Greetings, A quick question for all those current or aspiring full time traders; how do (would) you manage your day to day budgeting and general expenses with no fixed income.
Do (would) you trade with substantial sums to ensure a minimum monthly salary that is realistic.
I am not a full time trader , in beginning I started full time trading but with a regular job it is quite difficult to see market for long hours. Now I prefer to trade part time when I am easy , free and having some time without any tension. I can make smart income with part time trading too.
I do not know if you are a beginning trader, or an experienced one? but I will assume by the question - you are a beginner. If that is the case. . . you may have years of learning to trade ahead of you. . so whatever your decision may be, keep that in mind.
The short answer to this question is [I]yes.[/I]
Nobody who trades for a living is going to discuss his/her personal finances with strangers, publicly here on the internet, or even privately. So, you will have to be content with general answers to your questions about trading capital, earnings and budgeting.
That being said, you have asked two related questions, which I will paraphrase as follows:
How do you budget monthly expenses, given a fluctuating income stream from trading?
How much trading capital is required to support a given lifestyle?
It’s apparent from your post that you are thinking ahead to the time when you can live comfortably on the profits from full-time trading. So, let’s talk in terms of [I]your[/I] income requirements, [I]your[/I] ability to earn profits trading this market, and [I]your[/I] capital requirements.
I see from your post history that you came to the Babypips forum 3 years ago with several years of forex trading experience behind you. Therefore, we should be able to skip over the newby basics, and cut to the chase.
With your years of trading experience, you should have a pretty good feel for your ability to earn a consistent, average, monthly ROI (return on investment) — that is, an average monthly trading profit which is a consistent percentage of the balance in your trading account.
This whole discussion will depend on those two words, [I]consistent[/I] and [I]average.[/I]
Let’s start with the question about required trading capital.
If you are able to earn an ROI of x-percent, and if you are able to maintain (or increase) that ROI as your trading account grows and all the numbers become larger, then you can easily calculate the capital required to generate a given income stream.
Let’s run through a hypothetical analysis. Then you can play with the numbers, adjust them to suit yourself, and determine whether trading for a living would really fit your temperament and fulfill your goals.
Let’s say that you need $4,000 per month in gross income (before taxes) in order to support a reasonable lifestyle and make full-time trading worth the effort and risk. And let’s say that you want this income level to grow over time, which means that you want your account balance to grow over time. Accordingly, you decide to withdraw 2/3 of your profits each month, and leave 1/3 of your profits on deposit in your account in order to grow the account.
Finally, let’s say that you have a proven track record earning x-percent average ROI per month.
We can now write an equation for C, the trading capital you need, as a function of x, your proven ROI.
C = $4,000 / [(x)(2/3)]
which simplifies to
C = $6,000 / x
where x is monthly ROI expressed as a decimal (i.e., if ROI = 1% per month, then x = 0.01)
If ROI = 1%, then x = 0.01, and C = $600,000
If ROI = 2%, then x = 0.02, and C = $300,000
If ROI = 3%, then x = 0.03, and C = $200,000
If ROI = 4%, then x = 0.04, and C = $150,000
If ROI = 5%, then x = 0.05, and C = $120,000
If ROI = 6%, then x = 0.06, and C = $100,000
You may be surprised that it takes so much trading capital to support an average lifestyle. The best star-traders may be able to achieve and maintain ROI’s that are much higher than the numbers we worked with above — and those traders can obviously generate larger income streams trading smaller accounts more aggressively than the examples given above. But, for mere mortals, like ourselves, huge ROI’s simply aren’t sustainable over the long term.
Determining whether trading for a living is feasible for you will depend on how honestly and accurately you determine (1) your true income requirements, and (2) the monthly ROI you can actually achieve and maintain over the long haul.
If you start to underestimate your income requirements, and/or overestimate the ROI you can achieve, in order to make your required capital appear more obtainable, you will be setting yourself up for trouble.
Finally, your question about budgeting should answer itself, given our assumption of a consistent, average monthly ROI in your trading account, and given the fact that the trading capital in your account will be somewhere between 25 times and 150 times the amount of your monthly withdrawals.
.
