So, you're looking to take on day trading as your profession. Please make sure you read that first sentence again, "you're looking to take on day trading as your profession." This will require a significant financial investment on your part. If you have bills (rent, mortgage, car note, etc.), do you have another source of income outside of trading? Next question, if you take your current expenses and multiply them by 50 do you have that much in seed money? If the answer to both of these questions are no, let me save you a lot of time and headache and tell you upfront that you are not ready. This isn't a matter of will or self belief but as Bill Clinton said in the 2012 Democratic National Convention, "It's Arithmetic". The gift and the curse of day trading is it only requires a dollar and a dream. Many businesses have significant financial barriers to entry. For example, as of the writing of this article McDonald's requires a minimum payment of 750k of non-borrowed money. In America if you want to buy real estate, banks will require you to have 20% down in cash before they give you a chance. So, how much do you have to invest in your trading business?
Minimum Cash Requirements under US Law to Day Trade
Now that my conscious is clear, let's dive into the numbers a bit more. If you are looking to day trade equities in the US, you need a minimum of 25,000 cash. This dollar figure just allows you to get into the game based on the laws as stated by the Securities Exchange Commission. Now let's run through some scenarios of trading profiles. These are purely fictional, but much like when you hear the sermon at your respective place of worship, one of these messages will be your story.
Fearless 20 something day trader
So, Pete is 26 years old. He makes good money as a mortgage broker, is not married, has very little debt and things have gone pretty smoothly for him in his life. He lives in Austin, Texas, so his expenses aren't that much. He's been able to save 50k dollars at his job and is ready to take the leap of faith to start trading. Pete has 2,500 dollars a month in bills and this covers all of his living expenses. Since short-term trading is taxed based on your income bracket, let's say Pete is at the 25% tax bracket for federal and another 4.5% for state based on his trading income. So, in order to just break even after taxes, Pete needs to make ~3,600 a month or 7.2% monthly return. Now I know there are you reading this that will say, it's not really 7% because its you can day trade with 4 times on cash for equities. But remember to be careful with this sort of thinking, because there is just as much risk of losing money as the potential for profits when leveraging your cash. What do you think Pete's odds are of both growing his account and consistently paying his expenses? Let me dare to say Pete will be under a lot of stress.
55 year-old retiree day trader
Outside of the know-it-all youngsters, there are the early retirees that have succeeded in the business world that now want to tackle the markets in retirement. In this example we have Susan. Susan is a 55 year-old, wife and mother of 2. She is a retired marketing executive that was a consistently big earner over her career. Susan's husband is still working as a partner at a law firm earning a healthy salary, which of course helps with expenses and healthcare coverage. Susan's twin boys are starting their sophomore year at a private institution which sets them back a cool 60k per year. So, Susan needs to come up with ~3k a month to help carry the load to avoid her family from digging into their savings. Remember when I said Susan was a big earner, well she has over 7M in retirement of which she is willing to commit 1M to her trading venture. So, let's quickly recap the numbers again, Susan has 1M to trade of which she needs to make 3k to cover her expenses. This represents a .3% return per month. What do you think the odds are for Susan to both grow her day trading account and consistently cover her expenses?
37 Year Old Zen Trader
Mark is a 37-year old trader with a wife and 3 kids. His average monthly expenses are 3k. Mark was smart with his money and has been able to accumulate enough rental properties that he has a positive cash flow of 5k per month. Mark's trading account is 75k and he has a healthy retirement fund. What do you think the odds are for Mark to both grow his day trading account and consistently cover her expenses?
Saving for Retirement While Day Trading
You will notice in the above examples, we left out some basic items like how much they need for retirement and what are their long-term financial goals. I did this purposefully to simplify the discussion down to the most basic of levels - can they make it as a trader. It really doesn't matter how much you start with, but rather your ability to control expenses and how successfully you can tip things in your favor by keeping your debt to trading capital ratio in check.
Odds are not in your favor
Did you just read those 3 fictional stories and they haven't swayed you one bit in terms of the amount of capital required to start a successful trading career? You still think you can start with 10k while having 3k a month in expenses and still come out ahead in 12-months? Well let me offer you a very sobering statistic - over 80% of day traders lose money. While there aren't dozens of exhaustive studies, I did find one on the web which had a great sample set of data and some hard facts. The paper is titled "Do Individual Day Traders Make Money?". Without giving away all of the goodies from the study, the overwhelming findings is that after you factor in commissions, majority of active traders just break-even.
Once you factor in living expenses and life's curve balls, it's no wonder that most traders end up failing at their dream. It's funny in a way because most people think of trading as a risky profession, as if we are all going out trying to feed our families by playing the lottery In actuality, day trading can be a serious business and would probably have a better brand if its participants had a better understanding of the financial requirements to play the game.
If this article wasn't enough in terms of providing you with insight into your psyche, please visit our section on day trading psychology section of the site. Here you will find more articles that cover risk profiles and the emotions of trading.