Trading for a Living: Why I Have the Best Job in the World
Most people have a preconception of who and what a professional trader is. They might think about how trading is depicted in the media, movies, or on television, but I can tell you that it’s nothing like that. While trading is definitely exciting at times the vast majority of my days are spent staring at a screen and waiting for something to happen. Even though the life of a professional trader is not nearly as interesting or glamorous as it is in the movies there’s nothing else I’d rather be doing. Trust me, it’s not for everyone. It takes a lot of mental discipline and an appetite for risk that not everyone shares. If you are able to stomach the swings and trade with a disciplined plan, then trading for a living might be for you. Let’s talk a little more about the benefits and some of the drawbacks of doing what I think is the best job in the whole world.
The Freedom of Being a Trader
Professional traders used to be bound to the market centers they worked in. Traders who worked in the trading pits in New York City, Chicago and other regional exchanges did not have the freedom that even retail traders enjoy today. These professionals had to show up at the exchange everyday if they wanted to trade. With the rise of electronic markets this is no longer the case. Traders can now access markets from anywhere in the world that has an internet connection. Professionals and non-professionals alike can now trade complex financial products from their personal computers, smartphones and tablets. The advancement in trading technology has also made professional tools and platforms available to retail traders. The technology available for mobile trading has also advanced to the point where many traders are able to trade exclusively from their mobile devices.
This gives traders freedom and mobility that no other profession can provide. Traders can access and participate in their markets from anywhere in the world. Traders can also trade foreign markets from anywhere in the world. This gives traders the freedom to make their own hours and commit as much time as they see fit to trading. At any time during the day there is a market somewhere in the world that is open and tradable. This means that traders can essentially set their own schedules. After a trader determines what they want to trade they can also determine when and how often they want to trade.
Some traders choose to only trade the open or the close so their “work day” might only be a few hours long. A trader is really only required to put in as much screen time as they feel is necessary.
The Earnings Potential in Trading
Financial markets are big. They are impossibly, unfathomably huge and the potential earnings a trader can make is only limited by the amount of capital that they are willing to risk. Most people who are unfamiliar with trading think that in order to make money in the long run traders need to put on massive amounts of risk. Many people believe that trading with a smaller amount of capital isn’t worthwhile but these people are mistaken.
Traders can earn a very decent living with relatively modest daily profits. Traders should set daily profit goals for themselves and should have an understanding of what those goals mean. For example if a trader’s goal is to make an average of $200 a day they would net a yearly profit of over $50,000. This is a lot of money for most people. As a trader finds consistent success they are able to scale up their position size to potentially earn more. There really is no limit to how much a trader can earn.
You would be amazed at how many traders I know who work from home and are able to generate hundreds of thousands of dollars in profit on a yearly basis. These traders didn’t get to this point overnight but built their accounts over time. This is something that anyone can do if they have a consistent and disciplined trading strategy.
The sky is the limit. If you want to do something where you are rewarded for the time and effort you put in directly then trading might be for you. You are only limited by your own risk appetite and capital. Even though you might not think you have enough money to start trading you can still earn modest daily profits that will add up in the long run.
Be Your Own Boss
Many professions allow people to work with some degree of independence. People might even be able to work from home or remotely, but nobody who isn’t self-employed has independence like a professional trader does. Traders who trade for themselves do not have to answer to anyone. Although some people are not comfortable with this dynamic those who are willing to accept responsibility for their decisions will find that trading on your own is liberating. Professional traders have nobody to answer to but themselves. Their gains, losses and mistakes are all their own.
I love the fact that when I am successful I don’t have anyone to thank but myself. If you have always hated having people to answer to, trading could be a profession that you thrive in. This can be a bit of a double edged sword though. Traders who trade alone might not have someone they can bounce ideas off of or get feedback from. This is why it’s so important to find a community of other traders you can share ideas with and talk about the market with. While traders who trade completely alone can be successful many traders, especially beginners, benefit greatly from having some kind of support network.
Trading is Fun!
While I love trading for the freedom and earnings potential it gives me, the main reason I love it is because it’s so fun! Trust me, if trading wasn’t enjoyable I wouldn’t be doing it. That’s not to say that everyone in the world will find trading enjoyable. Some people simply lack the risk appetite to make trading a viable option for them. If you are someone who hates the idea of possibly losing money then there is no way you will find trading enjoyable.
