Can you honestly earn a good living or even get rich by share trading?

[WestCoastWizard]

I'm relatively new to stock trading but I've been trading forex for more than 5 years now and has been consistently profitable. I'm thinking of venturing to share market because forex is not an investment and I want to invest my excess cash. Forex is purely speculative in nature. I mean, who wants to invest in coins and paper notes that get eaten alive by inflation?

You've heard both on equities and forex how people made a "fortune" and became millionaires. I can see the possibility in forex, I just want to know whether the same thing applies to equities. Obviously you cannot simply buy and hold, but you have to trade shares in order to create massive gain. And you have to use derivatives to take advantage of both bull and bear markets, something that cannot be done using long-only traditional equities.

Now, the cliche image of someone who made it big in forex or equities is the big house show off, the expensive sports car show off, the big yacht show off, etc. But notice one very important thing: Although you see and heard about them on various media, you almost always and most likely to see these pictures as part of a sales page! Which means they earn more in teaching or selling products than trading.

In forex, to be a millionaire you have to have a big capital to start with. Let's think about the best case scenario. A professional trader aims for 50 pips per day per currency, and they usually get it. Maybe out of all majors and crosses, 2 give profitable setup every day. If this person manages to get them all in a day = 50 * 2 = 100 pips a day. This is not to mention some traders who scale in their winning positions and almost double their pips per trade.

100 pips a day * 5 days a week = 500 pips per week. That's the ultra winning part with so many assumptions for a full time trader. Now on the other side, a professional trader would never let their losses run. The opportunity cost is just too big to nurture a bleeding position. And I notice also that when they get stopped, they don't quit and stay objective because the next setup will usually be enough for them to recover the loss and even to profit. So say they admit that they are wrong when they are 10 pips out, and they make one mistake per day per currency pair. So 10 * 2 = 20 pips a day. 20 pips a day * 5 days a week = 100 pips per week. This doesn't mean that their winning ratio is only 66.67%. And again this is only an assumption of making one losing trade per day. It could be none, could be more.

If you put one lot for every trade, a very rough estimation would give you $5,000 gross profit - $1,000 gross loss, which leaves you with $4,000 clean income per week. Now for the sake of this example, they get this every week out of 52 weeks. This would give you a total of $208,000 p.a. return.

This number is either not possible or totally underestimating the real income of a professional forex trader. Nevertheless, I know a store manager who earns pretty close to that with significantly less risk. I admit he works 9-5, but his income is much more secure. And he doesn't need massive capital to start with. He just needs an alarm clock, a good breakfast, and a bus ticket to get to work. We traders need significant capital to get things going. You can start with $200, but $5000 initial deposit won't get you far even if you are good.

That's from the forex perspective. I understand the difference in the mechanics between forex and equities, but the principles remain the same. So the bottom line is, can you earn a living purely from trading equities (no teaching whatsoever, or other source of income), or even get rich and make a fortune from equities alone as we all heard from the media? Especially when the large majority of traders are losing money in this game.

 

[Smurf1976]

Especially when the large majority of traders are losing money in this game.

I've seen various quoted statistics over the years, and in general they are to the effect that most amateur traders (that is, those who aren't employed by banks etc to do it all day) lose money regardless of what they trade.

Trading is somewhat unique in that it has effectively no barriers to entry for anyone who has even a modest amount of capital.

Practically any other business or occupation has at least some barrier to entery. Want to be a builder? You need a license for that. Want to be a taxi driver? You need a taxi license. Doctor? Better go to uni and pass those exams, that's assuming you can actually get into medicine at uni in the first place. Electrician? Well so do many others, and most applicants for apprenticeships are knocked back. Truck driver? Well first you need a license to drive a truck which is a bit harder than the average car driver probably thinks, then you need someone to actually employ you as a truck driver. And so on.

Compare that to trading where anyone over the age of 18 and with a weeks' pay in hand can open an account and start trading. No schooling, no exams, no license. Nothing.

If getting into truck driving was as easy as getting into trading then we'd have truck crashes every day. Same with electricians and houses burning down, doctors and dead patients and so on.

You can successfully trade equities just as you can successfully drive a truck, fly a 747 or install a switchboard. But you're unlikely to succeed without a decent effort to learn - and lack of that is why so many fail.

