Technical Analysis of Indian Equities by Nooresh

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How much capital do you need to become a Full Time Trader in India ?

On the face of it trading full time looks like one of the most fascinating careers for some simple reasons.

 

The Wow Factor

 

-> Market timings 9.00 to 3.30.   ( Wow a 6 1/2 hour working day. )

-> Work from home. ( Who wont love to work in their boxers ? )

-> No Boss, No Appraisal ( I am the Boss )

-> Total Mobility. Work from anywhere with a net connection ( Did you not see that pic of a trader with a laptop in Goa ? )

-> Tons of Money ( If you are full time trader you make more money with the keyboard in your hands )

-> More time with Family. ( What would i do if i get done at 3.30)

-> I can take vacations whenever i want to ( and pray its not the big up or down day – for a discretionary trader. Traders are more weekenders )

-> I just need to keep executing the system and chill. ( The backtest results are just too good to think of position sizing)

 

( These reasons are used by sellers of trading systems, mentoring programs, softwares, extensive trainings etc )

A lot of other reasons can be added in relation to the existing job/business frustrations.

 

Some things which a real trader does not get against a salaried job or a strong cash flow business.

 

The Comfort Factor

-> A monthly pay . ( A trader can have bad months and positions he would like to stick to. Cash flow concerns)

-> 20 days of paid leave. ( Can you create a clone ? or is it easy to trade from the Himalayas)

-> Salary Hikes / Appraisals/Inflation adjustment. ( A trader may get drawdown's and big money spikes but its terribly lumpy)

-> Job Security or Alternative Opportunities ( Forget security there is a high burnout and failures in trading)

-> Experience increases value in job market and even bonuses . Look at your boss πŸ™‚ ( Your expected return is a factor of market trends and not your age. Your capital increases only when your returns increase beyond expenses big way)

 

There can be a book written on it but a few points which i could think quickly on a Saturday afternoon.

 

Now lets get to how much capital is needed ?

 

First let us decide a few quick things you should know about yourself before even thinking of the capital requirement. ( this is a quick calculation and not an exact guideline)

 

Step 1 –Your current salary post tax and expected growth rate of salary.

 

Step 2 – Your absolute living expenses , inflation and contingency fund.

 

Step 3 – The savings you have for trading capital.

 

Step 4 – How much of your savings can you risk if its not working out.

 

Step 5 – Will you be borrowing capital and if yes what is the cost. ( if you are borrowing from friends they expect more than bank return or at least return of capital πŸ˜‰ )

 

The next step is how much return you can make. ( Lets keep it assumed return. Reality turns out to be way different than expectations or back tests)

 

Assumptions

 

-> You better be looking at expectation of coming 5-10 years average with a lot of cycles and not the average return of last 6 months or 6 days.

-> We are not going into drawdown's or losses or all that hurting calculations. Assuming that you will make what you think.

-> We assume leverage will not be huge and that you dont suffer a 100% capital erosion.

 

How much returns do you expect you can make on an annual basis. ( post tax to simplify calculations) ?

 

-> 10%                       

-> 20%

-> 30%

-> 40%

-> 50%

-> 60%  ……………………. ( there i stop if you can do more than this over 5-10 years consistently please mail me πŸ™‚ . I will plead you to manage my money and a lot of people i know)

 

Now let us not get very mathematical and try making an dumb estimate through a scenario.

 

Mr Wannabe Super Trader

 

Annual Income – 12 lakhs post tax.

Living Expense – 8 lakhs

 

( Giving a skip to salary growth or inflation for now and expected return= salary. No compromise. )

 

So if you need 12 lakhs a year how much capital is needed at various return points.

 

Earnings Wanted Exp Return Capital
1200000 10 12000000
1200000 20 6000000
1200000 30 4000000
1200000 40 3000000
1200000 50 2400000

 

 

Now suppose even if you expect a 5% CAGR in your salary. ( not considering that 15-40% raise every 2- 5 years on a job switch)

 

This is how your capital needs to increase every year to compensate for it even on a duration of 5 years.