I love to take on risk and always have. If you are someone who enjoys games like poker then you might find trading to be very fun. Trading is about constantly assessing your risk and reward potential and determining the most efficient way to express a view you have on the market. People who don’t think that they would enjoy that would probably hate trading. Even though television and movies portray trading as fast-paced and exciting, it’s actually very methodical and can sometimes be tedious. Those who enjoy spending time analyzing details and working with numbers can really work well as a trader.
There is a saying amongst professionals, “Trading is hours of boredom punctuated by seconds of panic.” Trading can be tedious. Most days, markets trade in ranges and people who expect nonstop action will likely be disappointed with how most days go. Those who are also less equipped to deal with the stress of taking on risk will also probably not enjoy trading. If you are someone who loves the idea of taking on calculated risk to potentially make a profit and can deal with the occasional stress then you should consider trading.
While trading isn’t for everyone, those who have the risk appetite and the interest in market and analysis can truly thrive as a professional trader. The freedom, earnings potential, and fun nature of the game can make trading the ideal occupation for some people. If you aren’t sure that you fall into this category it’s easy to find out. Spend some time trading a simulated account and see if the routine and general day to day is something you think you could enjoy. Remember, not everyone is guaranteed success but for those that find it there are few jobs that are more enjoyable or rewarding.
How Much Money Do I Need to Trade?
So you have decided that you are going to try your hand at trading. Maybe you are trading because you have some free time and want an interesting and potentially profitable hobby, or maybe you are hoping to make a career out of trading full time. In either case you are probably wondering how much capital you need to trade effectively. Before you can answer that question you need to ask yourself what type of trader you are trying to be. Do you want to trade every day? Are you going to be an active day trader or a more passive swing trader? What are your goals for trading? What are you interested in trading? Here we will discuss how your answers to those questions affect the amount of capital you will need to trade.
What Products Do I Want to Trade?
Before you can know how much capital you need to trade you need to ask yourself what it is you are most interested in trading. Financial products have different margin requirements and risk dynamics so a trader’s choice of product to trade can significantly change the amount of capital required. Let’s look at the dynamics of some of the most popular products for retail traders and illustrate the main differences.
Stocks – Traders who want to trade stocks will generally need a higher level of capital that those who are interested in currency trading or some derivatives products. Margin accounts do allow traders to control larger positions with less capital but generally speaking the amount of cash a trader needs to have to hold equities overnight is high. Traders who are interested in day trading stocks also have regulatory considerations to make. The pattern day trader rule subjects traders who execute more than 4 day trades in a 5 day period to special regulations. Traders that meet these criteria are considered “pattern day traders” by FINRA and are required to maintain at least $25,000 in equity in their account. Should they earn the PDT classification and fail to meet the $25,000 minimum their accounts will be restricted to closing positions only. So if a trader wants to actively day trade equities they need to keep this in mind.
Equity Options – Equity options are also subject to the pattern day trader rule. Traders who want to swing trade options and plan on always holding positions overnight do not need to concern themselves with this rule. Those who are looking to day trade options however, are subject to the same restrictions the pattern day trader rule sets forth for stock day traders. Even though the day trade rules are the same, the inherent leverage associated with equity options allows traders to control larger positions with less capital than equities would require. This means that even though a trader needs to keep the PDT considerations in mind they will generally need less capital to trade intraday and overnight positions.
Futures – Futures offer a trader one of the most direct ways to play commodity and interest rate markets along with a variety of equity index and currency markets. Futures contracts are also leveraged products and in general, traders are able to control large positions with a small amount of capital. If the CME E-mini S&P 500 futures contract trading at 2100 the value of this contract is $105,000 (2100 x $50 per point) a trader could take a long or short position as a day trade with as little as $500 in capital. This means that traders are able to speculate on an intraday basis with a very high level of leverage. Futures are also not subject to pattern day trader rule requirements so a trader who wants to actively day trade but does not have over $25,000 in capital might find futures to be a more attractive option. With that in mind a trader also needs to understand the leverage futures provide can increase their risk significantly. So even though there is no day trade regulations a trader with less than $25,000 might not be able to trade all futures products. Every contract has its own specifications and tick values so make sure you understand how much risk you are taking on in futures.
