A recent direct message on Twitter asked me the question, “How much should a trader have to go full time and quit their day job?” He had not told me of exactly how he was trading except to say that it was exclusively NQ futures. He said he had traded for three years and in the most recent year was profitable with steady profits each month. He had not even told me where he lives, what his cost of living was or anything that I might need to answer his question.
It gave me an idea of how I would approach the question if I had all the data I needed to really answer it intelligently. I created a formula based approach with some assumptions and some padding for unexpected events so that each trader reading this can run his/her own numbers.
How much do you spend?
First, you need to calculate and understand how much you spend each year and whether or not that is going to change dramatically. Are you going to send a child to university next year? Are you moving to another state or city? Expecting a new one in the coming year? What’s your budget going to be? Call that amount your Total Expenses. In this example let’s make that a round $100,000 per year. That amount should include taxes.
Next what is your expected return?
This trader in the example said he had consistently been able to make monthly profits month after month. I have no reason to doubt that, but only he knows what he could produce in one market with one contract with his day trading strategy. You should ask yourself if you expect this particular strategy to continue with similar success. If you doubt that, maybe give it a haircut of a some amount. Does the strategy work with one contract, but will struggle trading 100 contracts? Can the strategy be expanded to other markets?
Let’s say the actual, last year returns were 40% and were consistent throughout the year. Maybe use +30% and call that Expected Return in this example.
Giving yourself a raise each year
The simple calculation of making enough to pay for your expenses wouldn’t be enough, because, with inflation, you’re going to need more next year. I would take whatever amount you end up with to produce your needed income/trading profits and add another 20% of that amount to give yourself an increase in income each year and help to compensate for inflation.
A simplistic formula and example results
Total Expenses / Expected Return % = Simple Size times 1.2 = Calculated Target Amount with inflation buffer included.
Plugging the above example into the formula:
$100,000 / 0.30 = $333,333 times 1.2 = $400,000
Another trader needing $150,000 per year and assuming a 10% return would need:
$150,000 / 0.10 = $1,500,000 times 1.2 = $1,800,000.
How do you get to that sized account?
The simple answer is a combination of adding capital and producing some good returns. Make as much as you can from your day job or selling under-utilized assets and put them into the trading account. Make good returns and compound them into a larger trading account. When you reach your number, ask yourself a couple of questions:
Are you confident of your ability to produce the estimated returns into the future?
Is your estimate of what you are going to spend realistic?
Will your relying solely on your trading for living expenses change the amount of pressure you put on yourself and cause extra stress and poor performance?
Will your trading setup that got you there have to change if you’re doing it full-time?
What size limitations might exist if you ratchet the size up to larger portfolio sizes?
If you get to your target, are comfortable with the answers to the questions above, you have the opportunity to retire like I have and enjoy the ride!
Yes sir!
I’m always concerned when someone “doesn’t do the math.” Yours is very good advice, but someone who hasn’t - or can’t or won’t - do the math (including setting up the problem) for themselves needs to keep their day job.