That said, the definition of "success" also needs to be kept realistic. Expecting to turn $1000 into $1 million in a few months trading equities is a bit like expecting to fly to the moon in a plane belonging to Qantas (or any other airline). Not a realistic expectation to have and any attempt won't end well.

 

[tech/a]

You need starting capital preferably LOTS $300K +.
Any good business would cost that to start--Mine without buildings would be over $1 mill
if I wanted to be my size today starting from scratch.(Civil Construction).

You need size.
You need to KNOW HOW to trade.
You only need ONE super trade or portfolio to alter your life.
You need to understand and be able to profit from LEVERAGE
You need to understand and profit from COMPOUNDING.
You need to recognize opportunity
You need to know what to do to take advantage of that opportunity
You need to DO IT.

SO----Yes you can.

 

[CanOz]

An interesting question though is if you are running a momentum strategy, such as the 20% flipper, how much capital do you need to trade with?

Considering...

You'll need enough capital to survive at least three years for living expenses.

You'll need enough so that you can still withdrawal profits for living expenses but allow the system to compound.

I haven't done the figures on that in particular but I sense that you would need more than $300k!

We are actually in the process of implementing something similar, something along these lines....

Have one system trading for growth, full compounding, no withdrawals permitted.

Have another system for income, withdrawals need to meet certain criteria.

Have a system trading our Super assets.

Have 1 lot of capital allocated for intra day trading.

Have another business, not directly dependent on trading as a sideline.

Obviously we have a substantial amount of capital, a life savings after twenty years of workforce and private business participation. This is not just a trading account scraped together in a few months.

The strategy needs to consider many things, when you are not in the market, what do you do with your funds etc.?

Obviously I'm not going to go into all the details of our personal wealth strategy, but the point is the trading is only a piece of the overall strategy, MIT most likely is with many.

Cheers.


CanOz

 

[VSntchr]

I've done the figures and for me the portfolio would have to be around $480k minimum.

Of course once you introduce leverage, this can reduce the EQUITY required within the portfolio...


And this of course assumes you have a positive expectancy and can reliably generate 15%+ returns...

 

[WestCoastWizard]

I see. I guess we can say that trading equities can pay your bills and more if, and only if:

1. you have a massive amount of capital to start with.
2. you invest for the long term gain and trade for the short term gain using derivatives
3. your 3 pillars of trading (mindset, money management, and strategy) are strong and well developed from your serious commitment to this business

I guess this is why I started with forex because you can start trading with just $200 and you can double that within hours, trading with only 0.5 lots (the max you can go with $200 and a bit room before margin call). Most would say this 100% return is BS, but if you think that on average, per day, one major currency pair moves about 120 pips, and if we can catch just 50 pips of it, we'll get ~$250 return on your 0.5 lots trade. That's more than double your deposit actually. And 50 pips daily is a very possible target for established traders.

But I don't think a similar case of volatility happens a lot of time in equities, where you can constantly exploit the volatility of the market. One area I can think of is the speculative shares. Even then, you have to search, search accurately, and trade timely just when it is about to jump and fall off. With giant companies, the occurrence is much less often. I remember when Google went south 10% last year after the leaked quarterly report, and the world panicked. Even NYSE had to manually intervene and stopped people from trading it.

I guess the take home message is the same as it is in forex, and in anything in life basically: go hard or go home. If you treat trading and investing as merely side income, and think a few books/courses/forums/indicators here and there will make you a good trader, you're in a very expensive hobby. Most likely your broker will send you the "market donor of the year" certificate.

 

[ROE]

if you seriously like trading and it is your passion and you want to be rich why not.

but if you take it as a job and just pay bill, why bother, you can take any job any where
and pay bills and not worry about losing capital

so wouldn't it be better off you take a job that pay bills and invest on the side for more income?

 

[skc]

If you put one lot for every trade, a very rough estimation would give you $5,000 gross profit - $1,000 gross loss, which leaves you with $4,000 clean income per week. Now for the sake of this example, they get this every week out of 52 weeks. This would give you a total of $208,000 p.a. return.

there are heaps of money to be made in shares trading. The principle of trading any intrument is the same, and the only differences btw FX and equities are imo market size and leverage. Equities have larger volatilities handsdown. The PnL of FX is only magnified because of the leverage available. So to make the same amount of money in equities will require more capital than FX, but the risk adjusted reward would actually be the same.

