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BookingAlpha Option Trading Advisory

Friday, September 7, 2012

How much capital do you need to trade for a living?

It is a good question, and one we probably never asked ourselves in the very early stages of our trading careers. How much capital do I need to trade for a living?

The answer obviously depends on many many factors. One of the most important being the cost of life in your city. Hey, after all you can survive with 100 USD a month in Cuba!! hehe. You would only need to make 1200 USD in profits per year to be able to make a living off trading. Well but there's no trading from inside of Cuba so I guess it doesn't count. Anyways, let's say you need 2500 USD per month, that's an accurate assumption for me in Toronto, Canada. 2500 USD per month means 30 000 USD per year.

Now, the second factor, equally important: How much growth on a yearly basis can you confidently say you can achieve on your portfolio? And this is a very tricky question that leads to another question: What kind of returns are consistently achievable over the long term? Because, the fact that you made 40% one year doesn't mean you can repeat it consistently. At that level you are most likely using risks levels that are not long term sustainable. So, what is a realistic yearly return?

Well, it is a well known and sad reality that somewhere between 90 - 95% of traders lose money. Approximately 5 out of 6 Forex traders blow up their entire account in less than 6 months. And it is also generally accepted that 70 to 75% of the so called professional money managers can't beat the S&P 500.

That means, if we get to beat the S&P 500 every year, we are doing better than 90% of traders out there, who simply don't make a single penny. It also means we are doing better than three quarters of the money managers around the world.

Looking at the data presented on this article, the S&P 500 average return over the last 25 years has been 9.28%. There are better and worse years, but that's the average. So, if you get to consistently achieve a 10% yearly return on your trading capital, you my friend, are a stellar trader. And taking it a step further, if you can consistently achieve 20% per year you are definitely elite.

Obviously, you can't assume you are going to be elite. But still let's assume you are an excellent trader and you can achieve 1% return per month. That means 12% per year. Let's assume that you have, in fact, already done it for 3 years at least, otherwise you can't really say "Hey I'm going to start trading for a living tomorrow!!" Ok, with 12% per year, and a need of 30 000 USD per year to live, the math is simple: 30000 * 100/12 = 250 000.

If I were an excellent trader, able to consistently achieve a 12% yearly return, I would need 250 000 USD, that is a quarter of a million, in order to trade for a living.

And this reality is hard. It strikes us all at some point in our careers as traders. Oh that moment of enlightenment and discovery when we say, "Wait a minute! My plan of trading full time with a 10 000 dollar portfolio is totally unrealistic!" Yeah,...c'mon, we've all been there.

Over time you realize that trading is a business, like any other. The majority of traders fail. That's true but guess what? The majority of wanna-be rock stars also fail; the majority of wannabe Hollywood actors never get there; the majority of people who wanted to be elite athletes never made it, and for every one you see competing at the Olympics, there were probably 1000 that quit along the way and couldn't make it. Find any lucrative activity, any, with a success rate higher than 10%, and if you find it, please I beg you to let me know.

Like somebody said, trading for a living is not about having a little money and making it big, it is about having a lot of money in order to just make a little.

But hey, cheer up! There is hope! If you can make it (I frankly haven't) life is probably going to be more enjoyable. It won't take one year, two nor three, it will probably take more than a decade of compounding effects, which is indeed very powerful. And in the meantime, while we are not able to trade for a living yet, let's just be happy and welcome any supplementary income we can get from the markets.

If you enjoyed this article you will probably like the one I wrote back in March 5, 2011 about how much money you need to retire. Here it goes: How much money is enough?

Related articles:
Trading with realistic expectations
A simple strategy that beats most traders
Covered Call vs Buy and Hold. Performance comparison
Invest and Retire before you die
ETF Rotation Systems to beat the Market

Go to the bottom of this page in order to see the Legal Stuff


  1. Hi,
    trading for a living means that you will most probably have to work full-time.
    Let's assume you have no other sources of revenue, your trading profits will be examined by the IRS ( or equivalent): your revenues will be subject to income tax and other charges. Taxes vary highly , but here( northern europe) we speak about 45 %, so you would have to nearly double your projected income. Not 2.500 but 5.000 usd/month...
    Not impossible, but it's a long and hard way to reach such a steady income months after months.
    In my view, the ideal solution would be to have another source of income to compensate the bad times that occur regularly in trading.

  2. Excellent comment. You're absolutely right. Thanks for pointing that out H.D!

  3. Hi,
    I'm wondering if in your arguments something is missing. I feel you haven't consider the leverage at all. Trading options (is what I'm doing just to make some extra income a month), you don't need to be a stellar guru to perform, at each single profiteable trade, returns far over 10%. The point here is NOT to loss 20% in the losing trades. As you pointed out correctly the challenge is to get it consistently over time.
    In my experience, with just a 20K USD account you can afford trades whose potential gain is, thanks to the leverage, absolutely fair with the target you mentioned.
    All in all, your 250K USD capital need, seems to me 10 times more than the actual need.

    1. You are more correct Anonymous in your capital requirements, I know it to be so as do other option traders I know.

      Of course good times come and go with different levels of Vega. For instance late 2011 when VIX was around the low 30's I personally pulled +291% from OCT4 11 - JAN4 12 and if we weren't pulling +35% minimum a month we just weren't trying to make money yet this same period in 2012-2013 with VIX around 15 I only managed +28%.

      Lazy Trader says you need 250'000 to make $30k I am guessing that is to trade a Covered Call system for income but as you say with Options being leveraged there ARE strategies and better returns available to make such money and YES consistently.

    2. That 291% trade, did you go all in ? You talk like your portfolio grew that amount. Did you trade your whole capital in that only one position?
      Second, for that one winner, how many losers do you normally have? Look at the best traders online and see their returns. Or read from other sources, for example The New Markets Wizards. Conversations with the greatest traders of America. Nobody, nobody, gets 200% returns a year consistently

  4. Hey Anonymous thanks for your comment. Well, to your point, I need 30000 a year for my living expenses. If I were to trade with a capital of only 20000, I would need to make 150% return every year. Show me one single trader who is able to consistently do that year after year. There's none.

    Again, Im not saying you cannot make a living trading 20 grand, there are countries where you can get by with 100 dollars a month, 150, 200. Well, if that's your case you can definitely trade full time for a living with a 20000 capital. Otherwise, it is simply not possible nor sustainable over the long run

  5. Nice article only wanna ask that really can depend on forex for our living.

  6. People do not understand these larger number returns anymore. There is so much work into non-speculative trading, that most trade with hedges. So basically....they hit a lot of singles and no longer try to hit home runs. With a balanced options portfolio you could make 30-50% / month income, With the volatility low and the light movement its a bit harder right now. But generally my goal is around 30 percent profit. Obviously though I would not want my entire bucket of fish out there though!! So 250K would be my balance before I try to make 20K / month or more a month personally

    1. 30 - 50% portfolio growth per month? Have you traded before ?
      With 30% portfolio growth per month, your 250K portfolio becomes....drum rolls please.....5.8 million just after trading one year.
      Not gonna happen my friend.