Just about everywhere you read in the financial space, you’ll find articles about stock traders that made it big. Professional traders are often depicted in high-class offices in front of eight screens, on yachts most people could only dream of even sailing on, let alone owning, or standing by cars that would make the average auto enthusiast drool.
These people made the stock market their day job and they’ve hit the big leagues.
But strewn throughout the context of these articles, you’ll also find advertisements attempting to sell you high-dollar software, signal services, and trading platforms. This begs the question: Can you really make serious money trading, or is the idea of Wall Street riches really just a myth?
Is It Possible to Make a Living Trading Stocks?
The simple answer to whether or not it’s possible to trade stocks for a living is yes. There are millions of traders out there and plenty of them have made active trading their full-time job.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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This means they make enough money trading stocks to maintain their lifestyles. It also means that many devote substantial amounts of time to the trading process, both in terms of active trading during market hours and stock research at other times
However, that doesn’t mean beginners should rush to get involved in active trading. Many active stock traders are experts at using technical analysis to predict short-term movements in the market, regardless of market conditions. Others are well-versed in fundamental stock analysis. Some are experts in both.
If you want to become an active stock trader and potentially quit your day job, you need to start slow. You must understand the risks, do your research, and practice grabbing the figurative bull by the horns. And you’ll want to answer a few key questions before doing too much work to get your day trading career off the ground.
How Much Can You Make Day Trading?
According to VantagePoint, day traders with a solid trading strategy who start with a nest egg of $30,000 can earn about $5,500 per month or $66,000 per year.
According to USA Today, the average American earns a salary of around $51,480 per year. This means that with a reasonable starting balance, and a solid day trading strategy, you could earn an above-average annual salary by exploiting price movements in the market.
But that doesn’t mean you should start day trading just yet. Unfortunately, only a small percentage of traders who attempt to turn the market into a career ever do so successfully.
What Do You Need to Get Started?
There are a few things that are absolutely essential for new traders to have before they get started in the stock market.
Technical Analysis Skills
Predicting short-term moves in the market is an intricate process that requires the use of various technical indicators. The most successful traders have a keen ability to spot patterns in trading charts that indicate when it’s time to buy and when it’s time to sell, also known as technical indicators.
Before getting started in the market, prospective traders should research technical analysis and consider taking an online course or two to learn how it works.
A Trading Strategy
The importance of a solid trading strategy is impossible to overstate. A trading strategy is like a roadmap that guides you on your way to stock market success, and a good one can make all the difference.
Your trading strategy must outline what types of stocks you should trade, when to buy them, and when to sell them. It must do this all while incorporating risk management techniques to protect you from a significant decline.
A Trading Plan
Successful stock traders always have a tactical trading plan that puts their strategy into action. So should you. Make sure your plan covers:
- Trade Size. You should never risk too much of your capital on a single trade. Your trading plan should include a trade size cap to avoid excessive losses if a trade goes bad.
- Trading Strategy. Your strategy should outline when to buy and sell stocks and other financial instruments. Use risk management tools like stop-loss orders and set specific parameters that stocks must meet before you start trading them.
- Emotion Control. Your plan should also include a course of action for overcoming emotions that can devastate returns. In some cases, that course of action will be to step away from the trading desk for the day when things aren’t going quite as planned.
- Time Commitment. Finally, it’s important to bring structure into the process when you trade for a living. After all, you want to make sure you’re at the trading desk long enough to generate meaningful returns. Create a schedule outlining the time you’ll spend as a professional trader. Some traders work for only a few hours per day, but most professionals devote eight or more hours daily.
A Paper Trading Account
Before risking your hard-earned money in the stock market in hopes that your strategy is ready to go and you’ll be able to quit your day job, you’ll want to give yourself a figurative final exam with a trading simulator.
These simulators allow traders to test their strategies in real-time market conditions with digital cash. They put no real money at risk.
If your strategy and trading plan lead to profits in the real-life environment, you’re ready to move on to real-world trading. If not, take a few steps back to determine what needs to change to put you in the black.
A Brokerage Account & Trading Platform
There are several online brokers to choose from, each with their own unique advantages, disadvantages, and trading platforms. Take some time to compare your options with the following factors in mind:
- Commissions & Fees. There are several commission-free brokers online, so there’s no reason to pay commissions on your trades. However, you should also look into margin rates, contract fees, and any other fee charged by the brokers you’re considering when making your comparison.
- Available Assets. Every broker has its own set of available assets to trade. With some, that list is relatively small, limiting your options. If you plan to trade many different types of assets, sign up with a broker that offers access to them all.
- Trading Platform. Many brokers offer more than one trading platform. Before choosing a broker, test each out to determine the best fit. You’ll need one with intuitive charting capabilities, plus any indicators and order types central to your trading strategy.
Obstacles & Risks to Consider
At first glance, trading in the stock market looks like a glass room filled with butterflies and rainbows. But where there are rainbows, there’s often rain.
Consider these significant trading obstacles and risks before getting started.
Low Success Rate
While plenty of traders make money buying and selling stocks, only a small minority make enough money to live off of. This means that most people who pursue a trading career will fail.
Volatility, or the rate of price fluctuations in the market, is a gift and a curse to traders. Traders generally like stocks that move rapidly, but some fail to realize that volatility isn’t directional.
In other words, a stock that rapidly moves up can also rapidly move down. If you don’t have your finger on the pulse, the downward spike could lead to a big hit to your earnings. The opposite is true when trading short positions.