In terms of market size... FX majors probably trade in the $B while big stocks in tens of $m. So market size should not be a factor within the usual definitions of "getting rich".

The other disadvantage in equities is transaction costs esp in australia for retail traders, but it is entirely possible to overcome that with a suitable strategy.

By way of example... A $1 stock moves in 0.5c ticks and an intraday 4% move (8 ticks) is more than common. Even with commission at 10bps, you are in profit even if you just catch 1 tick. Pick up 3 or 4 ticks in a day on 100000 shares and you can net 1.5k, and that would probably only take $25k in capital to enter the position, while only accounting for less than 1% of the daily volume. And that's just one name. There are probably 30 stocks in the asx alone everyday with these parameters. If you trade longer than intraday, the universe increases substantially again.

So the maths easily shows what is possible, and to me it doesn't show that FX is a much superior instrument. I guess my point is, if you believe that it is possible to get rich with FX, than there is no reason to doubt that you can get rich with shares either. The question, as always, come back to whether you are good enough. The question of possibility is beyond doubt.

 

[noirua]

Take care my friends in trading especially if you go short or long. My largest loss in 2011 was $22k on just a $2k short and the largest amount I had to put up one week was $45k, fortunately news arrived and it turned to a $500 profit - lucky then, not clever.

Yes, you could lose everything when there is no limit. If you're content to take the next plane out and never come back to Australia then that's OK I suppose.

The UK's most famous going short is aka Evil Knieval who has lost over $2 million on just one stock and losing $500k seems quite OK. Largest gain was over $5 million, but you need, as someone said, balls the size of mountain to copy him; or the equivalent.
A bit like a game of poker if you play it down to the wire big time. That's it really, trading increasingly become a gamble. The biggest loser, a lady in America, admits to losing over $1 billion.


One of the problems I had when increasing trading was, that it did not seem like real money at times. Some banks will give credit for trading, so providing I made a profit my account was credited and not debited. When the debits come in and a trader cant cover you can GO BUST big-time -- 75% do I read somewhere. Your bank could not care less, be certain of that, and some literally drown beneath the waves -- good luck, of course it wont happen to you, will it!?

 

[Garpal Gumnut]

I've done the figures and for me the portfolio would have to be around $480k minimum.

Of course once you introduce leverage, this can reduce the EQUITY required within the portfolio...


And this of course assumes you have a positive expectancy and can reliably generate 15%+ returns...

Agree VS.

Reliable returns is the nuts of it.

Unless you are Alvin Purple, ( see the Silly Walks, and , Not a Dead Parrot, episodes on the Daniel Kertcher threads ) this is well nigh an impossibility without brains, dedication, hard work and no bad luck.

gg

 

[WestCoastWizard]

if you seriously like trading and it is your passion and you want to be rich why not.

but if you take it as a job and just pay bill, why bother, you can take any job any where
and pay bills and not worry about losing capital

so wouldn't it be better off you take a job that pay bills and invest on the side for more income?

I love trading. It's even on a stage of unhealthy addiction. But I couldn't get a full time job that pays the bill because I have to trade 1-5 pm and 9-12 pm Perth time daily. So I can only work part-time.

I just want to get the general feel with equities in comparison with forex. There are similarities, but I need to get my head around the differences. And I thank you all for the responses given.

My excess cash is nowhere near the minimum capital requirement, so I'll stay lay low and just learn more about equities for now. Once that's done, I have 4 goals to achieve:

First, deciding which avenue(s) to pursue from the 4 options in the share trading: Invest in the share, invest in the company, trade the company, or trade the share.

Second, software issue: In Forex, Meta Trader is completely free with live data. I know nothing about share software. I heard live data always costs us money. I prefer a software that uses mql4 programming language so I can transfer all my indis and templates.

Third, broker issue: Again, I know little about them. I only know the big names: e-trade, Commsec, Bell direct, IG market.

Fourth, network support: Forex is a very lonely place for a retail trader. I only managed to meet about 20 people trading forex in Perth. I'm pretty sure the number is much larger in equities.

 

[wayneL]

If part of the question is "can you get rich", presumably the pot is not that big yet.

Notional returns are a function of capital, so if the pot is relatively small, you can choose to try to make a living, or try to get rich. Very few will have the skills/cajones to be able to do both.

If you want to get rich, have an outside income that pays the bills and allow trading profits to compound.