Traders can generally find a way to express the same market view using all of these products so they need to carefully consider their situation before deciding which to trade. Margin requirements for stocks, options and futures can also vary from broker to broker. Traders who want to employ a mix of swing trading and day trading in their accounts might choose to trade more than one product. Just remember to consider the margin and regulatory dynamics of each before you trade them.
Do I Want to Day Trade or Swing Trade?
When a trader is deciding what kind of strategies they are going to use they need to first determine how active they want to be and how much screen time they are going to be able to commit. A trader must also determine what it is they want out of trading. Do you want to day trade every day? Are you more comfortable holding positions overnight as swing trade setups? Some products are better for day trading and some are better for swing trading. Depending on the style a trader wants to use, their best product choice might change and the amount of capital they need to trade effectively will change with it.
Day Traders – Day traders are very active traders who never hold positions overnight. Any trades they open during the day are closed at the end of the day. Traders who wish to trade individual equities must use stocks or equity options. If this is the case a trader needs to have at least $25,000 in their account. With that being said, a trader should probably have well over $25,000 to begin with so they have a bit of a buffer if their first few trades take a loss. Traders who are more interested in equity indices or commodities can day trade ETF’s, options on ETF’s, or futures but need to be aware of the PDT restrictions associated with ETF’s and options. Futures do not have day trade regulations but many commodity futures trade with high multipliers so the amount of risk associated with them increases. For example crude oil futures trade with a multiplier of $1,000 for every $1 move in the futures. If oil futures are currently trading with a daily average true range of $1.80 a trader can expect the value of a 1 lot in futures to change by $1,800 a day. If a trader has less than $25,000 in their account this might be too much risk for them to take on.
Swing Trading – Traders who want to speculate on longer term moves do not have to worry about the PDT rule, so if they have an undercapitalized account they might not want to carry the leveraged risk associated with futures contracts. These traders can still use ETF’s and ETF options to speculate on movements in commodities and indices and can also use individual equities and options. Futures contracts that are held overnight also require a trader to post a much higher level of margin. If the day trade margin for 1 contract of the CME E-mini S&P 500 futures is $500 the overnight margin could be 10 times that amount. In this case a trader with a smaller account would not able to trade very many contracts, so using equities and options will likely be a better approach.
In summary, traders who want to day trade and speculate on intraday price movements in individual equities or options need to have at least $25,000 in capital. Those who are more interested in day trading indices and commodities can use futures but might be taking on a large amount of risk relative to their account size. Swing traders with smaller accounts should probably focus on equities, options and ETF’s as the risk in holding futures contracts overnight can be quite large. Generally speaking a trader should not commit more than 5% of their total account to any one position so when determining how much working capital they need traders need to consider the total amount of capital needed to carry positions in the futures, equities or options they are interested in. Make sure you have a solid understanding of your broker’s margin policies and take into consideration all of the dynamics above and you should be able to determine how much capital you need to trade the products you are interested in.
Most traders that do not have familiarity with equity options hold some common misconceptions about the amount of risk and capital associated with actively trading equity options. The notion that options trading is overly risky or requires a trader to invest a large amount of capital to hold a position is completely misguided. In reality, equity options offer a trader superior risk management capabilities and a higher profit potential. Here we will discuss how traders can benefit from trading options and can use them to trade better risk reward setups.
Before a trader can understand how options offer them a more efficient way to express their market views they need to understand the benefits of inherent leverage.
Leverage Is My Friend, Not My Enemy
The first and most obvious benefit of trading equity options over the underlying stocks is the risk management capabilities they offer a trader. To understand how options offer a trader a better risk management approach a trader needs to understand how options actually work. Most of the misconceptions that traders hold come from a lack of understanding in how the actual product works.
Equity options are derivatives contracts that give the buyer of the option the right but not the obligation to buy or sell a certain underlying security at a specified price and specified time. Sellers of equity options have the obligation to buy or sell the underlying security at a specified time and price. The cost of this right is the options premium. While the risk management considerations are different for buyers and sellers of equity options the sellers generally carry more risk. In this piece we will mostly be discussing options from the perspective of the options buyer. Let’s look at an example of an options trader and break down the trader risk and reward potential.
