Alton Hill is a Cofounder at TradingSim. He has a passion to help people and found that one of his ways of doing so, is through the world of Day Trading. Alton’s skillset is in Product Development and Design Thinking which he uses to write and improve the overall experience for TradingSim.
Day trading requires you to have quite a bit of cash on hand for your trading activities. Margin aside, I have said you need 50 to 1 cash to monthly expenses ratio. There is a little bit of room here if you have other means for income to offset your expenses, such as rental income. No matter what you d,o you will still require cold hard cash to be a success. When you really think about it, making money is the most important thing to focus on as you start out in your trading career. It’s not about picking the right stocks or placing one hundred trades per day, it’s just about making more money then your expenses. In this article I am going to cover 5 ways you can go about getting the seed money required to start day trading for a living.
Save the Money Yourself
Good luck with this approach. On paper it makes a lot of sense. You are using your own money, so you won’t have to answer to anyone. You are exercising an enormous amount of discipline by consistently placing the money aside each month. More importantly, you are showing you have the patience required to succeed, because most day traders when presented with cash will tell you they can make the money in the market quicker than they could save it on their own. The one major flaw in this approach is unless you are an executive in corporate America, to save the amount of cash required and still handle all financial hurdles life throws at you is a pretty daunting task. To make this example real, if a person’s monthly expenses are 4,000 a month they would need to have $200,000 in cash. If you think $200,000 is too much money, that’s fine, we just will have to agree to disagree. Now, back to our example, if this person makes 100k a year that means after tax they will likely take home about 75k depending on their tax bracket. If we subtract their expenses ($48,000 per year) from their take home pay ($75,000 per year) this leaves them with $27,000. This of course would not account for any of life’s curve balls (loss of employment, medical bills, new additions to the family, etc.) At this pace it would take the aspiring trader ~ 7.5 years to save up the required seed money. Mind you, this trader has not saved one cent towards retirement. How many people do you think will honestly be able to make it this route?
2. Use Credit Cards
If you read the book market wizards or some of the rags to riches stories from the street, you will undoubtedly hear of a trader that took 5k on credit cards to 1 million in a few years. To be honest with you, these stories get me going. Like most traders its in our nature to cheer the underdog that comes out of nowhere and makes it. While hearing these stories may get the blood flowing, the odds of them being grounded in truth are pretty slim. Day trading alone is a hard enough business to succeed in; couple that with the fact you are now using money that you don’t have, the odds just go that much further against you.
Let’s assume you go for broke and take out $100,000 dollars in credit cards. Your current monthly expenses are $2,000 dollars so you feel comfortable with the idea you are within my prescribed 50-to-1 cash to debt ratio. The one problem here is off the top if you are using credit cards there will be a minimum monthly payment requirement. On $100,000 that minimum will run you a cool $2,000 dollars (2% of outstanding debt). So, the monthly expenses have now just gone up 100% to $4,000 dollars. At this point you will need to make 4% return per month just to survive. Oh wait, you will have to pay some taxes of course, so that percentage has just jumped up to 6% per month. The last whammy I will throw your way in this scenario is if you lose any money. Unlike when you use cash, you still have to not only pay the interest on the money, but also have to repay what you have loss. This has a compounding effect on your trading capital. I think you get my point, do not use credit cards to fund your trading activity!
3, Take the Money out of your Home
This was the obvious go-to during the bull market in real estate. The sudden found wealth in people’s homes provided the means to kick start a number of trading careers from 2003 – 2007. Using equity from your home will provide a much better interest rate than a credit card, but the one problem with this approach is your home is used as collateral. In a worst case scenario if you lose your stake not only are you out of the game, but you also may lose your home. Again, much like credit card debt, the use of a home credit line will increase your monthly expenses and further compound your losses if things don’t go as planned.
4. Borrow from Family
Trading is a journey best taken alone. If you accept money from your parents and they are unable to completely stay hands off with the management of the money this will prove to be a headache you can’t escape from. You now have introduced for lack of a better term a partner into your trading venture. Yet, this partner has not taken the time to research the markets or attempted to understand the mechanics of your system. They are just there to point out when things aren’t going well and a constant reminder of their discomfort and the veiled threat of pulling the funds if you don’t make money everyday.
5. Trade Your Way to the Top
This is more of an old school way of getting the start-up money required to start your career. Simply put, if you want to trade in the markets, what better way to get the initial capital required other than trading the markets. Other than your time and sweat equity the market in theory should be an endless A.T.M. at your disposal. This is honestly my favorite means to get started. First off you are not committing any additional money from savings until you have proven you can make money trading. Secondly the money is all yours. You have not borrowed it from anyone and you do not have all of the pressures that come with not controlling your own destiny. Last but not least you are building the self confidence that you can actually pull off the wild idea of making a living trading. The major downside to this approach is it will take years before you are able to trade full-time. But like any profession worth mastering you must be prepared to commit to 10,000 hours of study before you can truly call yourself an expert.
What of the 5 options above would best suit your risk profile? As my Dad has told me over the years, most of the time in life the option which is the most painful is often the one built on a solid foundation.