I can remember the day like it was yesterday. A warm June day in Zurich; I was sat in an apartment overlooking the lake, discussing my options with my good friend and business partner. The sky was clear and sunlight was beaming through the window; an appropriate backdrop for the discussion the two of us were having with complete clarity, following an extremely successful trading period and subsequent downtime to refresh.
After a couple of hours of weighing up the pros and cons, I had complete confidence in my decision - It was time to take the leap of faith: resign from my career in banking and commit full-time to trading. The discussion itself was just lip-service; in my mind my decision had already been made, as I had gone through the necessary steps to know that the time was right.
These are the steps that I would like to share with you. As I took the plunge at the relatively young age of 23, I often get asked how I knew the time was right. Although it felt like a sudden moment of illumination, it was actually a prolonged period of boxes being ticked which led to me feeling comfortable and confident enough to rely on trading for my full income.
As with most things in trading, I had to be sure the timing was perfect, as I was potentially giving up a lucrative career in banking.
Consideration #1: Is my trading system stable and successful enough?
This is often the only consideration traders are willing to make. In fact, the majority of the people who have asked me about trading full-time haven’t even considered this point yet – which is very concerning.
Many traders will start seeing profits from their trading activity and assume their system is now working; leading to the assumption that it is now more financially beneficial to focus on that full-time. The next considerations will show you why it isn’t enough to make the decision based on the profitability of a trading system alone, but let’s discuss this point to begin with.
Unfortunately trading often moves in cycles, meaning you will have good and bad times; some people are lucky enough to have a system that steers them profitably through upturns and downturns in the market, but most people don’t. It is also a fact that even the profitable traders in this world are actually on a path to long-term losses but have not yet reached the stage where they would realise that.
Any system that will be relied upon must be back-tested and live tested through many different market conditions. It is not wise to base your decision on one year of trading, as that year may have represented only a few characteristics of the market. Not only must it survive the good and bad times, but it must also consistently bring sufficient returns for you to be able to rely on it for an income.
If it is only breaking-even half of the time and only just beating the market for the other half, is this really something that is worth giving up your stability for?
Consideration #2: Am I mentally prepared for trading full-time?
There are two aspects to this which should be given equal importance.
The first point is whether you are mentally prepared to handle the pressure of relying on your performance. In the same way that trading with a demo account is different to trading with a live account due to the psychology involved, the same is true with the difference between trading with a stable income to support you and trading for a living. The pressure increases exponentially as you rely on your trading performance for your living costs, which leads many people to trade poorly as a result. Trading has the ability to draw all strengths and weaknesses out of an individual and make them glaringly obvious – if there is any weakness, it will take its toll after you take the plunge.
The second point is also a big psychological problem: boredom. When trading is done well, it can often be boring; you are following a system and have set rules that you are following. You don’t want roulette style excitement, you want steady and boring to ensure you meet your financial goals without losing significant amounts of capital. This makes trading full-time very different to part-time trading. With part-time trading either your trading time is limited, so it retains a degree of excitement and enjoyment, or you take a ‘set and wait’ approach where you will be working on your day job while the trade is on and then have the excitement of returning to a closed trade. You need to be sure that you can handle the monotony and boredom on occasions without being tempted to overtrade and become more active than your system allows.
Consideration #3: Am I able to support the decision financially?
Trading is unlike most other careers, as you often take two steps forward and one step back (three or four steps backwards for some people).
An analogy for this is to think of a man building a wall; in most careers you will place some bricks every day and see the wall begin to be built either slowly or quickly. In trading you would place some bricks, beginning to build the wall, then come in the next day and kick some of it down – before then building it up again and doing the same thing.
Growth is not consistent in trading, you have to suffer some losses along the way.
This means you need to consider your financial stability and whether it’s appropriate for trading. There are three key areas: trading capital, monthly income required and contingency capital.
Your trading capital can be calculated by figuring out what your stats are from your system; what is your expected return, amount at risk, number of trades placed, success rate and so on. Using these figures, you can calculate how much base capital is required to reach your monthly income level, or other financial goals you may have.
You will, of course, need to add extra funds to allow for drawdowns. You don’t want to be in a position where your capital drops below a certain level where it is then impossible to generate the returns you need. Trading is not an activity to start playing ‘catch up’ with.
Your monthly income is the most straight forward calculation to make; you simply need to look at what your base outgoings are and what residual income you will already retain. The difference between your outgoings and income (obviously deducting the income you will lose from giving up your day job) is the minimum you will need to generate. You can minimise your outgoings to make your task easier and more sustainable, but you need to be realistic.
Finally, you will need contingency capital; this is absolutely essential for a number of reasons. Firstly, you will need to go through a period of adjustment at the beginning, which may cost you money if you are not trading profitable at that stage.
As mentioned previously, trading full-time can have significant differences to your mind-set which can lead to a difference in performance. In addition to this, you may have periods of bad performance which happen unexpectedly, or a big emergency expense that needs to be paid.
You can’t tell what the future will hold, so it is better to have a contingency fund. Typically when you have secure employment it is advised that you have a contingency fund worth at least two months of your salary, however for trading I would advise that this should be closer to six months.
These steps are all intended to reduce the pressure that is put on you when you are trading. If you are constantly concerned about needing to perform at your very best just to scrape by financially, you will never perform at your best. With that in mind, it goes without saying that you should clear all debt that you hold prior to trading full-time – the pressure of making debt payments will not lead to a healthy working life.
Don’t give up your day job!
Although there are many more considerations that need to be made, the three outlined above are the major categories that you will need to think about. Of course, everybody is different so you may find that one consideration holds more importance to you than the others; for example, if you have an abundance of trading capital and only a low monthly income requirement, you may wish to take the plunge anyway as you are financially secure enough to see yourself through some rough spots.
In closing, I would add that there is no rush for anyone to trade full-time. There are always ways you can test the waters before giving up your day job - perhaps it isn’t even necessary with your particular approach to trading for you to be full-time. Of course you will benefit from a more flexible lifestyle if you are trading full-time and you can travel the world if you wish to.
However, if you decide to take a sensible approach and don’t give up your day job for just a while longer, you have the opportunity to create a more comfortable situation for yourself financially and more stable with your trading, which will serve you better in the long run.
With all that being said, when you have your parachute packed and the time is right to take the leap of faith - you will know about it.