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Most traders, not just in India but the whole world wonder if they can make enough money from trading to live a comfortable life. Yes the real question is if they can leave their day jobs and make similar amount trading the stock markets to feed their families.
Well frankly I really don’t get this. Why everyone want to leave their jobs? Lets keep it for another day.
I get many phone calls and mails asking something similar on the above lines. However recently I got this email from one of my subscribers Mr. Chandirasekaran which is quite interesting and I would like to share his question too. I have taken his permission. My answer follows the question.
Hi Dilip Shaw,
Fantastic article on how to manage our finances!
I also agree with your views on Gold and property. Gold is not very lucrative over longer periods compared to equity. Similarly property is illiquid and not suited to middle class people like us as you rightly mentioned.
By the way I wanted to ask you something. Its inspiring to know that despite 7 lakhs loss, you have learnt some hard lessons and finally came out of it and now able to generate sustainable income.
Now I just wanted to know whether you are able to make money on an annual basis at least 70% of your last salary from options/equities etc. consistently? I mean whether you are able to meet all of your family monthly expenses and also able to lead a comfortable life?
Thanks & Best Regards,
This was my response:
Thank You for the kind words. 🙂
If you read my article here:
You will find this:
Most traders who take my options trading course ask me what I do with the profits earned with my trades. Well I believe in power of compounding. Frankly right now I do not need the money that I make from trading or the stock markets. So I would rather make sure I am compounding it. If I take it out and do not use it, and assuming I keep it in my bank account – it will grow at only 3.5% per year. Compare this to almost 3% per month. So where should I keep my profits? Of course I should reinvest it. If I keep re-investing in my trading account it will grow much faster than if I put it in my bank account or even an FD.
You got your answer. I strictly follow the 25-25-25-25 rule. (25% of my savings goes into Government backed securities like FD, PPF etc, 25% goes into 4/5 star rated mutual funds, 25% goes into direct equity buying of companies with strong management and the rest 25% comes into my trading account. However since my limit of investing in the trading account is reached I do not add any more money into it – but do not withdraw the profits as well – so indirectly I am investing into it. For more detailed info read here.) Even if I want my wife will not allow me to invest more in my trading account. She cannot forget the bad times, and even today the pain is in me. In 2011 I really had a tough time to convince her to put some money out of our savings again into my trading account. It came out to be a good decision.
However it does not mean I am not investing more into it. The profits generated are also earned money right? So investing 100% of the profits back into my trading account is also the same as bringing new money into the trading account. Essentially I do not feel the necessity to add any extra money to my trading account. Another reason is my limit of bringing new money into my trading account has been reached, so that law does not allow me to bring any more money. Yes temptation is there but I will not fall for it. However by not withdrawing money I am increasing my trading kitty. Hope its clear, bringing more money into the trading account every month or investing the profits back into it is the same.
To answer your question – my account is still not that big that I can withdraw money from it every month and live a comfortable life. But if I keep going at this rate – eventually in 4-5 years I will be able to leave my part-time consulting job. But frankly I love my job, so I am not sure if I will leave it soon.
I understand why you asked this. Most people who call me ask the same question. Can they make enough from trading to live a comfortable life?
Well it depends on your needs, the kind of profits you can generate from trading and cash in your trading account.
For example Family A may need Rs. 50,000 per month to live comfortably. The head of the family is smart and makes 10% profit per month, but his trading account has only Rs. 1 Lakh. He cannot leave his job at least now.
Family B may need 1 lakh per month. They generate 5% profits per month and their trading account is 20 Lakhs. Yes target met. Their bread earner can leave his/her job.
You get the point. Your family needs, the profit percentage and cash in trading account – all will have to be taken into account when someone decides to leave his job and fully depend on profits generated from trading.
Frankly you will find few people doing that. Even hedge fund managers have a job. Mutual fund managers have a job. You need a lot of money to make a lot of money. But one can get there, it only needs determination, hard-work, patience and a step by step approach. It will take time.
Since Mr. Chandirasekaran asked me this question, I will try to explain it as a normal retail trader. But please assume that it could be you.
In a worst case scenario at 2-3% a month a 10 lakh account may be making anywhere between 20,000 to 30,000 a month. For me that is not enough. I need to make at least one lakh a month to live comfortably. For that around 40 Lakhs is needed. When you have 40 Lakhs to trade it has to do with traders mindset as well.
1. If I have only 40 Lakhs as savings – it is foolish and suicidal to keep 100% of it in a trading account. One silly mistake can take it all. What if by mistake you press the “sold” button and thought that you have actually “bought” and did not see the order/trade reports or the Contract Notes. Yes it is a rare blunder – but what if this happens? We are humans and we can do mistakes right? After a few days you check to see that option has doubled and eventually when you wanted to book profits you find that you have lost a lot of money because you did a silly mistake. Remember you will not get back this money.
