fueled your interest and curiosity, and even if you disagree with the numbers, that it has provided you with a useful framework within which to develop your own answers to the “elephant in the room” question of how much capital is needed to realistically embark on a successful full-time trading career. Feel free to change the return, income, expense and baseline figures to fit with your reality, goals and expectations.
~ QuasiD is a Moderator within Tickerville’s Active Trading Service. He can be reached at
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Personality typing can be a complex field. Whole texts have been devoted to the topic in the psychology arena. Today, we will begin by delving into one of the most widely used broad line personality typing systems, the Myers-Briggs Type Indicator system (MBTI). The MBTI has been around for decades and is used by universities for roommate matching, and by many corporate and government human resource departments for training, leadership and team building compatibility. We are not talking 27 metrics for finding the ideal mate here, just developing an understanding of a Trader’s four basic personality traits, and how these preferences relate to finding a trading system best tailored to the Trader’s strengths. Just pull up MBTI in the Wikepedia or google it for a basic overview.
There are four basic MBTI preference dichotomies that each are represented by a capital letter. These preferences in turn make up a combination of 16 different personality types made from an acronym of the four basic personality preferences. The four personality paradigms are as follows:
Extroverted vs. Introverted – do you derive energy from actions and others or internally from reflection and concepts
Sensing vs. iNtuition – are you data/present focused or theory/future focused
Thinking vs. Feeling – are you a logical or emotionally driven decision maker
Judging vs. Perceiving – are you planning/action oriented or consensus oriented
These four personality preferences combine into a basic MBTI personality type. Each of the 16 MBTI types has a very distinct way of approaching aspects of life, including trading in the markets. I have provided a basic chart of the 16 MBTI personality types, and there is a wealth of further discussion on them available on the web. The occurrence of the 16 MBTI types are not equally dispersed in society but range from a high of 14% for the most prevalent type, to around 2% for the least common types.
Once you find your preference type, you can begin to consider what type of trading system best fits your personality, and in turn, maximize your advantage in the markets by aligning your individual personality preferences to those of your trading system. You can also avoid adopting trading methods that run contrary to your personality preferences.
As this discussion is much to broad for coverage in a single article, I will focus on the one of the four personality distinctions where a distinct and purposeful Trading choice can be identified for Traders. This preference identification will allow the Trader to have a comfort with their system and not find themselves fighting their personality preference by using a system best designed for others. Let us look at the Sensing vs. iNtuitive preference distinction.
Sensing versus iNtuitive personality types differ in their preferred way of taking in or perceiving information. Traders with a Sensing preference work better with concrete facts and data. Sensors seek out the “what” and not necessarily the “why” of a set of circumstances. On the other hand, iNtuitives are THEORY based and seek to predict future events from current circumstances by looking for relational patterns.
The type of trading system that fits you best as a Trader is thus closely tied to your S vs. N personality preference. Sensing types gravitate and find comfort in data based systems, and are likely to have a greater comfort level in a more mechanical based approach to the market. They trust “the numbers” and spend the time analyzing and back testing a trading system for consistency and validity. They are more comfortable with spreadsheets containing facts and figures and have an easier time booking gains or taking losses based on what is happening in the markets now, versus what might happen in the future. Surveys have estimated that approximately 7 of 10 people prefer the S type way of perceiving information. Eight of the sixteen MBTI types contain the “S” acronym.
INtuitive Traders gravitate to patterns, theories and relational connections between points of data, rather than merely looking at the data points in and of themselves. N types like to predict and figure things out. They tend to be creative and focused on the forest versus the trees. N types need to be aware of their preferences in this regard as they may have a harder time taking losses, and may tend to stick to losing trades for too long based on what they believe “should” be happening in a trade based on predicted outcomes. Their study of theories, patterns and relational outcomes can cloud their view of current market conditions and reactions. Approximately 3 of 10 people fall into the N type preference of perceiving information. Eight of the sixteen MBTI types contain the “N” acronym.
Bringing these preference types back to Tickerville examples, we can see how MBTI types relate to comfort with a selected Trading system or approach. Most everyone is familiar with “Alan” who exhibits an S type of data preference. Alan has developed a data based, mechanical approach to trading the markets that is consistent with S information perceiving preferences. Look in the forum each morning and you will find Alan’s “data” posted with mathematical precision. Alan does not predict, he merely waits patiently for objective market conditions to occur and enters and exits trades bases on that present data. His trading is generally not predicated upon what he might feel or predict may happen, but rather based upon on what is happening.
Contrast that with a trading approach based off of patterns utilized by Quint or I. We are both N type perceivers who love the theory, patterns and possibilities of the market. We like to talk about the “art” of trading, not just the “science”. N traders must work consciously to develop a data based risk management backdrop to underlay their intuitive preferences and focus on the challenge of wanting to be “right” on a trade rather than following the market data flow. My sense and experience is that N type perceivers are drawn to the markets for the intellectual challenge, but have a difficult time with consistency and risk management. However, N thinkers tend to be the creative and inventive types who can look beyond the facts to exploit relational opportunities in the markets. There is a fine line to walk for N types as Traders. When I think N trading, I see subjective trading, relationships with fundamentals, macro topics and other relational based trading approaches.
As you can see, personality preferences and trading approaches can be complementary or contradict. Personality preferences are a big reason why one trading style or system will not fit all Traders. Successful Traders first must know themselves, both to identify the trading style with which they have comfort, and to be mindful of the potential pitfalls that may stem from their personality type.
For those curious as an aside, I am an INTJ, with very strong I, T and J preferences and a mild N preference. This is the most independent of all personality types and found in roughly 2% of the U.S. population.
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QuasiD is a Tickerville Active Trader Moderator and may be contact via e-mail
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