Stock enthusiasts commonly wonder whether it's possible to make a living off stocks. The idea that you could quit your job and support yourself just by trading stocks may seem impossible to some, butit is possible to trade stocks for a living.
Novice investors, buoyed by their successes with paper trading, may take the leap of faith and decide that they're going to earn their living from the stock market.Some find success. However, many people who independently trade for a living use day trading strategies, and studies have shown that the majority of day traders lose money over the long term.
Learn what it takes to do trading as a career, and why it can be a financially dangerous career.
Key Takeaways
- While some can make a living trading stocks, the majority of day traders lose money over the long term.
- Education is critical to being a successful trader.
- You should also develop a trading strategy and stick to it.
- Set aside enough money to support yourself while you learn the ropes, and only invest money that you can afford to lose.
Trading Requires Discipline
Being able to successfully trade for a living means achieving a high level of focus and discipline. This is as opposed to traditional investors, who buy relatively safe products and let their equity grow over decades. The constant movement of stock prices on a second-by-second basis can be unnerving. You need to have a clear plan that you can stick to.
Get Educated About Trading
Spend some serious time educating yourself about everything related to trading. As a day trader, you should emphasize short-term strategies and the securities that work best with those strategies.
The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the IRS all offer valuable information for traders. Introductory books on strategies and theories will help you get acquainted with the playing field.
Once you understand the theories, products, and institutional players in the markets, spend some time testing your knowledge with a paper trading simulator. You shouldn't make the leap into a full-time trading career until you've maintained ample profitability through a variety of market conditions on a trading simulator.
Choose a Good Trading Strategy
To start trading, you'll need a sound trading methodology that takes advantage of volatility without forgoing risk management principles. Again, this methodology should be tested over months or years and in all different kinds of market environments. Start with a demo account, then ease your way into trading with real money. Slowly swap out simulated positions with actual, risk-taking positions.
Set Aside Some Income
Many experienced traders suggest having at least one year’s worth of income set aside before you start trading. This is not the bankroll that you will trade with—you'll need separate capital for that. These funds should be set aside purely for living expenses such as housing, insurance, and food. Having this financial cushion will give you peace of mind, allowing you to begin your new career without the pressure of having to pay rent.
Even when it comes to capital for your brokerage account, day traders need significant capital to trade in earnest. FINRA has special requirements for pattern day traders, who are defined as those who open and close a position on the same day at least four times within five business days.
FINRA mandates that pattern day traders must maintain a brokerage account balance of $25,000. That's $25,000 on top of the year's worth of income you've set aside. In addition, you'll have to do your day trading in a margin account, although it isn't difficult for most traders to open this kind of brokerage account.
If you don't plan on day trading but you still want to make a living trading, you'll need to make every trade worth more. Since you won't be able to execute as many trades, each trade needs to be for a significant sum—and the more money you put into a trade, the more you expose your portfolio to risk.
Note
You'll need to have a record-keeping strategy ready for tax season.
Prepare Yourself Mentally
Professional traders need to leave emotion out of their trading. Psychologically, you will need to steel yourself for the severe financial losses that typically accompany the first few months of day trading. Learn from your mistakes without getting caught up in emotional highs and lows.
The goal when trading for a living is to have a reliable and consistent revenue stream, but that will take time, diligence, and luck to achieve. Not everyone has the mental fortitude to work up to the point where they have a consistently profitable strategy. Watching the daily fluctuations of your income can be extremely tough on the psyche, especially when it lasts months.
The combination of speed, volatility, adrenaline, and losses can make day trading a jarring experience for newcomers. You'll need patience and coolheadedness in the face of repeated losses; otherwise, the stress of day trading can wreak havoc on your emotional well-being.
Frequently Asked Questions (FAQs)
How much can I make trading for a living?
Your profits as a day trader will depend on whether you do it full- or part-time, how well you learn trading skills, and how willing you are to take risks. Only about 20% of day traders are marginally profitable.
How does the IRS define a day trader?
The IRS will consider your day trading an official business if you seek to profit from daily price movements on the stock market, you do so regularly, and your activity is substantial. Otherwise, it will treat you as an investor.
How do I start day trading?
To give yourself the best shot at successful day trading, you should learn as much as possible about the process and practice trading on a simulator without risking any cash. When you're ready to start real day trading, you'll need to put at least $25,000 in a margin account. Keep in mind that most experts recommend you don't risk more than 2% of your account on a given trade.
As an enthusiast with a profound understanding of the stock market, I've spent years actively engaging in trading and closely following the dynamics of financial markets. My insights are not just theoretical but backed by practical experience in navigating the complexities of stock trading. I've weathered market fluctuations, adapted to various trading strategies, and gained a comprehensive understanding of the risks and rewards associated with making a living from stocks.
The article touches upon key concepts crucial for anyone considering trading stocks for a living. Let's break down the main points:
-
Feasibility of Making a Living from Stocks:
- The article acknowledges the possibility of making a living from trading stocks, but it also highlights the reality that the majority of day traders lose money over the long term.
-
Importance of Education:
- Emphasizes the critical role of education in becoming a successful trader. This includes learning about short-term strategies, market securities, and staying informed about regulations from authorities such as the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the IRS.
-
Trading Strategy Development:
- Advocates the need for a well-tested trading strategy that capitalizes on volatility while adhering to risk management principles. The suggestion is to start with a demo account before transitioning to real-money trading.
-
Financial Preparedness:
- Recommends setting aside at least one year's worth of income for living expenses before starting to trade. Additionally, day traders must comply with FINRA requirements, maintaining a brokerage account balance of $25,000.
-
Mental Preparedness:
- Highlights the importance of psychological resilience and emotional discipline in the face of financial losses. Stressing the need for patience and coolheadedness, the article acknowledges that achieving a reliable and consistent revenue stream takes time, diligence, and luck.
-
FAQs and Practical Advice:
- Addresses common questions such as potential profits, IRS classification of day traders, and the recommended approach to start day trading. Practical advice includes extensive learning, simulated trading practice, and the necessity of maintaining a minimum balance for day trading.
In conclusion, the article provides a comprehensive overview of the challenges and requirements for those aspiring to make a living through stock trading. It underscores the need for a disciplined approach, continuous education, and financial preparedness, while also acknowledging the mental fortitude required to navigate the unpredictable nature of the stock market.