(On the day I trade in the evening I check my email to see the Contract Notes. This essentially makes sure I double check my trades – one in my trades report and second in my Contract Notes. All traders should do this as well. This will ensure a 100% accuracy in trades. If you have done a mistake you can rectify the very next day.)
2. Even if you have more money stacked somewhere you will get stuck with two choices:
a) If you keep 40 lakhs in a good debt fund or FD it will give you a return of around Rs. 30,000 per month without any work or stress on your part. Compare this to all the hard work and stress required for trading.
b) If you have 40 lakhs more in FDs or whatever you tend to be complacent. You try to get aggressive. Why? Because you have a lot of money (around 80 lakhs) – now you want to make even more “lots of money”. Greed leads a trader take huge risks and lose a lot of money. One trader a few days back called me to say its ok for him to lose Rs. 30,000/- per month but not more. WHAT? He is willing to lose that much per month. Why? Because he generates 1 lakh in interest per month. Frankly I think he does not need any more money – he wants to trade to pass his time or try aggressive trading to make loads of money. Probably just to satisfy his ego. People trading to pass time/kill boredom/have fun and/or aggressively trading to make a killing – all are doing a big mistake. They will most certainly lose money.
One trader with more than 1 crore in his account took my course. I asked him why is he taking my course? He already has a lot of money, so what is the need to trade with so much money? (Well there is nothing wrong to trade with a one crore account, but I just wanted to ask. How many times do you get an opportunity to talk to a retail trader with a one crore account? As a trader I wanted to know his psychology.) He said that he loves to double his money.
Well here is the story: He started with a few lakhs, took the account to one crore and on that day was sitting on a unrealized loss of 90 lakhs. Like I said these people take unlimited risks, because they have unlimited money and they do not care.
It comes back to the same question – can you generate enough to make a living out of trading?
Yes it is possible, but you will have to do a serious introspection on why you want to do this. Firstly ask yourself why you want to leave a lucrative job? If you love your job – what is the need to leave it? Is your job hard work? Well trading is also hard work. It is not a cake walk else everyone would have been successful. But if you really hate your job and are serious enough to trade and make a living out of it here are the steps you need to take in order to reach there:
Step 1) Invest money in stock trading education. There are books, websites and people offering education. Get education from reliable sources. Learn some trading strategies.
Step 2) Start paper trading on the strategies you are comfortable with. When you are paper trading be serious. Treat this as real business and real money even if no money is involved. When paper trading I recommend trading with at least 10 lots or more. Remember no money is involved so you should learn as much as possible. With 10 lots you will make or lose a lot of money – this will help you to understand what happens when you will trade with a lot of money.
Write the trades in a notepad or excel sheet. You should also approximately deduct the brokerages even if this is paper trading. This will help you to calculate real ROI. Paper trade for 3 months at least. If you are making losses. Go back to Step 1. It means your knowledge is lacking or your strategies needs improvement. Come back to Step 2. Again practice for 3 months. If profitable even 1 percent, go to step 3.
Step 3) You are now confident and ready to trade. Take some money out of your savings (at least one lakh) and put it in a trading account. Make sure your trading account is with a discount broker charging Rs. 20/- or less per trade not per lot. This will save you a lot of money on brokerage.
Step 4) Its time for real trade. Trade small in one or two lots only, even if you feel great and want to go all out. If you are successful for 3 months, increase the trades with 1 lot.
After one year consider yourself successful trader if you have done at least 50 trades and made even 1 rupee profit. Yes its good enough to break even in your first year of trading.
Now if you feel money is short, this is the time to add money to your trading account. You are making profits – there is nothing wrong in adding money to a small account. Add small and a fixed amount every month. However you should keep an overall limit. Like this it will take some time but eventually you will reach a point where you will be comfortable trading and making enough to support your family.
Step 5) Leave your job when you are 100% sure you can make a living out of trading.
Step 6) Do not get aggressive and take huge risks when your account has grown big. You may not believe but this is the most difficult step to follow. As I have said people with huge accounts rarely make money because losing a few thousands every month mean nothing to them as they want a big killing trade. For this one trade they keep taking big risks and keep failing until they realize their account is fully blown up. At this time it is too late to recover.
There was one option trading firm in USA that lost years of profits in just one bad trade. I hope if you are already there or will reach there one day, will remember this article and not commit such a blunder.
In the whole process keep your spouse in the loop. Profits and losses should be shared. Why? This will stop you from taking unnecessary risks. In the back of your mind if you know that you are answerable to someone, you will never take big risks. Sharing your profitable trades will make you happier and sharing your loses will reduce the pain. It looks trivial but it works.
As you can see growing slowly is the mantra. Compound your money to such an extend that you feel comfortable leaving your job. If you take it step by step – that day will come sooner or later. But if you want to jump and reach there fast – you will fall and fall badly.
I hope you got the answer.
All the best to all those who want to accomplish this, and of course to other traders as well.
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