Great reply by Clint…
Dr Lexy will have something to say, I imagine, given her experience as a f/t trader…
For me, having gone fully self-sufficient for the last 12 months as a music tutor, I can tell you how hard it is to juggle the income fluctuations, always unsure how long a certain client will stay with you and if there will be more queuing up when one leaves… I also work on a need-to-know basis as an interpreter and translator, which adds to my income but is not very predicatble… I end up without an edge, having spent pretty much everything I earnt each month, although I have an automated saving deduction that I put aside each month…but, no money to put into a pension, for exampke, at present… To extend this to trading, if you worked at it like a self-employed, freelance business, you would have to be prepared to live meagerly and cope with uncertainty every month…For this reason it is important to know what risk you are taking and how realistic your income projections are…
Not so much, to be honest: I felt I couldn’t really add anything much useful to Clint’s outstanding reply, above.
In addition to which, as a result of one small but hugely significant change I finally made to all of my trading, only 9 months ago, I’m now going through a phase in which (after withdrawing enough “wages” to cover all my living expenses, each month) my emphasis is firmly on increasing my account-size and therefore the number of lots I can routinely trade … which isn’t particularly relevant to the question, and only 9 months’ “new figures” isn’t really enough to be pontificating on the subject, anyway. :8:
The detailed explanation by Clint above is very good and extremely appropriate. It details very clearly how attempting to trade for a living requires a lot of capital behind you.
However, I personally find the concept of ROI rather misleading when trading on leverage because not all one’s capital in one’s trading account is actually working for you as it does in, say, a savings account. It is only the amount used as margin that is actually at work and the rest is just sitting there to provide a buffer to absorb the constant changes in the level of margin the open positions require and is therefore somewhat arbitrary. For example, two traders could have identical positions and achieve identical results but with totally different ROI’s simply because one has, for example, 100,000 in his trading account and the other has 200,000. The excess balance over actual margin requirements that is actually kept in one’s account is quite undefined and, in fact, many traders keep a portion of the overall trading funds in other trading accounts or in their bank accounts. However, this kind of overall ROI calculation, when based on the [I]total funds [/I]that one has appropriated for trading purposes (wherever they are actually deposited), does gives an idea of what is required to trade for a consistent average high level of income whilst being able to absorb the low swings that inevitably occur from time to time.
Another way of looking at this is to base your capital calculations on your trading strategy itself. Before one can even consider going FT one has to have a solid trading method that has a proven track record of producing a significant level of profitability. But the character of that trading method is also very critical. For example, a long term trading method may produce a good profit on average but might need several months to work through. This might cause complications and uncertainty where income is needed monthly, especially when a period of losing trades occurs. On the other hand, short-term trading methods can produce rapid and regular results which are easier to monitor regarding overall progress and also facilitate closing-out during periods when not trading such as holidays, sickness, etc. - but can be very erratic and uncertain.
Using a short-term trading method to calculate you capital requirements kind of works through the same process but in reverse. For example, one can first determine how many trading days per month are feasible according the method used. E.g. if generally most Mondays and Fridays are excluded as well as days with high risk events then we may be realistically looking at 10-15 actual trading days a month. If one aims to earn USD 4000 per month as a day trader then, on average, each trading day should produce approx USD 300-400. But it must be remembered that this is the[U] net[/U] result according to the normal risk/reward ratio that the method has historically produced.
Then by using the method’s usual performance parameters of how many trades per day and how many pips per trade, it is possible to establish a yardstick level of how many contracts are needed per trade to produce this level of net daily earnings and therefore what amount of margin is required. Then one can apply one’s established capital management rules to also establish how much additional capital is needed to meet the max risk per trade percentage being used.
But this kind of approach is entirely insufficient as such because it does not allow anything for the occasional prolonged drawdown period or non-trading. The capital requirement must include a big safety margin that can comfortably carry a full-time trader though a period of bad results without forcing him to reduce his trading size - and equally the income should be sufficient to replenish and build the capital base when things are going well. How much capital is required for this safety net depends entirely on the trader’s own circumstances and is not really a calculation based on trading.
