The Tough Truth About Part Time Trading

part time trading

Practically every week, I get an e-mail or two from an aspiring trader. “I want to make some extra money trading”, the story usually goes. Sometimes it is from young adults, already scrambling to get out of the rat race. Other times it is from a retired folk who suddenly realize that money is tight, and working at a fast food restaurant is a loathsome option.

For some reason, $50,000 per year after taxes seems to be the amount most frequently requested. I guess it makes sense – who wouldn’t have a more comfortable life with an extra $1,000 spending money each week in their pocket?

Most want this amount by part time trading. They have obviously seen all the trading “gurus” out there bragging about their alleged profits (spoiler alert: most gurus do not even trade, and the alleged profits are fairy dust!), and the people who e-mail me want just a little taste of that but do not want to be full time traders.

Let’s forget about the sheer audacity of the request – seriously, what kind of part time job pays someone with zero or little experience $50-75 per hour?

And let’s forget about the difficulty in making ANY money in trading – the statistics tell us more than 90% of people lose at trading – which is absolutely true.

Casting the sheer difficulty of the task aside (becoming a profitable trader is a whole book in itself!), let’s just look at the math. How can someone net $50,000 per year from part time trading?

First, how much capital would you need? Assuming a 30% tax rate, to net $50,000 per year, you’d need to make around $71,000 in a year. Not a trivial amount. If you only had a $10,000 account to start, you have to have over 700% annual return! WOW!!!

Unfortunately, it is even worse for most part time traders, who might only have $5,000 to start with. They would need over 1400% return per year, for every year they trade, since they are withdrawing all profits.

Of course, some gaudy returns are possible, but those returns are possible only with EXTREME risk – basically losing it all versus a slim chance at an extraordinary gain. I call it a “lottery ticket” approach, since it has about as much chance of occurring as winning the big prize in the lottery.

Obviously, as the amount of starting capital goes up, the annual return goes down. But even with $180,000 starting capital, you’d still need 40% annual return to meet the profit goal. Most professionals do not hit that kind of annual percentage return, and even if they do, it is hard to do multiple consecutive years.

Figure 1:  Annual Percentage Returns Required To Take Out $50K After Taxes

Figure 1:  Annual Percentage Returns Required To Take Out $50K After Taxes

So, what about an alternative: take some money out and slowly build the account? The good news is you’ll eventually be able to take out $50,000 after taxes, every year. The bad news is that even with 50% annual returns (VERY difficult), and taking out only 60% of net profits, it will take 26 years of this kind of performance to hit the $50,000 withdrawal level. In other words, not very palatable for most part timers.

Figure 2:  Year 26 is the first time this part timer can take out $50K!

Even for someone willing to forego current income to reach the $50,000 goal has it tough. Assuming 50% per year return, 30% tax rate, and reinvesting 100% of net profits (taking out 0%), it still takes 10 years before one can withdraw $50K per year without dropping the account balance.

Part Time Trading

Figure 3:  It Takes 10 Years With Reinvestment to Get to $50K Return Level

As daunting as even this scenario sounds, remember two things:

  •  This assumes 50% annual returns, each year, for 10 years! In other words, you will be in VERY rare air to reach this return level.
  • This ignores the inevitable drawdowns that will accompany such returns (assume 25-50% annual drawdowns, as a likely minimum).

Download

I have included a spreadsheet for you to tailor to your own situation. Just change the numbers highlighted in blue for your circumstances.

Conclusion:

You can definitely become a part time trader - that is not an issue. But make sure your goals and objectives are realistic before you start trading. For most people, the math simply does not work out. Unrealistic expected returns, small starting capital, and pie-in-the-sky income requirements make part time trading very difficult for most.

Remember, trading is a marathon, not a sprint. Keep your requirements for return and income small at first, and focus just on growing the account and trading well. If you do so, profits will eventually follow. 

Get in touch to Download files, resources, and some materials to take the advantage.

-- Kevin Davey of KJ Trading Systems

About the Author Kevin Davey

Kevin Davey is a professional trader and a top performing systems developer. Kevin is the author of “Building Algorithmic Trading Systems: A Trader’s Journey From Data Mining to Monte Carlo Simulation to Live Trading” (Wiley Trading, 2014.) . He generated triple digit annual returns 148 percent, 107 percent, and 112 percent in three consecutive World Cup of Futures Trading Championships® using algorithmic trading systems.

His web site, www.kjtradingsystems.com, provides trading mentoring, trading signals, and free trading videos and articles. He writes extensively in industry publications such as Futures Magazine and Active Trader and was featured as a “Market Master” in the book The Universal Principles of Successful Trading by Brent Penfold (Wiley, 2010).
Active in social media, Kevin has over 15,000 Twitter followers. An aerospace engineer and MBA by background, he has been an independent trader for over 20 years. Kevin continues to trade full time and develop algorithmic trading strategies.

  • Ryan says:

    Another sensible article by Mr. Davey.
    I will need to keep this article link handy the next time I get asked the same question.
    Ryan

  • Eric says:

    Part-time is a misnomer. Think of trading “part-time” successfully like a whole second job instead. And one that won’t pay well or at all for years! Just like being good at anything else, you have to enjoy the process or you won’t make it to the reward.

  • Curtis says:

    50k might be suggested because around 55k is the median wage in the US. Right, it sounds like they are looking for the same amount as a regular above average full-time income.

    First, I think it needs to be differentiated those who are serious and can only trade part time versus those looking for a temporary side gig. Now, if you’re looking for a side gig then I’d argue to just forget it and move on. There will be people who have exceptional results. But, if you’re talking about “part-time intensity” and “part-time hours” then there is simply no way. Even the people who I known who had exceptional results were working all day and night trading. There is simply no chance that’s going to work unless you have a PHD and are a genius– always exceptions!

    However, the focus should be that anyone who wants to trade needs to find a way to leverage their abilities. Some of the ways to leverage are pay to try out, offering a trading system for subscription, and/or sale a subscription or services.

    In the past, the try out options were really mediocre with only TST. But, there are new options like OneUp and another more established firm (not sure I can mention yet ) but they also offer ability to scale up futures trader to 25k account and trade on their floor they claim to be building out.

    As for selling your system, you can use a tracking service (like Striker). One potential problem is that you need a larger profit factor on tracked systems due to market orders and fees. So, not all systems are suitable. Alternatively, you can offer your signals outright or sell the system outright.

    I would say that normally even with the leverage up approach it will still take 10 years because you will need to develop your skills, acquire your capital, marketing, and most of all historically, especially for discretionary trader, it is very difficult to get funding. But, because of TST model and newer more serious entrants, I think that changes the equation perhaps significantly. With the new model, if you are talented then let’s say it takes you 1-2 years of study/sim trading and then 1 year to get funded and scale up, the timeline suggest 2-4 years– and that is very good from someone who’s been at this 10 years.

  • Babak says:

    After reading this article I think it is better for 99.99, not to enter trading world at all.Full or part time no difference.
    You need to have a good job to save money to deposit your account to make at most 20-30% return a year ! just stick to that job and invest in real state .

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