Investing: A Viable Career Path?

Making a living off investing is possible, but it is not easy. It requires discipline, education, a good strategy, and enough money to support yourself while you learn the ropes.

Most 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.

Before quitting your job, it is important to know that you can achieve steady returns across different market conditions. You will also need enough capital to meet margin requirements, withstand market downturns, and diversify your trades.

If you are interested in investing in dividend-paying stocks and funds, you will receive regular cash payments throughout the year, which can be used for essentials such as housing, food, and healthcare.

There are many other ways to generate passive income, including investing in real estate, high-yield savings accounts, and peer-to-peer lending.

Discipline and a clear plan

Trading for a living requires a high level of discipline and a clear plan. Here are some key considerations for those seeking to make a living through investing:

Education

It is critical to spend time educating yourself about everything related to trading. This includes understanding the theories, products, and institutional players in the markets. Get acquainted with the playing field by reading introductory books on strategies and theories. Familiarize yourself with the rules and regulations set by institutions like the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the IRS. Test your knowledge using a paper trading simulator before considering a full-time trading career.

Trading Strategy

Develop a sound trading methodology that takes advantage of market volatility while adhering to risk management principles. Test your strategy over different market environments and timeframes before deploying it with real money. Start with a demo account and gradually progress to risk-taking positions. Remember that successful trading is as much about managing risks as it is about spotting good prospects.

Financial Planning

Ensure you have sufficient capital to cover both trading capital and living expenses. Many experienced traders recommend setting aside at least one year's worth of income for living expenses such as housing, insurance, and food. This financial cushion will provide peace of mind and allow you to focus on trading without the immediate pressure of generating profits. Additionally, plan for taxes by monitoring dividend tax rates and setting aside funds to comply with taxable income requirements.

Mental Preparation

Trading can be emotionally challenging due to the constant movement of stock prices. To succeed, you must leave emotion out of your trading decisions. Prepare yourself for the financial losses that often accompany the initial months of trading and learn from your mistakes without getting caught up in emotional highs and lows. Develop the mental fortitude to handle the stress and isolation that can come with full-time trading.

Risk Management

Effective risk management is crucial to long-term success in trading. Understand that even small percentage losses in your trades can have a significant impact on your overall capital. Be cautious and conservative in your risk allocation, especially when starting. Remember that the goal of trading for a living is to achieve a reliable and consistent revenue stream, which takes time, diligence, and sometimes luck.

Education about trading

Trading requires a high level of focus and discipline. To trade successfully, you must first educate yourself about everything related to trading. This includes understanding the basics of markets, risk management, and money management.

The Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the IRS all offer valuable information for traders. It is also beneficial to read introductory books on strategies and theories to help you get acquainted with the playing field. Once you understand the theories, products, and institutional players in the markets, you should test your knowledge using a paper trading simulator.

You can also access an array of educational resources online, including articles, videos, podcasts, and in-person events. These resources can help you develop a trading strategy and stick to it. For example, Charles Schwab offers an extensive library of educational content for traders, including technical and fundamental analysis, strategies for equities and derivatives, and risk management.

It is important to remember that trading requires a significant amount of capital to get started. 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 these traders must maintain a brokerage account balance of $25,000.

A good trading strategy

Making a living off investing is possible but challenging. It requires discipline, a good understanding of the market, and a robust trading strategy. Here are some key considerations for developing a good trading strategy:

Planning

A trading strategy should be based on a well-considered investment and trading plan. This includes defining your investing objectives, risk tolerance, time horizon, and tax implications. It's important to use objective data and analysis and periodically re-evaluate and adjust your strategy as market conditions change.

Technical Analysis vs Fundamental Analysis

Most trading strategies rely on either technical analysis or fundamental analysis. Technical analysis focuses on studying price movements and patterns to identify market trends and make trading decisions. This approach assumes that all relevant information about a security is reflected in its price. Fundamental analysis, on the other hand, involves evaluating factors such as revenue growth, profitability, and market trends to identify investment opportunities.

Common Trading Strategies

• Trend Trading: This strategy involves using technical analysis to identify the direction of market momentum and trading in the direction of the prevailing trend.
• Range Trading: This strategy focuses on short-term profit-taking within a defined range of price oscillations.
• Breakout Trading: This strategy aims to enter a trend as early as possible, anticipating a "breakout" from the current range.
• Reversal Trading: This strategy identifies when a current trend is about to change direction and then follows the new trend.
• News Trading: Trading based on news announcements and market expectations, requiring quick assessment and decision-making.
• End-of-Day Trading: Trading near the close of markets, studying price movements, and speculating on how the price could move.
• Day Trading: Taking advantage of price fluctuations during market open and close hours, typically with multiple positions open in a day but none left open overnight.
• Swing Trading: Trading on both sides of the market, buying when expecting a rise and selling when anticipating a fall.
• Scalping: Taking very short-term trades with small price movements, aiming for small profits on each trade.
• Position Trading: Holding positions for a long period, ignoring minor fluctuations, and focusing on long-term trends.

Risk Management

Regardless of the strategy chosen, risk management is crucial. This includes setting stop-loss orders, take-profit orders, and limit orders to minimise potential losses. It's also important to only invest money you can afford to lose and have a separate financial cushion for living expenses.

Enough money to support yourself

If you want to make a living off investing, you'll need to have enough money to support yourself while you learn the ropes and only invest money that you can afford to lose. Most aspiring full-time traders underestimate the capital needed. For example, you'll need around $200,000 minimum between trading capital ($75,000 to $100,000), Financial Industry Regulatory Authority's (FINRA) mandatory $25,000 for pattern day trading, and about 12 months of living expenses.

You should also have a financial cushion to give you peace of mind and allow you to begin your trading career without the pressure of having to pay rent or worry about other living expenses. Even when it comes to capital for your brokerage account, day traders need significant capital to trade in earnest.

If you don't plan on day trading but still want to make a living trading, you'll need to make each 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.

To ensure you have enough money to support yourself, you should plan your living expenses. Know the dollar amount you can live on and still have a comfortable lifestyle. This means counting any Social Security income as part of your income needs. You should cut out any expenses you don’t really need. The lower your living expenses, the less you will have to withdraw from your portfolio.

You should also invest for income growth. If you can invest in dividend stocks with a history of increasing their dividends, you can grow your portfolio. The growing dividends will cover inflation as you rely on the portfolio for income each year.

Mental preparation

Making a living off investing is possible but not easy. It requires a lot of mental preparation. Here are some key things to keep in mind:

Discipline and Emotional Resilience

You will need to achieve a high level of focus and discipline. The constant movement of stock prices can be unnerving, and you must be able to stick to your plan. You will also need to leave emotion out of your trading. You will likely experience severe financial losses, especially in the beginning, and you must be able to learn from your mistakes without getting caught up in emotional highs and lows.

Understand the Challenges

Be aware of the psychological challenges of full-time trading, including isolation, irregular income, and relationship strain. Understand that trading is more than just executing a few good trades—it requires a serious commitment to continual learning, financial discipline, and risk management.

Have a Financial Cushion

Before you begin, set aside enough money to support yourself while you learn the ropes. Many experienced traders suggest having at least one year's worth of income set aside before you start. This will give you peace of mind and allow you to focus on learning without the pressure of immediate financial concerns.

Education and Strategy

Spend time educating yourself about everything related to trading. Understand the theories, products, and institutional players in the markets. Develop a sound trading strategy and test it out using a paper trading simulator before you risk any real money.

Frequently asked questions