Trade: A trader buys the XYZ Jan 100 Calls for $1.00
Maximum Risk: $100 per 1 lot
Maximum Reward: Unlimited
Every options contract gives the buyer the right to buy or sell 100 shares of the underlying at a specified time and price. Put options give the buyer the right to sell and call options give the buyer the right to buy. In this case the trader is paying $100 ($1.00 x 100 shares) for the right but not obligation to buy XYZ shares at $100 on January expiry. The trader paid $1.00 for the contract so they would need the stock be over $100 for the trade to profit. Since stocks can technically have an infinite upside potential this trade does not have a bound on profitability. Let’s compare this to a trade in the underlying stock.
Trade: A trader buys 100 shares of XYZ stock for $100/share
Maximum Risk: $10,000
Maximum Reward: Unlimited
In this case a trader’s breakeven point is lower than it is in the options trade. The trader’s risk is also much higher. The main benefit of trading the stock instead of the options is that if the stock does not move the trader will not experience a loss. Since options have an expiration traders can lose money if the stock does not move quickly enough. This is one of the reasons that most traders think that options are riskier than stock. If stocks do not move options traders can still lose money. However this is a fair trade off considering we can take the options trade with 100 times less risk that the stock trade would require. The options trade also controls the same amount of stock but for 1% of the capital needed to buy the underlying outright.
While options traders can lose money if the stock does not move, an options buyer cannot lose more than they paid for the option. The inherent leverage that options provide actually lowers risk for traders. Many traders are scared of leverage and what it means for their potential losses but as you can see clearly illustrated above, when used properly, leverage actually lowers overall risk. This become even more obvious when we compare puts to short stock.
Trade: A trader buys the XYZ Jan 100 Puts for $1.00
Maximum Risk: $100 per 1 lot
Maximum Reward: $9,900 per 1 lot (if stock goes to 0)
Trade: A trader sells short 100 shares of XYZ at $100/share
Maximum Risk: Unlimited
Maximum Reward: $10,000 (if stock goes to 0)
The risk reward benefits of options are even more apparent in this case. To carry a short position in the underlying stock a trader would expose themselves to unlimited losses. The options trade allows a trader to take a speculative short position with nearly the same reward potential and a limited level of risk. Again, options cannot be worth less than 0 so the options trader can never lose more than the premium they paid for the position.
Leverage is your friend, not your enemy. Don’t let someone tell you that options are riskier than stock. If someone says that to you they simply don’t understand what they are talking about. While risk might be elevated for options sellers, options buyers benefit from what is essentially a built in stop. The fact that options contracts cannot be worth less than 0 also brings us to the next major benefit of trading options over stock. Staying power.
The Staying Power of Options
The next major benefit of trading options is staying power. If a trader is trading the underlying stock they may choose to use a stop loss to limit their risk and exposure. There are 2 main drawbacks to trading equities with stop losses.
- The stops may not hold – Equity markets do not trade overnight. This means that they are prone to gapping. A gap happens when the underlying market opens significantly higher or lower than the previous day’s closing price. This can make traders stops completely pointless. If the market opens through the traders stop they have lost more than they thought they could in the position. This happens more often than you might think.
- Once stopped out a trader no long participates – After a trader is stopped out of a position in stock they cannot participate in any potential rally or reversal back in their favor. To do so they would have to re-enter the position taking on more risk that they originally wanted to in the trade. Options provide a solution to this problem because even if the options contract goes to 0 before expiration the trader is able to stay in the trade knowing it cannot be worth less than that. This allows a trader to participate in any recovery or favorable move in the underlying without having to add to the position and take on more risk. This is especially beneficial for traders with smaller accounts that do not have the ability to add to or re-enter positions they have been stopped out of.
This aspect of options is more valuable than you might realize. If you are stock trader think about how many times you have been stopped out of a position only to see the stock reverse and move back in your favor. Using options will give you the ability to stay in trades longer with less risk. All the while you are still benefiting from the inherent leverage and risk management capabilities of options.
While there is a myriad of other reasons to trade options these two aspects discussed in this article should be enough to change your mind if you had a negative opinion of options before. Leverage is not something to be afraid of. If used properly the leverage options provide can be used to take on positions with less risk and more overall profit potential. They also allow a trader to maximize their staying power in a trade. These are two dynamics that benefit every trader, not just traders with large accounts and large amounts of risk capital on hand. Regardless of your trading situation you should really consider trading options. The benefits of options will become obvious after your first couple of trades.