Perhaps the following approach could be useful for someone who trades for a living: Have a [B]whole[/B] year of living expenses in a bank account with a reasonable interest rate on the money. Pay your daily bills from this money. This bank account should act as a ‘capacitor’ (electronically speaking) to smooth out the weekly/monthly fluctuations in your trading return. Refresh this capacitor regularly with funds from your trading account, in a manner that the trading account will not diminish, but grows in the long term.
And in the case you realize that your trading gives you not as much return as you need long-term, then you still have the funds in your ‘capacitor’ to assist you while looking for a regular job again.
So this gives point no. 6 on the list of requirements: [B]Enough[/B] funds. Better: [B]More than enough[/B] funds.
Trading for a living undercapitalized is a call for disaster.
While I do agree that everyone should have a back-up emergency fund, trading for a living and having that kind of fall-back makes me a little nervous. The reason I say that is this. If you know you have a buffer like that to back you up in case of problems, you may tend to take more risk than would otherwise be the case. Similarly, if you do have to draw down on your emergency fund, it could very easily lead to “make up” trading where you try to make back the money. Again, that can lead to increased risk.
The best solution is to have an overcapitalized trading account so that 1) you don’t need to make overly large returns to meet your needs and 2) that if you do have to drawdown it won’t hurt much.
I do agree with you Yani. The simple way to trading success is to [B]developed one’s own proprietary trading system[/B]. Buying any trading system is the lazy man’s approach, and the lazy man cannot succeed in this game. No matter how crude it is from the start, as long as you figure it by your own, thats what is important.
Then the next step is to gradually refine your system through trial and errors using a simulated or demo account. Then after at least one year of trading simulations with honest to goodness recording of the results and your observations in the market and recording of your emotional or psychological reactions, you start trading with actual account using first a small capital. Then gradually increase it after finding success in your strategy.
[B]Discipline[/B] is also the other most important aspect. If trading is a bird, then discipline is its wings. In the same manner as the birds cannot fly without wings, one’s trading cannot take off without imposing the wings of DISCIPLINE.
[B]Overcoming fear[/B] is also equally important. Fear exist only in the realm of the mind. As long as you are not prepared you will have fear, and as long as you do not have confidence on your own proprietary trading system fear ruins your trade plan.
[B]Money Management [/B] is the rule that ensures long term survival. Trading can be viewed as a game of probability. Though if you only make right trade 50% of the time, as long as the winners is bigger than the lossers, you end up making enough money at the end of the year. It can also be viewed as a business, as long as the revenue (profit) is bigger than the expenses (losses) your forex trading business grows bigger accross time.
There is also another alternative that hasn’t been mentioned yet, one which is used all the time by people in other businesses: Other People’s Money (OPM). OPM is used by just about any business to get itself off the ground. More than likely, if you own a house, you’ve used the power of OPM to buy it: your mortgage.
If you really view your trading as a business (and you should) then looking to trade OPM is one option that you can take a look at. Obviously there are some serious obstacles to overcome to do this (having a good enough track record to be able to get investment, being able to handle trading money that is not your own, etc), but it is an option that can accelerate you towards becoming a full time trader, where you earn your income from your trading activities.
In the same vein, what about considering joining a trading firm, and using their money to trade by? If you’re good you make both the company and yourself money.