Trading for a Living – From Home

‘Barriers-to-entry’ is a common term in economics that describes the existence of high start-up costs. Alternatively, it detects other potential obstacles that could prevent new competitors from effortlessly entering an industry or area of business. Those who benefit greatly from barriers-to-entry benefits include pre-existing firms because they provide protection for their revenues and profits. Some of the more common barriers-to-entry include special tax benefits. These advantages apply mostly to existing firms, patents, high customer switching costs, and strong brand identity or customer loyalty.

Trading is a practice that many consider to be a high barrier-to-entry field. While there is some merit to this assumption, it is not entirely true; at least, not in today’s market. That’s not to say that anyone with a lot of ambition and patience cannot trade. Moreover, it does not mean that they can’t do it for a living. They can, even if they have little to no money.

In a time where people have no choice but to work from home, trading for a living certainly does sound appealing. For those who no longer have a job thanks to the virus outbreak, trading for a living is especially enticing.

What is day trading?

Because you will see it frequently in this article, let’s take a quick look at what ‘day trading’ is.

This practice is the purchase and eventual sale of a security within a single trading day. Basically, it is what happens when you open and close a security position in one day’s time. Most of the time, this will take place in almost any marketplace. Here is a break down that simplifies the explanation:

  • Open and close (round trip) – By “open and close,” we mean buying and selling. In the case of short sellers, it is selling (short) and then buying. An alternative name for this is ‘round trip’.
  • Security position – Day trading applies to pretty much all securities, like stocks, bonds, ETFs, and even options (calls and puts).
  • Same day – If you carry out a round trip on the same day, then it is technically a day trade. By holding your security position well beyond the conclusion of the trading day, then it is not a day trade

In addition to day traders, there are also ‘pattern day traders’. These are people who make four or more day trades within a rolling five business day period. Those trades typically make up more than 6% of your account activity in the span of those five days.

Changing times

At the risk of stating the obvious, technology is always changing and this has various effects on certain fields. Because of this, there is also an increase in volumes on exchanges. This, as a result, is triggering a number of very low barriers-to-entry trading careers. There are some cases where there is no requirement for personal capital. For others, there is a requirement for capital to get you started, but only a small amount. With this, you can properly verify your commitment to trading.

Markets are generally interlinked, so it is always open trading time somewhere in the world. In fact, it is possible to access a good chunk of those markets with relative ease. What this means is that even people who are currently working full-time or have children at home can trade. Job or no job, kids, or no kids, you can still participate in trading. It ultimately boils down to just being a matter of finding the right market and opportunity.

Now, before you dive headfirst into trading, you should understand that it is not the easiest of businesses. As a matter of fact, it has a tendency of being very tough to stay in for the long haul. When you look at some different trading alternatives that are available, you will see that you can enter the market. However, the success you wish to achieve will mostly depend on you. In this article, we will take a look at a couple of these options. We will see if they offer full-time or part-time career opportunities, or if they can simply generate additional income.

Can the average person trade?

There is a common misconception when it comes to full-time traders. Many people believe that traders working full-time with advanced degrees, as well as high pedigrees, work only for investment banks. Another common assumption is the thought that, if you want to trade, you need large amounts of capital. Not to mention the expendable time that you are willing to dedicate to the practice.

There is some truth to these initial impressions, though. To work for an investment bank or on a major institutional trading floor, you will need to have connections. What’s more, you are likely to go far if you have a prominent educational background that makes you stand out. Be that as it may, we will focus primarily on how the average person can start trading and creating wealth. Whether the average person has either extensive or very little trading experience does not matter.

Independent trade

The first option is arguably the easiest due to how flexible it is and how you can mold it around your daily life. That is trading from home; in other words, trading independently. However, as easy as it appears, day trading stocks from home are also among the most capital-intensive arenas.

This intensity comes from the minimum equity requirement for a trader who is a pattern day trader is $25,000. It is important that the maintenance of this amount be as consistent as possible. If the trader’s account falls below it, they will not be able to day trade. That is, not until the minimum equity level undergoes restoration by depositing either cash or securities.

For that reason, potential traders need to remain vigilant about the other markets that require less capital. Moreover, markets that have considerably lower barriers-to-entry. The foreign exchange (i.e. forex) or currency markets will typically offer this type of alternative. The opening of accounts is a possible thing to do for as little as $100. In addition, with leverage, a large amount of capital is controllable with this substantially small amount of money. This market is open 24/7, thus it provides an ideal alternative to those who are unable to trade during regular market hours.

High leverage does mean higher risk, of course, but there is a catch to this. If a trader does not possess a large amount of capital, it’s still possible to enter this market. And with very low barriers. It would be smart to educate yourself on the risks that are at play and build your own trading plan. These are important prior to participate in trading activity, but when you are highly leveraged, it becomes even more crucial.

