So, you want to be a full time share trader?

By Dale Gillham

If you can replace your income from trading while in a full-time job, not only will your confidence increase but you will also have built a sum of money to draw upon when you become a full-time trader. This safety margin is one of the smartest plans you can have, as well as one of the main strategies for building wealth.

What exactly is this safety margin? It is simply a ‘fail safe’ plan in case things go wrong. For example, if you use leveraging to invest, you may avoid using all the available funds the lender provides. As a full-time trader, a safety margin means having enough cash in the bank to sustain your lifestyle for at least six to 12 months. This gives you more options when something goes wrong.

All too often I see traders who attempt to trade full-time without enough cash to support themselves, trading short term and taking higher risks. This only results in making trading decisions based on the need to derive an income, rather than on good trading techniques. They end up exiting trades when they should hold, or entering trades in the hope of a quick profit.

One of the biggest misconceptions about becoming a full-time trader is that you need to trade short term. If your capital limits you to trading short term, I suggest you revert to my original proposed strategy of trading while working full-time. Failure to do so will place you at high risk of losing your capital and ending up back at work.

Portfolio set-up

The best way to set yourself up to trade full-time is to have a portfolio of good medium to long-term shares that will perform year in, year out. If you then want to trade short term, I recommend using only 10 per cent of total capital. This ensures you are protecting your capital by not subjecting the majority of it to high-risk trades. Remember that the amount allocated to short-term trading does not have to replace your income but supplement your total portfolio.

For example, if you have $100,000 in capital and you need to make $50,000 in income, your asset allocation could be $90,000 in a safe medium-term share portfolio with the average trade length between seven and 18 months. If you averaged a 25 per cent return on this portfolio each year, including dividends, you would receive $22,500, which means you only need to make $27,500 from your short-term trading account.

Therefore, the $10,000 capital in your short-term account needs to generate, on average, just under $2300 a month, or slightly under 25 per cent of the capital, each month.

Let us assume you decide to use Contract for Difference (CFDs) to trade short term, which enables you to leverage 10 times your capital. This means that when you trade a share using CFDs it only has to rise 2.5 per cent in one month for you to make 25 per cent on your capital. This is very achievable and, more importantly, very repeatable for someone who has acquired the knowledge and has the experience. All too often traders overestimate their knowledge and experience – a costly mistake, as many have experienced over the past few years.

Consider being a part-timer

People often want to trade the market because they are tired of working full-time and want a change in lifestyle. Getting up at 7am is not exactly wonderful when working for a company that does not pay well nor appreciates your efforts. Thus l suggest that as you move to becoming a full-time trader, switch to part-time work instead of giving up work entirely. This has a huge benefit in that your ‘psychology’ will slowly adjust to being less dependent on a steady income stream.

Working part-time will also help your transition to the life of a trader. Many people find they actually crave work again after they leave. Being a full-time trader can be lonely – you are ‘home alone’ while your friends are at work and this can lead to boredom. Some people I know have taken up hobbies or charity work to keep them occupied; others have gone back to work even though they were successfully trading full-time.

Therefore, before taking the leap, it is important to consider the changes to your lifestyle as well.

Becoming a successful full-time trader is definitely a journey and not something that happens overnight. Some people find that when they get there it is the best thing they have ever done; others find it is not for them. Whether you take up full-time trading or not, the main thing is you enjoy and profit from the journey.

Read part one of this series - 'Trading traps'.

About the author

Dale Gillham, founder and chief analyst of Wealth Within, successfully trades tens of millions of dollars on behalf of clients using his proven and audited investment strategy. His company also specialises in delivering Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment. Visit Wealth Within for more information.

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