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Investing Basics

Can You Replace Your Income Through Trading?

One question I often get asked is whether you should live off your trading profits or let it grow?

My answer is, it depends…

Why is that?

Well, it depends on your current account balance, and on your goals.

If you goal is to quit your current job and trade on a full time basis, it is probable that you will need to build up your account to a more substantial size

If a retirement nest egg is your goal, it is likely that you will have to allow it to build up over a long period of time.

If, however, you are one of the fortunate few who start off with a substantial balance in the beginning of their trading, or if you have already accumulated a larger amount of trading stake, it is possible you may have the ability to live off of your investments and trading account.

It is my hope that this lesson will provide many of my viewers with the information they require to not fall prey to a false dream put forward by misleading seminar “gurus”, and believe that they can start with a $10,000 trading account and soon make enough money to replace their income and live off.

If you are someone who has been misled by a seminar “guru”, please keep on reading.  I will give you a much clearer idea of the realities involved in trading.

Have you ever heard of the 90/90/90 rule?  The 90/90/90 rule states that within 90 days, 90% of traders lose 90% of their account.  This is quite frightening, isn’t it?  It is true.  It is my goal to stop you from becoming one of the 90% described here.

Let’s say that you start with a $10,000 account.  Imagine that you wish to replace your salary, which is say $50,000 per year.  This means that you would be required to achieve a 500% return on your $10,000 account.  We think it hardly needs to be said that this is an unrealistic expectation!

The unrealistic nature of this sort of expectation is made even more apparent when you consider that the best traders in the world achieve 25-30% a year returns consistent over an extensive period of time.  The idea that someone, let alone a beginner, could reach a 500% return is ridiculous.  It is also dangerous, as people are being lead to take great risks through extreme leverage (ie spot Forex trading) on the basis of this hope.

In fact, while trying to utilize financial leverage, you are likely to lose your account in its entirety.

Even if someone has the incredible skill necessary to achieve a $50,000 return on a $250,000 account, this is “merely” a 20% return on capital. 

When I made my start, I did so in a very small way, and slowly built up my stake in trading.  I made sure I did not spend the money I made by making my trading account a pure trading account, and separate from everything else.  I made this separation because I knew I would never achieve financial freedom if I spent my profits.  I knew that they needed to be reinvested in my endeavour if I was to get anywhere.

Are you familiar with the Rule of 72?  You might have heard of this rule, but many people haven’t.  The Rule of 72 assists you in calculating the time it would take you to double your investment, given your achievement of a particular return.

Let’s assume that you attain a 20% p.a. return.  By the Rule of 72, it will take about 3.5 years for an initial amount of $20,000 to be doubled. 

A fact that is often forgotten is that if the increased amount is not spent, simply by virtue of the concept of compound interest, it will take only an additional 3.5 years for the amount to be doubled again and reach $40,000, and then another 3.5 years to reach $80,000.  This means that in only a little over one decade, you have the ability to boost your original $10,000 account by eight times, simply as a result of the fact that you didn’t spend the money, but rather gave the money the chance for its profits to compound and give you additional returns over time.  This is the reason that Albert Einstein referred to compound interest as the “eighth wonder of the world”.

As you begin your journey in trading and investing, look out for additional means of supplementing your income if you start off with a small account.

Through doing this, you take away the pressure of needing to obtain impossible returns in order to support a luxurious lifestyle. You now make your focus not on the results, but the process. 

It takes time to grow your trading account and your investments.  It is not an easy process, and it is unexpected difficulty that leads some people to believe it is impossible.  However, the fact is that if you are determined and willing to move slowly but surely, and are willing to focus on the process rather than the results, your account will have the chance to develop into a significant size.

This was the process I used to achieve success after starting from scratch, and you have the chance to do the same. 

Remember that it is the tortoise that often wins the race!

To find out how you can safely learn to trade and invest in 10 simple steps, click here