The success of many stock traders has resulted in newbies asking questions like, “Can you make a living trading stocks?” Like many investments, such as Bitcoin, making a living off stocks depends on many factors, including how you can manage risk.
Yes, trading stocks is like any other business. The more money you begin with, the easier the risk. Regarding making a living, it’ll take a bit of time making mistakes and learning because mistakes are “inevitable”.
Can You Make a Living Trading Stocks?
The simple answer is “yes”, you can make living trading stocks, especially if you can be patient, ready for the risk, and not regretful. At $50,000 capital, it’s risky unless the amount does not mean so much money for you.
Trading is not an invest-and-checkout scheme. At least 80% of traders close their accounts within 4 months and more than 90% don’t even earn from it. But sometimes, they’re at fault. You don’t wake up, invest and make. As a beginner, nothing may be working within 3 years when you’re still making many mistakes and evolving strategies.
Before you invest in stocks, can you become one of the few that succeed? If you have lots of responsibilities, including providing food, paying the rent to remain in a roof, etc., the pressure is enormous.
A beginner’s brutal reality is “making mistakes”. But what can you do as a beginner investing in stocks with financial pressure piling up?
You need a job to cover the expenses of your bills, rent, food, etc. Now, set up a time for trading or investing without affecting your work life. If you have an hour daily or a whole free day for trading, you are day trading and it may not work, and you want what works.
Get a mentor to guide you through the best practices. Most people have the experience and strategies they may share with you, but you can’t depend on them, and they won’t reveal everything. A good mentor will provide the best advice but probably keep some pieces of information. Secondly, you’d have to spend at least 3 months learning your mentor’s method using a demo account.
Investing in stocks is a business you must practice before investing a considerable amount of money. For a start, you depend on your job and mentor, and when your business is successful, you become a full-blown stocks trader/investor.
The idea is to “avoid rushing”. 3 months is not too long to learn a strategy that may or may not work, meaning you have to put in more months to discover another method and understand it.
Trading Stocks Depends on Your Capital
Trading stocks is not capital-intensive, but your interest depends on your capital. Suppose you can make 30% yearly, which even Warren Buffet hasn’t made recently. To earn $60,000 interest, you will invest more than $200,000 in the capital.
Technically, without $200,000 in liquid trading capital, you’re better off not trading. So, you see, trading stocks for a living would require up to millions, which is possible if you start little.
Tips to Be an Excellent Stock Trader
Have a Strategy
You’ll burn out many times from mistakes to know how you can trade carefully. Moreover, there is no perfect “strategy”; otherwise, there’ll be no stocks market to trade.
Build yourself to enjoy the stress of growing every day and have enough capital to invest for a sizable return.
The table below shows potential earnings on 30% return for various trading capital amounts:
Learn to Deal with Your Emotions
As a beginner, you must know how to deal with the emotions that come with trading money. How would you respond to losses? Think of how you’d feel losing when you lose 20% instead of making 30%.
The few ways to deal with your emotion include the following:
- Remaining patient
- making one trade at a time
- After losing about $50 in a day, do not trade again. Some investors would call it “weakness”, but it’s you colling off and trying again.
As a beginner, do not trade against the overall trend.
Meanwhile, many novices flock into trading stocks merely because they can access the stock market from mobile phones. They may be capable of trading, but the reality is your “trading capital”.
Sometimes, the market can be good, and the uptrend makes more money for many investors. However, a novice trader can be carried away by little wins which are temporary. And when they lose, their emotions overwhelm them.
As a novice, you must educate yourself about the future trends and know your emotional state. Understand how you react to a loss. The market never ends no matter what you do, so you can simply overcome your emotional burden and re-focus your efforts on solving the earlier setbacks.
Risk Management: Creating a Trading Plan
Suppose you have $50,000 trading capital. We divide the money into 3, making it $16,000. So, $16,000 is the amount you trade with.
The Risk-On is 30% of $50,000, with equivalent lose $15,000. That’s huge. Now, are you willing to lose $15,000?
Let’s discuss effective risk management. To manage risk effectively, limit your risk per trade to 5% per month. A novice can trade on risk per trade of 1.25% per week is equivalent to $200. At 5% per month, you lose $800.
