Career trader's perspective on living off trading profits vs living on salary?

[wrbtrader]

I prefer to think of trading as a home based business rather than a hobby. My hobbies cost me money.

As for a professional trader, that is someone trading for someone else.

I'm from a family of traders. My old man was a successful floor trader for many years until the stress got to him and then he moved on to the FED. I have two relatives that are institutional traders and a few close friends (U.S., Canada and France) that are institutional traders. I obvious consider any trader that works on salary for a firm or getting paid to trade someone's else capital...these are professional traders.

In contrast, traders that work for themselves (their own capital) and its their primary source of income...I consider these types as professional traders too depending upon their associations and if they treat their trading like a business regardless if they do such in a at home office or renting an office space in a building.

Everybody else that either don't treat their trading like a business, its not their primary source of income, their spouse is financially taking care of the family (spouse doesn't consider what you do as a job) or their government doesn't recognize their trading as a job...these are not professional traders. These are either hobby traders or academic traders.

How do you classify the type of trader I am?
My income comes almost exclusively from equities.
Capital gains and dividends.
Both are taxed favorably in Canada.
I certainly don't think of myself as a Professional Trader.

If your primary source of income are via trading...there must be something else going on for you to think you're not a professional trader.

1) Trading is your primary source of income but its not enough to trade for a living. Thus, you're either supporting yourself via a large income earned prior to becoming a trader, you're retired, large inheritance for you to live on for the rest of your life or someone else is supporting you to ensure you have private insurance to take care of you that's not covered by the provincial social health care.

2) You don't treat your trading as if its a business or those around you (family & friends) don't see it as a job for you.

What I'm saying is that there are different variables for someone to label someone as a professional trader and we can't slap that label on someone until we know more information about them.

P.S. Depending upon what country you reside in, citizen of...different rules for considering something as a business from country to another country.

 

[butterfacetrader]

I'm from a family of traders. My old man was a successful floor trader for many years until the stress got to him and then he moved on to the FED. I have two relatives that are institutional traders and a few close friends (U.S., Canada and France) that are institutional traders. I obvious consider any trader that works on salary for a firm or getting paid to trade someone's else capital...these are professional traders.

In contrast, traders that work for themselves (their own capital) and its their primary source of income...I consider these types as professional traders too depending upon their associations and if they treat their trading like a business regardless if they do such in a at home office or renting an office space in a building.

Everybody else that either don't treat their trading like a business, its not their primary source of income, their spouse is financially taking care of the family (spouse doesn't consider what you do as a job) or their government doesn't recognize their trading as a job...these are not professional traders. These are either hobby traders or academic traders.



If your primary source of income are via trading...there must be something else going on for you to think you're not a professional trader.

1) Trading is your primary source of income but its not enough to trade for a living. Thus, you're either supporting yourself via a large income earned prior to becoming a trader, you're retired, large inheritance for you to live on for the rest of your life or someone else is supporting you to ensure you have private insurance to take care of you that's not covered by the provincial social health care.

2) You don't treat your trading as if its a business or those around you (family & friends) don't see it as a job for you.

What I'm saying is that there are different variables for someone to label someone as a professional trader and we can't slap that label on someone until we know more information about them.

P.S. Depending upon what country you reside in, citizen of...different rules for considering something as a business from country to another country.

Good description. I agree for the most parts. Although for your description of 'hobby traders' where someone has a job and trades on the side, I'm not sure I'd use that term. Maybe "part time trader" like how you can get a 2nd job and be a 'part time job' on top of your normal day job. A "hobby" or "academic" trader is someone who probably has little to no skin in the game and are trading paper accounts, in my own view. There certainly are people like this, e.g. in the academic world with people writing papers and doing fundamental research into market structure who may trade paper accounts to test ideas etc. WHereas, someone with a day job, and also trades something on the side for extra income, are kinda like 'part time traders'.

 

[bone]

"it all depends"

cliche but true.

Individual mindset and emotional response to risk, household and relationship requirements, and capital are the variables.

There's no shame in holding down a "full time job" and making $50K a year swing trading if that's your comfort zone. Especially for married men - women have an innate requirement for security. And relying only upon trading income can be hard on a marriage. Because no matter how much you make, it will get spent and your wife ( and probably you ) will project the last three month's profit forward to the next ten years. Guaranteed. It's genetically predisposed. And that's a mistake.

I have clients who used to be full time traders, had some limited success - and went on to start businesses or become professionals. After several years, they never quite lost the "itch", and they hire me because they want to trade but likewise they want some flexibility in terms of future employment. I always tell them that having a good, steady income stream is a positive - and to study hard and really take the time to devote to developing themselves as consistent swing traders. Many of them I advise to only quit their "real" job if the discrepancy between their job earnings and their trading profits is obscene enough to make it an obvious decision.