Thank you for the comprehensive breakdown. It seems that cash is king, I wouldn’t want to estimate a monthly return above 5% with consistency. That might be the problem with retail trading overall and why so many of us fail…getting 5% or so monthly is relatively easy but usually insufficient to justify the effort if dealing with a small account balance; although I suppose it depends what your motivations are.
Hello again, ropunzel
Some thoughts on building a modest trading account into one that can support a full-time trader’s lifestyle:
Suppose you can consistently earn an average return of 5% per month on a modest account balance — say, $20,000. In other words, you have the trading skill to earn $1,000 per month, on average, in the forex market, using your $20,000 account as trading capital.
But, you are discouraged by the following stark realities:
If you withdraw all of your average $1,000/month profits, your account will never grow.
You can’t possibly live on $1,000/month, so the idea of “trading for a living” appears out of reach.
Clearly, before [I][B]Plan A - Trading for a Living[/B][/I] can be put into effect —
— you will need to adopt [I][B]Plan B - Building your Trading Capital,[/B][/I] in order to make Plan A possible.
So, if you concentrate on (1) continuing your disciplined trading, earning 5% per month on average on the trading capital in your account, (2) using all of your profits to grow your account balance, while (3) supporting yourself with your nine-to-five-job — how long will it take you to achieve the balance you need in order to quit your job, and begin supporting yourself trading forex full-time?
Let’s run the numbers.
If the [I]required capital amounts[/I] calculated in my previous post are accurate, then you need to grow your $20,000 account to $120,000.
We can write the following equation:
($20,000)(1.05)^x = $120,000
which says that $20,000, increased by 5% per month for x-number of months, will equal $120,000
We can rewrite the equation as follows:
(1.05)^x = $120,000 / $20,000
which simplifies to
(1.05)^x = 6
We can solve the equation for x, using logarithms:
x (log 1.05) = log 6
x = log 6 / log 1.05
x = 0.77815 / 0.02119
x = 36.724 months, let’s call it [B]37 months.[/B]
Letting your profits accumulate in your account, and using those accumulated profits to increase the size of your trades — compounding your profits, in other words — you can grow your $20,000 account to $120,000 in 37 months, [B]diligently doing what you said above is “relatively easy” to do.[/B]
Thirty-seven months to lay the groundwork for a career-change, for an opportunity to be self-employed, and for the very real chance to create significant wealth in the years that follow.
You can compute the time required to reach a balance of $120,000, starting with a different initial balance, by simply replacing $20,000 with a different amount in the equation above, provided your calculator handles logarithms.
Example:
For an initial balance of $25,000,
(1.05)^x = $120,000 / $25,000
which results in x = 32.15 months
etc.
One final thought: Building a modest starting account into a $120,000 trading account through your own diligent trading is far superior to being given (or, god forbid, borrowing!) $120,000 in the beginning.
Proving to yourself that you can trade $20,000 to $120,000, without becoming impatient or reckless, will prepare you emotionally and psychologically to handle the larger position sizes, the larger gains, [I]and the larger losses[/I] inevitably associated with trading a larger account.
Thirty-seven months to embark on an exciting, new career. — It’s doable.
.
I agree with the part [I]after[/I] the “but”, certainly.
The first part, I suppose, depends on what you mean by “relatively easy”.
I’d say, myself, that it appears to be relatively easy only for a [B][U]very[/U][/B] small minority of aspiring traders, who are highly educated, highly experienced, highly motivated [U]and[/U] have the right kind of personality-type for trading.
I found, when I started trading (after a [B]lot[/B] of education, screen-time, and so on) that it was “relatively easy” to have the odd month in which I achieved 5% or so, but that doing that [I]consistently[/I] was a whole different ball-game - to put it mildly.
Good stuff everyone, here is my two cents
Before you start calculating all the money you will be raking in, the first step in becoming a full time trader is to get your financial house in order. Are you carrying credit card balances, do you have car(s) payments, In other words you need to be debt free except for your mortgage. Next comes learning to live as lean as possible, you don’t need a BMW sitting in your driveway if you are working from home. Now work out your house hold budget knocking as much off as you can. Once you have the number you can live on each month, you must have enough in saving to cover 6 months of living expenses ( 12 months would be better). This is what you will be living on, not your trading. Simply put, you cannot make good trade decisions if you are depending on your next trade to keep the lights on. Any trading profits will go to fund the next 6 months of living expenses, only after you have a full 12 months of living expenses in saving can you think about Any luxuries ( like that BMW), a better move might be to increase your trading account, we can talk about that next.
