Who thinks they could make a living trading?
Generally I think the idea (fantasy, I think is a better word) that one could make a living trading is one that is sold to the masses. Very smart people with books/trading systems/brokerage services know that there is a huge pool of people who are unhappy with their present economic situation and as such a large potential customer base. That said, with enough capital and realistic expectations it is possible to trade for a living.
How much would you need to start your trading business? How much do you think you would need to make/year/month? (Dont forget you'll be taxed on Profit).
One must look at the long term returns of the market he wishes to trade, then make an intelligent decision based on his personal skill and track record. Say the market I wish to trade has averaged a 10% return over the long term. Based on my skill, I think that a worst case scenario is a 5% return, average return is 8%, and best case return is a 16% return. From this you can then determine how much you need in starting capital based on how much you need, before tax, to make in profits per year. For example (everything before tax):
1. I need $4,000/month or $48,000/year to replace my current job salary
2. Based on my worst, average and best case scenarios, I would need (48k/%return):
Worst = $960K
Average = $600K
Best = $300K
Obviously if my starting capital does not even get to 300K, then realistically I am not ready to start trading for a living. However if it did fall somewhere between the best and worst case figures, I must then decide if I can survive during the years when I perform at worst case level. For example
Say I have $500K capital. If I perform at worst case, then my return for the year is $25K. I have to ask myself if I can realistically survive with only $25K to sustain me for that year.
Important to note that the worst case scenario is still a positive return! I won't even go to what a worst case scenario with a negative return looks like.
Why would you want to trade for a living?
An extremely important question which I think one must answer before even starting to put together a business plan. Do you want to trade for a living because you are unhappy at your job? Do you think you are underpaid at your present employment situation and think you can do much better trading? Do you believe that by trading you will have more control over your time and more free time for other things? Is trading something you truly believe is right for you? "Know Yourself" has always been one of the most oft-repeated phrases when it comes to trading and for good reason. As in any decision in life, if the decision to trade for a living is not made after a thorough analysis of the facts and your personal circumstances, it would be very difficult to succeed.
Are people under misconceptions (generally) when wishing to trade for a living?
A resounding yes. The industry promotes trading as "the last frontier". "Live and work anywhere in the world! Control your own hours!" Some even go as far as showing fantastic returns and needing only a few minutes per day to do it. What can we expect Mr Joe average, who has never traded before, to think then? Perhaps he has started imagining what life would be like living next to the beach, powering up his laptop while having a beer, to check how much money he has made. Ok maybe that is a bit extreme. Perhaps a more realistic fantasy is one where he doesn't have to work the same number of hours as in his current job, and yet make more money. This after reading a few books and attending a few seminars.
Please let me clarify that I do think that trading for a living is very possible, and that there are people who already have achieved this. I answer these questions from the perspective of a person who has recently been introduced to the market, who has seen the fantastic returns, and who has started going through some literature on the basics of trading (or perhaps even joined this forum) and may have started trading a little bit to test the waters. My answers are not meant to be discouraging, but rather as a reality check against the blue-sky propaganda usually produced by the industry. Note also that I assume that whatever starting capital allocated for trading remains the same, ie during good years no additional capital is added to the starting capital and during bad years no funds are withdrawn to supplement the shortfall for living expenses.