It is fascinating - just having a consistent revenue stream to pay the bills and the mortgage ( the "job"); from my observations makes them very good traders. They don't FORCE trades in order to make money in order to pay bills. They tend to be more selective with their trade entries. Some of their Sharpe Ratios are just obscene. For a number of my clients, this is a happy medium.

My full time independentprofessional traders tend to be really well capitalized. And from what I can tell, many of the biggest hitters live somewhat modestly in terms of what they live in and what they drive. But they travel and vacation well because it helps their mental state.

There's something to be said about not putting external pressure on yourself beyond the marketplace.

The guys I knew of from the floor who were very successful traders and who kept what they made typically bought the Enzo and the 5,000 acre ranch in Colorado and the yacht and house in Newport Beach AFTER they left the pit and quit trading. They had already paid their taxes, and knew what they had financially going forward.

 

[xandman]

Makes sense.

Most of the "made" guys on the floor (gold badges) just came in to talk with longer lived broker buddies and do a few 1-2 lots. Perhaps, they held positions longer. Heck, one guy was even rumored to go dumpster diving for fun.

Anyway, their "known" steady income from the floor where seats they leased to other traders. If you make an outsized/fat tail return, you may want to annuitize a good chunk of it.

 

[Epic]

I'm not saying traders lose only because of taxes. I'm saying the hurdle rate to be a successful trader is very high. You have 500k in capital. You have two options: you can trade it or buy and hold it. To justify trading it you have to overcome those three issue I described above. It's an opportunity cost calculation.

If you are successful at beating those three, you should be trading actively. If not, you shouldn't be. I don't think most retail traders think about taxes when they think about their trading and its a huge source of slippage.

You cite buywriting as outperforming the market. Your example perfectly highlights what I am saying. The buywriter over the long run outperforms the market by 1% annually. However, he creates 12 taxable events each year. So if the buy and holder does 9%/year, the buy-writer has done 10% but will pay almost 50% in taxes: he will end up with 105% of his principal while the buy and holder will have 109% if he doesn't liquidate. And if he does, the buy-and-holder will still win with 107%. You ignored the tax implications in that strategy. Why? Most research papers do as well.

This is a traders forum. Everything should be determined in the context of opportunity cost; and taxes represent a huge opportunity cost. Yet, it's amazing how many "traders" on here don't do that.

I manage some friends and family money. I am judged on my after-tax returns (approximated) to the S&P500. The argument I made to them was that at the beginning of next year they should have more money to invest in a buy-and-hold strategy than they would if they invested in it today. Next year they can decide if they want to stick with me or switch to a more passive strategy.

I haven't read the entire thread, so don't know if someone already corrected this, but felt I should point out that this example is way off base. The buy-writer in your example still comes out better than the buy-and-holder even with the 12 taxable events.

A buy-writer takes a position in the underlying only one time just like the buy-and-holder, and there are no additional taxable events. The only taxable events are for the capital gains on the options. If we use your rough numbers where the call writing resulted in an additional 1% return, and we assume even the highest short-term rate of 39.6%, the buy-writer is left with 109.64% of principal and the buy and holder is left with only 109%. If the buy-write was 1256, then the taxation is much lower than 39.6%.

Your point about taxation is valid. Traders tend to underestimate the impact of taxes. Just the example was flawed.

 

[Epic]

To the OP's question. There is no longer a real reason to have to choose between trading and working a real job. Modern technology allows for anyone to easily do both. IMO, most traders realize greater success if they have a steady paycheck coming in. They also realize exponentially faster account growth.

Basically, if you can describe your process, then it can be automated fairly easily. If you can't describe your process, then you likely don't have an edge that will prove consistent enough to be long term. So by definition, if you have a definable edge, you should be able to automate it to run by itself while you pursue some other method of generating a steady paycheck that is more short term reliable. The two can easily be happening simultaneously and your spare time is when you improve your system.

I really hate the either or situation that new traders tend to put themselves into. It almost always guarantees failure.

re: managing money for others. This is only for those of us who don't mind the stress and want the growth potential that not even the world's best system could produce. For all but a select few, you reach a point where it is not possible to generate as much increase from personal capital as it is with OPM for a fraction of the effort. It takes awhile to build the business and it is very hard and time consuming, but after the ground work is there, any decent manager will easily raise >10X his own capital in a short period. With a 2/20 fee structure, that is 3X his personal returns from fees. Which is easier to do long term; 30% annual in a personal account or 10% annual in managed accounts? Even for the small manager the increase is the same in both.