When trading stocks, you’re making short-term predictions centered around which direction the stock is likely to move in. But whether you’re making predictions about stock price movement or anything else, short-term predictions are often inaccurate.
Think about it this way. If you were to predict that a driver gets a speeding ticket on Main Street in your hometown in the next three seconds, you’d have a low probability of success. But if you were to predict that someone would get a ticket on that same street sometime in the hour, your chances would get better.
Now, imagine you predict someone gets a speeding ticket on Main Street sometime in the next month. Your probability of success is likely to be nearly 100%.
Time makes the difference. The bottom line is that short-term predictions in the stock market can be dangerous business.
Pattern Day Trader Rules
To ensure that those with a lack of market knowledge and a lack of ability to absorb a loss don’t get involved in the high-risk process of day trading, FINRA created a designation known as the pattern day trader.
The designation covers traders who make four or more day trades within any period spanning five business days. These traders must keep at least $25,000 in their trading accounts.
The good news is that this rule does allow any trader to make three or fewer trades per week. If you want to start a trading career but don’t have $25,000 to invest right away, you can start on a part-time basis and stay under the day trading limit until your account builds to meet pattern day trader requirements.
Ways to Make a Living Trading Stocks
There are two different ways to make a living as a trader: trading from home and working for a trading firm.
Trade Your Own Account
The most popular, and most obvious, option is to trade your own money. All you need is a computer with internet access and a brokerage account, and you’ll have the access you need.
Pros & Cons of Trading From Home
|Make your own hours||Lack of human communication|
|Earn meaningful income||Must be self-motivated|
|You’re your own boss||Lack of professional guidance|
Work for a Trading Firm
Hedge funds, actively managed exchange-traded funds (ETFs), mutual funds, and other investment firms employ several traders who work as a team to find and exploit opportunities in the stock market.
As with trading your own money, trading for a firm comes with its own list of pros and cons:
Pros & Cons of Trading for a Firm
|Guidance from leadership||Hours set for you|
|Work with a team||You’ll always need to answer to someone|
|Exciting, fast-paced work environment||You may need to commute to an office|
How to Get Started Trading Stocks for a Living
Getting started as a stock trader is a relatively simple process. However, it’s important that prospects take every step in the process seriously, as this can mean the difference between making it to become one of the 10% to 15% of people that succeed and having to look for other opportunities.
Follow these steps to make it happen.
Step #1: Learn
The stock market is an intricate system with several moving parts, and it’s important that you know what each part is and where it goes before you get started.
There are several sources of education online. Some of the most popular options include:
- Articles. Articles about the inner workings of the stock market and the stock trading process are all over the web. Make it a habit to read about the stock market for at least an hour a day.
- Videos. Some consumers would prefer watching educational videos, and there’s no shortage of them online. All you need to do to find them is go to YouTube and type “how to trade stocks” in the search bar. You’ll find countless videos that will put you on the right path.
- Courses. It’s also a good idea to take a course or two on day trading. There are several online courses to choose from that will help brush up your knowledge.
Step #2: Develop a Trading Plan
Your trading plan should include a strategy that outlines the types of stocks you’ll target, when to buy them, when to sell them, and measures to take for risk management. You’ll also need to plan for actions to take when emotions take hold, set a schedule, and determine your trading hours.
It’s best to think of trading as a business, meaning the trading plan is a business plan.
Step #3: Use a Trading Simulator
At one point, trading simulators were top-of-the-line technology, and users had to pay membership fees to access them. Today, they’re a dime a dozen, available for free in seemingly every corner of the internet.
Sign up for a paper trading account from one of the many providers and test your strategy.
If it’s a bust, no sweat. You didn’t actually lose anything. Go back to the drawing board and think of things you can change to bring your strategy up to snuff. Once your strategy leads to relatively consistent winning trades in the simulated environment, you’re ready to move on to step #4.
Step #4: Open a Trading Account & Start Trading
Compare brokerage accounts and trading platforms following the tips in the section titled “A Brokerage Account & Trading Platform” above. Sign up for the service you’ve decided to use and fund your account.
Once your account is funded, you’ll be ready to start trading!
Tips to Help You Trade Successfully
There are a few simple things you can do to help ensure your success as a trader:
- Stick to Your Strategy. Your strategy was designed to expose you to the highest profitability at the lowest risk possible. Never try to out-think the market. If you simply stick to your strategy and trust your research, you should be on your way to success.
- Know When to Walk Away. Trading is an exciting and emotional process. However, when traders let emotions take control, substantial losses are often the result. If you find yourself being overcome by fear or greed while you trade, it’s time to walk away and come back to the market later.
- Start Small. Trading isn’t a get-rich-quick scheme. It’s a process that requires a significant learning curve and a bit of patience. Start small, learn the ropes, and grow. Just like any other career, there are several rungs on the ladder from the bottom to the top. Be diligent, yet be sure to scale that ladder carefully.
- Always Practice Risk Management. Risk management is the name of the game in trading. Even the most successful traders make losing trades from time to time, but the size of those losses will be the difference. Make sure your strategy includes instruction for minimizing the unavoidable occasional loss. Stop-loss orders are a great way to actively manage risk.
A trading career is an exciting and rewarding one that has the potential to open the door to both financial freedom and lifestyle freedom. However, if you plan on pursuing a career as a trader, it’s important to consider the risk and be diligent about the educational process.
Only 10% to 15% of traders ever make enough money to live off of their trading activities. Those are tall odds. But with enough research, practice, and experience, you could find yourself beating them.