How to become a full-time trader

I often suggest starting with a move to part-time work before diving in with both feet. The reasons? Life is easy with a healthy salary, and should your stock market funds become depleted, there’s always a tap ready to be turned on to fill it back up. That’s not the case when you turn your back on employment or your profession and are living off your gains from the market. You may have a losing month, but the bills still need to be paid – and now you’ve got a smaller account. Many people underestimate the heightened emotions once you cut off income, and so going part-time or starting a side stream of revenue is both a useful distraction and pressure reliever before you become dependent on the market. Any losses, anxieties and uncertainties will be amplified heavily when you step into the ring.

I’m often asked how much you need to trade full time, and there’s no single right answer. It’s entirely dependent on your personal and financial circumstances, and your expected returns for the year. But there is a way we can calculate that.

A prudent exercise is to list all of your monthly expenses, total this up, and multiply this number by 1.2. Adding 20 per cent extra to monthly outgoings in this way helps insulate you from an expense shock, and gives us a conservative figure. We then need to multiply this by 12 in order to get the total monthly costs for the year.

Next, repeat the same exercise for your annual expenses then multiply this by 1.5. This extra 50 per cent factors in a healthy safety net should any one-off costs crop up (which they inevitably find a way of doing).

Once we have these two figures, totalling them both gives us our total costs figure (TCF). Take this figure, double it, and this gives us our annual profit target (APT).

The reason we double our TCF to get to our APT is that we need to give our target some leeway should we fall short, and also because as traders we need to compound our accounts. If we require 15 per cent returns to pay our bills, and we achieve 15 per cent returns, our account has not grown and we’re in the same position as we were at the start of the year (albeit with an added year of experience). It’s no good breaking even every single year – we need to be building our equity curve upwards and growing our net assets.

We now need to divide the APT number by our available funds (without leverage). For example, if you have £100,000 available to invest, then this is your available funds. Just because you can leverage that to £400,000 as a retail client, does not mean you should class this as your available liquidity. Once you’ve divided your APT by your available funds, you get the number you need to aim for. If the number is above 0.2 you should seriously consider if full-time trading is for you. This is because you will require an annual percentage return of over 20 per cent. It’s achievable, but ideally we want to give ourselves a nice cushion and set our targets low. That way we both buy ourselves time and also have the benefit of enjoying significant account growth. We also don’t put ourselves under as much pressure.

Ideally, the lower the percentage required to hit your APT the better. But how can you improve this?

Can you boost your income elsewhere?

First, you need to take another look at your spending. Decide what are 'needs' and 'wants' and try to turn as many needs into wants as possible (and then remove them from your expense list). The lower your costs, the more available runway you give yourself. Secondly, try to boost your income elsewhere. Again, this improves your runway. Once you’ve come to a final figure, evaluate your performance over the course of your career and see if your APT is realistic. If you’ve barely hit 10 per cent over the past several years, having more time won’t necessarily mean your returns are increased. In fact, I have one investor friend who wasn’t able to work during lockdown and found he had too much time to tinker. Post lockdown, working kept him busy, and the stock market was no longer a distraction. Too much time is a real issue. Finally, it makes sense to have a financial buffer outside of your available account funds, so you’re not drawing down from your funds immediately.

Secondly, you need to be sure you have the right environment. You absolutely need your partner on board, if you have one – and you need to be honest with them about the risks and about what could go wrong. This can be a difficult conversation, especially if you have to convince someone else that the lifestyle they have become accustomed to is not only under threat but is actively being downgraded by you in order to give you more runway. Without the support of your immediate family, you are likely to fail.

How to set yourself up as a professional

If you’re sure you want to transition to full-time on the markets, it’s time to set yourself up as a professional. That means investing in hardware. If you’re using a laptop screen then I’d suggest buying at least one external monitor (I use ultrawides), and a wired mouse and keyboard. The wires are not as tidy but the advantage of wires mean that you’ll never run out of battery or power because you forgot to charge your mouse.

You then need trading and investment software. I recommend SharePad (you can trial a free month with the code: Michael) – this allows you to filter for stocks on both technical and fundamental indicators and ratios, as well as create watchlists, set alerts and alarms, and monitor your account. It does a lot of heavy lifting and removes manual work. The more ground you can cover efficiently the more effective in the market you will be. 

You also need to ensure you have a good mix of resources readily available both for idea generation and to stay on top of current events and stocks. Making use of free resources such as Investor Meet Company and PI World can keep you up to speed on management calls and presentations, as well as a premium platform such as Research Tree, which is a paid research provider. And, of course, Investors’ Chronicle to top it off.

You should constantly be looking to refine your sources of information. Filtering and working out what is necessary is crucial if you’re to exploit this information to your advantage.

Having a network of investors to speak to, and chatting with others who are in the business, can also help with learning about different parts of the market and even with getting ideas. You shouldn’t copy anyone, but use the information, verify it for yourself, and decide if it meets your risk/reward strategy and trading objectives. It’s no good if someone has found the best stock in the world if their timeframe is five years and yours is five months.

Become an expert in your field

But learning about the market you hunt in is imperative. I have followed some stocks for years and only traded them a handful of times, sometimes only having exposure to them for just a few minutes. But those trades were only possible because I was aware of the stock, knew what it did as well as the current narrative, and was able to contextualise a new piece of information quickly when it hit the market. You can gain an edge on some trades just by outworking everyone else.

Finally, it pays to be aware of all the biases that will be exacerbated when you make the move to trading full-time. Recency bias can cause stock market participants to overweight new information that doesn’t deserve it. Another common issue is confirmation bias – looking for information that suits your point of view. We are at our most objective before we place a trade; once the trade is open we have both an emotional and financial interest in being right. To combat both of these biases you can log your activity.

But even then, recency bias can mean traders can place far too much importance on their last couple of trades. The results from your last 10 trades are down to variance. But 100 trades are data. You need to be constantly thinking about the next 100 trades rather than focusing on the results from 10. However, that doesn’t mean you should ignore the data, as this data can be studied and improved upon. You can do this with a free trading tool called Trade Smash. Recording your trades is the single best thing any stock market participant can do, as without the data there is no way of knowing if you’re exiting too early, or if you’re sticking to your plan, or even if you have an edge at all.

Making the market your main source of income means it needs to be treated as a business. That means a set schedule that must be kept to diligently. Having a schedule means you can follow it regardless of how tough the market is, as there will inevitably be ups and downs. Full-time trading is as much money and psychological management as it is looking for stocks to trade.