Consider the following:
2.5% risk of 16,000 = $400 per day (40 days of trading)
5% risk of 16,000 = $800 per day (20 days of trading)
10% risk of 16,000 = $1,600 per day (10 days of trading)
20% risk of 16,000 = $3,200 day (5 days of trading)
30% of risk 16,000 = $4,800 day (3.3 days of trading)
What’s the objective?
Limit the risk. 1.25% risk of $16,000 = $200 loss week. In bad months, your risk reduces to $800. When you can afford to lose more money, you increase the capital.
Things to Consider
- What’s your intent? Have you a proper business plan that addresses your daily, weekly, and monthly objectives and expenses?
- How does your trade get to the exchange? If it involves intermediaries, does it affect your trade?
- Does latency change? If latency changes, does it affect how you determine an entry or exit point?
- If the month ends in a negative, can you recover your expenses? If yes, how long would it take to cover your costs before gains surpass your break-even point?
- What’s your objective? Typically, the objective is to ‘make a living trading stock’. As mentioned earlier, educate yourself first. However, education is not all about studying the market trend. You must also understand your local network, computer, and connectivity. How many times do you face connectivity problems in a month with your provider? In most cases, connection times drop during high traffic hours, which interrupts you and you may want to find a new stable provider.
- Do you know the in and out of the traded security? You may not understand it fully, but with time, you’ll gain the knowledge. For now, start studying the price movement with common indicators, including MACD, Aroon Indicator, Average Directional Index, etc. You can install an application, a trusted live data source like Bloomberg.
Trading Hardware Requirements
You will have to invest in the following hardware:
- Monitors and stands
- Surge protection bars
- Electronic cables
- Internet connectivity devices
- Computer systems
If you can incur additional, acquire backup computer systems and invest in multiple servers with different internet providers to avoid disconnection from trades. As a backup plan, you can replace your computer hardware at least once after 3 years for improved performance. Most trading experts recommend investing in a high-end processor – Intel or AMD. RAM – at least 16 gigabytes, commercial-grade GPU, mid or high range motherboard,
Trading Software Requirements
- Learning software: Fibonacci, Pivot points, etc.
- Data analysis: Excel
- FCM (Futures Commission Merchants) or Broker’s software
- Informational resources: Hedge Funds, your broker, and other data analysis resources.
Can You Make Money Trading as an Individual Investor?
Unless you don’t have the money, you can trade as an individual investor comfortably. However, your winning streak will not be consistent. When you make small wins, set them aside for paying capital gains tax.
Ways to Earn a Living Trading Stocks
You can swing trade by finding stocks prices that are down temporarily. The value of stocks will increase again, so you purchase your shares and sell again when the value rises. This method of stock trading requires patience because the stocks may take longer to recover.
You can practice momentum trading. Momentum trading involves searching for stocks that are on the rise. Hopefully, the stock market will continue to increase while you trade your shares before the value price decreases.
Day trading is quite common among beginners, and it’s a good starting point that requires no patience. However, the ROI may be low. As the term implies, you buy and sell on the same day, leveraging small increase in stock prices and make about 2% interest. Day trading makes you a pattern day trader and you may require at least $25,000 in your brokerage account.
With options trading, you can buy a stock at a set date for using its current price and when the stock price decreases, you do not buy the stock. However, you lose your premium. For instance, suppose a stock is trading currently at $100 per share. After studying a particular market, you decide it’ll be valuable in the future, and you enter an options trade for the stock. You will be charged a premium to earn the right to purchase the stock in the future when the price rises.
Suppose the stock price increases a month later from $50 to $75, you activate your options contract and buy the share at $50 (the old market price) and sell it for $75.
If the share price reduces to $35, and you no longer want the shares, you keep your $50, but the shareowner gets your premium. Your premium is like a subscription for the market that gives you the right to buy the share for the same amount in your options contract regardless of the value.
Although you can make a living trading stocks, you are not guaranteed a return upon initial investment. It also depends on the knowledge you’ve learned, how you learned and applied it in the market.
Again, do not start this journey without a mentor, an experienced person in the field. They may be willing to teach and inform you with a proven and improvable trading plan. In essence, you can set aside anything in trading, but without an organized trading plan and stable income source(s) to handle your bills, it’s complicated.