 

 

Expected Earnings Exp Return Capital Capital to be added
1200000 30 4000000  
1260000 30 4200000 200000
1323000 30 4410000 210000
1389150 30 4630500 220500
1458607.5 30 4862025 231525

 

This is assuming your returns are linear at 30% year on year.

 

Now lets assume you are not good and consider that if you dont make money over 2 years or lose 30% of your capital you quit. ( Not a criteria but just an assumption)

 

Can you really afford failing and do you have that much contingency fund ?

 

Will you be able to take a hit of 20-30% on your trading capital even if it is interim or the end of your trading stint. Do you have a contingency fund to pay up your living expenses in a drawdown period?

 

Even if you can make a 20-40% return the capital requirement is roughly 3-5 times your expected earnings and ideally around 8-10 times given the drawdowns, bad months, trading break, vacation etc. 

 

Lets make it a little more troublesome.

 

- > Put a tax rate of 30% on the trading income. You can reduce it through expenses and a good CA.

 

-> If you are borrowing capital the cost of capital in India is 11-24%.

 

-> How will you pay up your expenses in times of drawdowns. You may essentially need at least 1 – 2 years salary in addition to your trading capital.

 

-> How will you be able to add capital with increasing inflation or do you believe that a couple of years as a fulltime trader your expected returns should increase ?

 

The questions can continue for longer and longer. So let us cut the post here and review it post comments from readers.

 

Also before ending the post let us add an additional though on How to become a Full Time Investor.

 

-> Estimated time for returns may not be annual or monthly.

-> Only cash flow is through dividends.

-> Dividend yields can be 2-3%.

 

A full time investor may need 30-50x the expected earnings unless one intends to reduce capital for expenses. But the kicker in investing is compounding.

 

This is a quick Saturday afternoon post so mind the errors but would love your comments. You can even mail in your views to me on nooreshtech@analyseindia.com ( even on gtalk )

 

For all the people in Bangalore do drop in to meet me in this Seminar.

 

INDIAN EQUITIES OUTLOOK & INTRODUCTION TO TECHNICAL ANALYSIS – BANGALORE SEMINAR ON 23RD AUGUST – 2014

Online Payment Link

https://www.instamojo.com/noooreshtech/bangalore-seminar-/

Nooresh Merani

www.analyseindia.com

Twitter – https://twitter.com/nooreshtech

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nooreshtech@analyseindia.com

Article by Nooresh Merani

Nooresh has written 2704 articles.

You can follow Nooresh Tech on Facebook and Twitter here.


{ 19 comments… add one }
  • Prashanth August 16, 2014, 17:02

    If I have 1.5 Crore, can I become a Specialist Doctor? Nope, one also needs to study for 7 years and pass all exams in the interim.

    I would say its something similar for a person to become a trader as well. The amount of experience its necessary before one even starts to think about quitting a job for full time is somewhat closer to that (or put it another way, 10,000 hours of Practise) and even that does not mean one is really sure to excel in the markets πŸ™‚

    Do note that on the long term, nearly 95% of all traders fail (Just talk to your friendly broker and you shall know how tough the markets are).

    Reply
    • Nooresh August 16, 2014, 17:13

      Valid point on how much work and effort goes into becoming a full time trader πŸ™‚ Its one of the most difficult careers to survive in and thats why the sarcasm πŸ˜‰ through out the post.

      Like with 1.5 crore you cannot become a specialist doctor but you can buy a seat πŸ˜‰ in a college with that money and fail terribly.

      The post talks about how much deposit money or fees you need to pay even to survive as a full time trader even on assumptions that you being in the 5-20% who succeed πŸ™‚

      Regards,

      Nooresh

      Reply
      • Indranil Zagade April 10, 2018, 08:02

        So, How much a full time trader earns monthly? Also, Do you conduct technical training in pune?

