If You're Gonna Trade, Have a Backup

At this point, I've outlined everything you need in order to trade successfully. You've seen my routine, my approach and my tools. So it should be simple to chuck your job and become a professional trader, right?

Well, not exactly, because just about every successful trader I've met has one of two things in addition to a good methodology: an alternate source of income, or a huge pile of money to draw from.

That's right. As good a trader as you might think you are, it's difficult to make money on an even, consistent basis. And yet mortgages need to be paid and groceries need to be bought. Those regular expenditures are fine if you're doing well. But what about those weeks and months where you're not making a cent? Well, the bills don't stop, and the annoyance slowly turns to panic as you see your equity get chipped away.

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And once panic sets in, you're only a step away from doing something really dumb, like letting your emotions get in the way.

Therefore a buffer is needed, and that's why, except for a stretch when my wife was "retired," I not only had her income but my income from writing and TV. I really can't emphasize enough how important that additional cash flow is, as more than a few times I've been more than thankful to get that regular paycheck.

Of course, the other alternative is to start with a nest egg so large that you only need to trade a portion of it to cover your expenditures. How large naturally depends on your monthly outflows, and that is also a factor of how that nest egg will generate income. Even so, the calculations aren't hard.

With all that in mind, however, the typical person sitting in some mindless cubicle, and who has had success at trading thus far, will want to take it "full-time" regardless of my warnings. So, how much does he or she -- we'll call that person Trader X -- need as equity? There, the calculations are straightforward.

Let's assume a great trader generates 30% compounded per year. That's a year in, year out rate of 30%, not an "average" of 30%, by the way.

Let's further assume that Trader X is not great but good and will return only 15% a year. Finally, let's assume Trader X has $5,000 per month in expenses, or $60,000 per year. Therefore, Trader X will need $60,000/15%, or $400,000, to start with.

Oh, but wait. Thanks to our ever-growing government, we can count on a portion of that going to taxes -- federal, state and local. We'll peg that percentage at 30%. So now instead of needing $60,000, we need $85,710 ($60,000/70%). And to generate that $85,710, we now need to start with $571,000! Oh boy, the amount keeps getting bigger, and that assumes we don't want to grow our equity over time.

Still, the final calculation -- your starting equity should equal about 100 times your monthly expenses -- is a good place to start and should get you on your way should you decide to make the big leap.

You can get there, though. Honestly. And if you try or even dabble at trading, I really wish you the best of luck. I hope this series has helped, and that we meet in person sometime soon.

Today, the Dow, PFSWeb (PFSW Quote), PeopleSoft (PSFT Quote), Zimmer Holdings (ZMH Quote), DaVita (DVA Quote) and Kinross Gold (KGC Quote).

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And that is the final word from Hawthorne, N.Y., where a test of Google's desktop search application will be worth your while. If you're like me and have a lot of documents and emails you're constantly looking through, you'll find it invaluable!

And don't forget - now is a great time to learn how to make bigger, faster profits with technical analysis and charting. Get a free trial of my newsletter, The Chartman's Top Stocks and follow along with me.