How much trading capital you need to do trading for Living.
A simple answer is the more, the better. Under capitalization is one of the major problems that traders have. First of all, trading is one of the most difficult professions on the earth due to its very high earning potentials. If you have a few thousands trying to make a living at it, then what I can tell you is that it is impossible. You need at least 7-8 Lakh (100K $ approx.), to even stand a chance to make a modest living if (a big if) you have the skills.
For example, your objective is to make 3-4 Lakh per year consistently, which is 50% of your 7-8 Lakh. A 50% annual return year over year WITHOUT compounding is very hard to achieve even for the most experienced traders. With compounding, not even Warren Buffet could. I believe Warren Buffets track record is perhaps around 15%-20% minus management fees with compounding. The Madoff’s track record was around 10% compounding. You know why I mentioned Madoff here. Stay away from anyone who claims something like that.
As I always mentioned in the past, a few lucky shots or even a couple of years of lucky shots mean nothing to me. A trader must prove herself through at least one major crash like the dot come bust or the financial crisis that we just had, and a major bull market. If you have gone through these cycles and still made some decent money, you are all set for the rest of your life since trading will never change. It is this way today and was like that 100 years ago because it is all about human psychology.
A consistent 50% annual return without compounding is hard. But I believe a 30% without compounding is doable. But 30% of 8 Lakh is only 2.5 Lakh. 2.5 Lakh is around the poverty line in the developed world such as the US, Canada or Japan. 2.5 Lakh per year is a mediocre amount in India. The beauty of trading is that you can do it wherever there is an Internet connection. I believe the income tax is around 17% in Hong Kong, 20% in India. We will explore this option in another post.
So obviously 2.5 Lakh is not good in the India. If you need to make 5 Lakh per year, you would need 16 Lakh trading capital. I am every bit against using leverage/margin. So let’s not even go there. If you have 1 Crores, you could make 30 Lakh theoretically provided you trade liquid stocks. That is one of the reasons why I never trade those thin penny stocks. The more liquid, the harder they are to trade because there are too many professionals in them. But you have to go compete with them head on.
Now you see why it is the more, the better. But this does not mean people who are temporarily undercapitalized should not even try. You should. But you should not focus on how much you can make in the first couple of years. Instead, you need to focus on your trading plan/system because all it matters, in the end, is your percentage. If you could trade 1 lakh account well, you should do well with a 10 lakh account.
Remember Trading for Living is a serious job and do not leave your full-time jobs until and unless you have been time tested in the markets. This is just an overview, We will discuss the calculations in next post.