        Reply
  • mark August 16, 2014, 17:41

    Think luck is more imp..still remember a post 10000 in wipro is worth 50 crores in 25/30 years…not sure if just capital is need…that too huge capital in lacs n crores….so write strike at right time is d key…

    Reply
    • Nooresh August 16, 2014, 17:45

      25-30 years is long term investment and pure luck. For every Wipro there are 10 others who have disappeared or not performed.

      But even if one strikes a 100 bagger with 1000 rupees will not change things big way.

      Reply
  • RAJMOHAN March 16, 2015, 09:38

    GREAT ARTICLE NOORESHJI!! YOU ALWAYS MAINTAIN INTEGRITY WITH FORTHRIGHT EXPOSURE OF MARKET REALITIES. KEEP GOING. GOD BLESS YOU

    Reply
  • Vikas V September 7, 2015, 10:26

    nice post all the numbers have been well accounted for. Probably add a note on experience. Trader should try it on a smaller scale for a good enough time until he has covered atleast one major bull and bear cycle and make sure he has the psychological strength to survive the rough and sunny weathers of the market before taking a decision. Also the fact that a trader should have support from his family and near & dear ones before taking the final decision. A note on one time setup expenses should also be good. Should ideally have a comfortable place, good internet, computer, trading software, backup, etc

    Reply
    • Nooresh June 13, 2016, 09:40

      Hi Vikas,

      I have not gone into any details but just capital required with assumptions one will make returns what one thinks can make. So the post takes only one aspect πŸ™‚ there are way too many.

      Reply
  • Ganelsh December 11, 2015, 15:54

    I would like to know more about share trading as full time career. Though I have invested 4 lacs in mutual funds and 1 lac in shares but never made money.
    Can you help to me know about share trading and smart investing.
    Thanks in advance

    Reply
    • Nooresh June 13, 2016, 09:41

      Hi Ganesh,

      Raw Material in trading and investing is Cash and if there is not much of it its better to take ur time learning the skills needed before going into even thinking about full time.

      Reply
  • shrikant May 6, 2016, 04:51

    Nooresh sir looking at other side of coin only. There are many traders which you may not know who are Professional Traders. They can give correct answer of this question.

    Reply
    • Nooresh June 13, 2016, 09:44

      Professional traders is just another word coined for someone who may possibly be making a living out of trading or trading on behalf of a proprietary book.
      I have only taken one aspect which is capital required not talking about skills and temperament.

      Reply
  • Nishank June 13, 2016, 03:23

    Your post is the worst of it’s type for any budding financial analyst, trader or broker..
    Do you know that a trader can manage his job in a brokerage firm or an investment firm or become a venture capitalist alongside his trading..
    Have you ever heard of value investing??
    Finally are you a trader or some sarcastic blog writer who has written too much??

    Reply
    • Nooresh June 13, 2016, 09:49

      Hi Nishank,

      Should a budding financial analyst , trader or broker be shown a Rosy Picture only ? The post only looks at an aspect of capital required assuming you have skills and temperament and
      will make a return what one thinks. Its just a computation going reverse.

      A trader can manage his job in a brokerage/investment firm. — How many brokers allow their employees to trade officially. There are a lot of restrictions in a investment firm.

      A venture capitalist may not need any capital for venturing out ?

      Have you heard of Value Investing ? —- Is that a question or your authority over it ?

      Been writing for 10 years so I can definitely say written too much. Whether the blog is sarcastic thats a view of the reader ! I do trade for myself and am a Registered Investment Adviser.

      Would suggest you read many other articles in the blog too —

      Cheers

      Nooresh

      Reply
  • Ravi December 3, 2017, 01:05

    Please notify me of new posts

    Reply
  • Indranil Zagade April 10, 2018, 08:05

    So, How much a full time trader earns monthly? Also, Do you conduct technical training in pune?

    Reply
    • Nooresh April 12, 2018, 10:08

      Its not a salary which is confirmed monthly … It can be a loss too !

      Reply

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