You don’t need a big income to start building wealth. Someone with a large income could still end up spending more than they make, never really “getting ahead.” Whether you have a big income or a small one, start building wealth by taking a few steps in the right direction. These steps include building consistency, investing properly and creating additional income streams.
Strive for consistency in your income. If you have a good idea of what you will make from month to month it makes it much easier to plan ahead. It also reduces stress, as big fluctuations in income (especially to the downside) typically increase stress. For day traders, if you make money one day but lose it the next, you’re treading water financially. It’s very hard to save or invest when this is occurring because it is always feast or famine.
Create consistency in your income by focusing on executing each trade perfectly. Make your day, and each trade, about routine. If you create a consistent routine and process, then more consistent income will follow. You also need a good strategy (see How to Day Trade Stocks in 2 Hours or Less), but strategy isn’t the problem for most struggling day traders. You can have the best strategy and still be inconsistent if you don’t implement the strategy exactly as specified all the time.
Strive for consistency, instead of making dollars in the moment. Consistency will produce higher returns month after month, while chasing dollars in the moment will create inconsistent and typically low returns over the long-run.
When I started day trading as my primary income in 2005 I scoffed at investing. Why would I invest, doubling my account every few years, when I could day trade and double my account every couple months! I now know a few things I didn’t know then.
I found out that as my day trading account grew my percentage returns could not keep increasing with it. The reason was position size. As a day trader I have to get in and out of the market quickly, meaning I am highly impacted by the volume available at those exact moments. Volume is not infinite, and therefore my position size can’t increase infinitely either. You eventually hit a point where your day trading income becomes capped. For more on this topic see Why Day Traders Can Make Great Returns, But Aren’t Millionaires. Yes, you could create new strategies, take more valid trades or trade for longer each day, but I choose to invest instead.
Day trading can provide a consistent income (and a good one, even though you eventually hit a cap). Investing is different. Your money accumulates slower, but you can utilize a lot more of it. For example, when I day trade futures I only need about $40,000 to trade 10 contracts, and I don’t have much reason to take a bigger position than that. Therefore, any capital in my futures account over the $40,000 I don’t have use for (remember that’s the high end, you can start day trading with a couple thousand dollars). Withdraw the profits each month and invest it.
Investing has no cap…you can utilize millions of dollars, because you can buy for days, weeks and months. Volume is not an issue when buying multiple stocks over the longer-term.
Learning to invest properly is important. It is different than day trading. In day trading we look to capture quick bursts of momentum and short-term trends. With investing my goal is to buy solid companies at depressed prices, with likely minimal downside but a lot of upside based on historic precedent.
I highlight all the stocks I am buying in the Canadian Investor Stocks Newsletter. Just like in day trading, I am selective about my trades. I only buy stocks that have a minimum of 100% upside potential, and that have been around a long time and aren’t likely going bankrupt. Many trades have 200%, 300% even 600% profit expectations. Most of the stocks I buy also pay a dividend…a good one. And if they don’t, I must reasonably expect a higher profit from the stock price movements.
Multiple Income Streams
Dividends are one possible stream of income. Since my strategy is to buy dividend paying stocks (usually) at depressed prices, that means the dividend the company pays often provides a high yield, such as 10% or more. For example, if a company pays a $1 dividend per year (per share) when the stock is trading at $40 that provides a yield of 2.5%…not great. But if you buy the stock during a big sell off at $10, your dividend yield is 10%. You make 10% just for being a shareholder.
The trick is then to take your dividends and invest them in other dividend paying stocks. Soon, you have a lot cash trickling in from all over the place. Not to mention you still have the capital appreciation of the stocks you own…and I have a plan for when I will sell every one. How much to invest in each stock, and when to get out is explained in the Canadian Investor Member Area.
Dividends are one income stream, but there are many others. Almost every personal finance book you read recommends multiple streams of income. Not that you may need it, but it is good to have. Do the people on Shark Tank or Dragon’s Den need more income? No, but they enjoy what they do…so create another stream of income based on what you like to do. I love to trade, but also love writing, investing and helping others. These all create additional revenue streams.
As a day trader, one of the huge advantages to having a secondary (or multiple) income stream is that it takes the mental pressure off your trading. You can trade in a calm state, and not have to worry about being profitable today to keep the lights on. For news traders that is always a big fear.
Small changes have a big impact over the course of a couple years. Most people aren’t willing to think about the big picture, but if you do your life will change. First create consistency in trading (or day job) so you can start putting money in your investment account each month. Utilize your RRSP and TFSA for investing.
It all starts with putting away whatever you can in your investment account. Once you have about $500, buy some investments. When you have another $500, but some more. Don’t deposit $100 and buy stock, deposit $100 and buy stock. Buy stock in at least $500+ blocks so commissions don’t erode your capital right out of the gate.
Like day trading, investing involves risk. Research what you are doing before jumping in, and consult a professional if needed. This is not personal investment advice, nor a recommendation to buy or sell anything.