Proprietary firms

Over time, proprietary trading firms would become very attractive thanks to their training programs and low-fee structures. Are you not entirely sold on the idea of trading from home (i.e. independently)? If so, then working on a trading floor might sound more appealing.

A day trader who is working for a proprietary trading firm is not an employee, but a contractor. They receive no wages or benefits. Instead, all they get is a portion of the profits that derive from trading whatever the firm is into. The trader will receive company capital (or leveraged capital) to trade and the firm partially manages the risk. Personal discipline is still very much a requirement. With that said, trading for a firm will take some of the weight off of a trader’s shoulders.

Working for a firm will also likely require working in an office during market hours. However, there are some firms that allow traders to trade remotely from the comfort of their own home. There are several benefits that come from working with a trading firm. Some advantages include free training, being around other successful traders, and a wide variety of trading ideas. Additionally, there are reduced fees and commissions and access to capital, as well as monitoring of performances.

A majority of proprietary trading firms will usually accept people who show initiative in their backgrounds. Moreover, people who have at least some education in their prior field. The reason for this is so the firm is able to monitor a trader’s risk. They will release those who fail to show notable promise, doing so with very little overall loss to the firm.

Hype behind ‘Machine Learning’

When it comes to trading for a living, there are some mistakes you can make. One of which is falling into the trap of ‘Machine Learning’; specifically, the hype behind it.

Machine Learning applications are a recurring thing that you will frequently come across. The media loves them, people do not fully understand them, and investors refer to them as “buzz words.” The main issue with Machine Learning is that it is incredibly tough to apply in trading. In fact, when you think about it, Machine Learning is more of a filtering method rather than a decision-making tool.

For example, paper trading tests will, for the most part, prove to be tremendous. However, they will also fail in real trading. Why is that? Because they will over-fit. One can fight it with cross-validation and carefully select the best models that perform best on out of sample. You may think that you are safe, which consequently adds bias and effectively leaks data. Generally speaking, this is not the way to do that.

You can avoid over-fitting by way of carefully averaging and gauging on different assets, periods, or time frames. Make use of atypical train/test splits and include random noise for the evaluation of your generalization power. Above all else, be very careful; you do not know what you do not fully grasp.

There is uncertainty about the future, but Monte-Carlo simulation is an example of a great tool. It is a broad class of computational algorithms that rely on recurring random sampling to acquire numerical results. With it, you can simulate a lot of scenarios.

Roller coaster in the market

Market volatility is attractive to some and too big of a risk to others. Whatever your thoughts on the matter, it’s something that all traders must go through.

Turning in a profit in a period of six months is nice. However, you always run the risk of losing more than a couple of previous months. There are times when the market is unapologetically brutal and is incredibly fast. Avoiding these situations is possible, and you can do so by simply playing small. One of the biggest mistakes anyone can make is getting cocky with your betting.

The Kelly criterion – also popularly known as the scientific gambling method – is a formula for bet sizing. Oftentimes, applying it leads to substantially higher wealth in comparison to any other strategy in the long-run. Although it is an important consideration, under-betting is typically a better outcome than over-betting. Two key factors that help you reach success are risk assessments and position sizing. Having a game plan that guarantees a chance of winning is as vital as accurate position sizing and margin requirements analysis.

Patience is key

The final point we will go over is patience. This is by and large one of the toughest things to accomplish when partaking in day trading. As strange as it may sound, there are times when the best trade is to not trade at all. Taking on the role of a day trader means becoming essentially a market junkie. As the name implies, there’s an addiction to checking the market and a serious adrenaline rush when it all commences.

Sometimes, cash is the ultimate factor. Because of this, simply not trading or biding your time until the appropriate trade shows up is the best you can do. This especially true when markets suddenly turn into chaos during times of crisis or sellouts. Looking at trading from a different point of view, one might see being similar to breathing in air. If you do not trade, then your existence would cease to be.

Overall, getting this urge under control is a primary key to your success. It is not uncommon for a trader to keep adding to losing positions or to try and save terminal positions. They tend to do this instead of just waiting and keeping the cash, which is the wiser move

Conclusion

As soon as you decide on which trading method best suits you, the next step is important. If trading from home is something that interests you, then you need to pick the markets you will trade. And you must do so by basing your choice on your capital and interests. Afterward, you must create a comprehensive trading plan, which doubles as a business plan. Trading is your business now, anyway. And, of course, you must decide how you will operate as a trader.

The next step is to explore different online brokers and make a comparison of what they offer their clients. Seek out the aid of a mentor or look for someone who is willing to help you as you embark on trading for a living. Only then will it be the time to start trading.

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