Now lets talk about how large of a trading account you will need. You need to at the minimum replace your monthly living expenses, this is why you want to get that number down, and working part time or earnings from your spouse can go to those living expenses meaning your trading account may not need to be massive. If you can make 5% return on your money each month you are better then 99% of the traders out there. 1 to 2% a month or 12-24% annually might be more realistic, I would use the 2% monthly number, and figure how much of a trading account you will need to replace the short fall in our living expenses. If you exceed that 2% profit, use that to build your trading account.
There you have my simple blue print for becoming a full time trader, most will never get there
I agree with Clint’s wonderful reply.
I use this http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
to show compounding in practice; the above shows that, with a yearly 5% ROI on a £1000 account
you would gain a meager £1653 in twenty years…
I compound so it grows no matter what, since i’m right more than i’m wrong it grows like a bank.
Hmmm… Psalm 90:6 springs to mind 
That is a very useful input
Good input. putting money aside to relieve the immediate financial pressure on your trading is very important for psychology and objective merit based trading. I’m surprised you say 5% is high, do you not use leverage.
Sounds like you’ve been doing this for a while and sometimes you can look at a chart and without much analysis intuitively know what is going to happen next, simply because you seen it so many times before. If you’re going for a low return, you can afford to wait to trade those moments only, across 28+ available currency pairs.
My problem is doing better than that reliably which I can’t. So i’m chasing my tail looking for a high yield system because im too afraid to use the true required capital to go full time where 5% return covers all costs and some: what if the broker goes under.
Hi Lexy, are you trading as an individual or have you incorporated as a small fund in some way. I figure the problem as Clint alluded to is cash and if you’re going full time you might as well set yourself in such a way that if you are successful you can then be marketable to attract investment from others some years down the road.
Yes; I’m entirely independent.
The possibility has recently been raised that next year I may also trade remotely a little additional account, possibly linked to my own, for a small offshore hedge-fund, on a profit-sharing basis. I had never thought about this before, and I do have some reservations about it - but there’s no harm, in principle, in investigating the potential for additional trading capital, I suppose.
I’ve just replied, with a suggestion for you, in your thread asking about “arcades”. 
What a post.
I’m sorry. But I wanted to get this out to the front of the pack here.
For those who have dreams of getting to the place of full time trading, this just might be the [I]way[/I] to do it. Sure there could be other ways, but I think this is good old common sense.
Thanks for [B]all[/B] who chimed in on this thread!
Good stuff!
Mike
Me thinks this might be a good time to share a few simple, time-saving Excel tips.
As may become evident, I have way too much time on my hands…
Anyway, let:
-Initial deposit (20K)= Present Value (PV) - always negative in Excel so enter “-20000”
-Target total (120k) = Future Value (FV)
-Average monthly rate of return (5%) =Rate
Then in Excel, to calculate the number of periods (nper), we’ll have the following:
Say, in the above example we were given the number of periods (37) and instead we were required to calculate the average monthly rate of return we’ll have:
We can similarly determine PV [formula: “=PV(…)”] and FV ["=FV(…)"] assuming the required variables are known.
You may have noticed that I’ve manually entered the relevant figures in the formula bars in the examples above - this was purely for explanatory purposes and is not the done thing. The correct approach can be seen in the examples below - after opening the parenthesis in your formula, click on relevant data cell and seperate cell addresses with a comma.
Also, the “Payment” variable as seen in the above and below tables, is not applicable to these calculations but must be included in the formula and set to zero.
Now according to Tradimo, Phil Laak a pro poker player/trader turned 10K into over 80K in just two years (trading). So as a matter of interest, lets calculate his average monthly and annualized returns based on these figures using Excel:
Average monthly return:
Annualized returns:
So there you go - save these or similar templates in Excel and you need never look at a calculator (or logarithms) again when performing these calculations…)
