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Paying myself


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Paying myself

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  #1 (permalink)
Larken
Stockholm, Sweden
 
 
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Hello everyone, first post on the forum

I am trying to set up some kind of system where I regularly take profits from my trading portfolio.
For simplicity, let's say I have $100,000 in my portfolio and I'm looking to pay myself a monthly salary with this. Important to point out as well is that this is my only source of income!
So far I've thought of two different systems, but I'm sure there are many other ways and systems, so I'd be happy to hear of any.

1) I would take 50% of the monthly profit as wages and let the other 50% remain in the account for growing. Obviously on loosing months I wouldn't receive any payment at all.
The drawback with this is that on a loosing streak I wouldn't make anything.

2) I would take 1% from my portfolio each month regardless of performance. This could be tweaked and fitted so let's say:

0.5% between $1 - $100,000
1% between $100,001 - $200,000
1.5% between $200,001 - $300,00

Let me know if you have any suggestions or tell me how you guys do it yourself.
There has to be a balance between taking profits and letting the portfolio grow.

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  #3 (permalink)
 deaddog 
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What I did when actively trading was to sweep all cash over 100K, or whatever your account size is, in to a cash account that I used for living expenses. On down days there was no sweep and I didn't add to the account or sweep again until the account was over 100K.

So I start every day with an account size of 100K or less. If I have a good day then I put cash in the bank and if I had a bad day then I had less capital to play with the next day.

My timing was fortunate as I managed to build up a nice cushion before I had a string of losses. Had I hit my drawdown cycle with out that cushion I might be doing something else today.

"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
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  #4 (permalink)
Larken
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deaddog View Post
What I did when actively trading was to sweep all cash over 100K, or whatever your account size is, in to a cash account that I used for living expenses. On down days there was no sweep and I didn't add to the account or sweep again until the account was over 100K.

So I start every day with an account size of 100K or less. If I have a good day then I put cash in the bank and if I had a bad day then I had less capital to play with the next day.

My timing was fortunate as I managed to build up a nice cushion before I had a string of losses. Had I hit my drawdown cycle with out that cushion I might be doing something else today.

Interesting way of doing it. However, I think I'm looking to do a mix between taking profits and letting the account grow as well.
Thanks!

Larken

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  #5 (permalink)
 artemiso 
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Where 'net income' is defined as your trading revenue after subtracting operating expenses (e.g. data feeds), I recommend taking out living expenses + tax on your net income, where living expenses depends on your desired 'ordinary lifestyle' utility (rent, food, healthcare, retirement savings etc.) and reinvest the rest.

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  #6 (permalink)
 kevinkdog   is a Vendor
 
 
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When I started trading full time 7+ years ago, I realized beforehand that having to take money out of my trading account for living expenses would be a big psychological "monkey on my back."

So, I made sure I had 3-5 years of living expenses in a separate account, not earmarked for trading.

That made trading a lot easier mentally and emotionally, since even if I blew out the trading account, I would still have living expenses for at least a while.

My trading account, then, became just for trading. The only time I withdraw money from it is if I need it to pay taxes on profits (and if no profits, I don't have to worry about taxes!). That helps the account grow more quickly, also.

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  #7 (permalink)
 mattz   is a Vendor
 
 
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I think that the practical approach would be not to touch the money for three years, and see what consistency you achieve with your returns. This would give you an idea of your methodology drawdowns and recovery time when things do not go as planned. Like @deaddog said, if you are undercapitalized you may not be able to recover from drawdowns.
In a span of three years, you should, although not necessarily, encounter many trading scenarios as far volatility or lack off, high range and low range, etc. After you analyze your performance month by month, then you can decide how much and how frequently to take out revenues.

Matt
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  #8 (permalink)
Larken
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Thanks everyone for sharing how you've approached this subject, it has given me a lot of food for though. What surprises me a bit is that this subject, which in my opinion is the foundation of successful trading, isn't discussed much in the trading community. In my search on the internet I only found a couple of threads on this matter.

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 Big Mike 
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This 1 minute video (NSFW language) is worth remembering. Traders have ups and downs. Markets have ups and downs. Always pay yourself...

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  #10 (permalink)
 Tymbeline 
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Larken View Post
So far I've thought of two different systems, but I'm sure there are many other ways and systems, so I'd be happy to hear of any.

1) I would take 50% of the monthly profit as wages and let the other 50% remain in the account for growing. Obviously on loosing months I wouldn't receive any payment at all.

I'm somwhere between this plan and what Kevin describes above in post #6.

I usually take out half to two-thirds of each month's takings, or half to two thirds of what there is in profit from the previous high-point anyway, and I could last a year and a half or more without taking out anything, if I ever had to.

I'm happy to grow the account slowly. It isn't my only income but it's typically a chunk of it.

In short, there isn't a "right answer": it inevitably depends on your own financial circumstances, but I think you need to pay yourself something, in principle, if you're profitable, and grow the account too, however slowly.

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  #11 (permalink)
 deaddog 
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kevinkdog View Post
When I started trading full time 7+ years ago, I realized beforehand that having to take money out of my trading account for living expenses would be a big psychological "monkey on my back."

So, I made sure I had 3-5 years of living expenses in a separate account, not earmarked for trading.

That made trading a lot easier mentally and emotionally, since even if I blew out the trading account, I would still have living expenses for at least a while.

My trading account, then, became just for trading. The only time I withdraw money from it is if I need it to pay taxes on profits (and if no profits, I don't have to worry about taxes!). That helps the account grow more quickly, also.

Lots of questions; as @Larken stated there is not much discussion on this subject. I hope the questions are not too personal>

The first question that comes to mind is where did the initial capital, enough to fund 3-5 years of living expenses plus trading capital come from?

3-5 years seems like quite a range. Did you plan on changing your life style depending on how the trading was going? That is if you went into a period of drawdown were you prepared to reduce your annual budget?

Do you still maintain that 3-5 year cushion? At what point do you take money from your trading account to replace living expenses? Is this done annually or when the trading account exceeds a certain amount?

In your experience what do you consider to be a realistic expectation for returns?

Did you have years where you wouldn't have made enough to live on?

DD.

"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
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  #12 (permalink)
 kevinkdog   is a Vendor
 
 
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deaddog View Post
Lots of questions; as @Larken stated there is not much discussion on this subject. I hope the questions are not too personal>

The first question that comes to mind is where did the initial capital, enough to fund 3-5 years of living expenses plus trading capital come from?

3-5 years seems like quite a range. Did you plan on changing your life style depending on how the trading was going? That is if you went into a period of drawdown were you prepared to reduce your annual budget?

Do you still maintain that 3-5 year cushion? At what point do you take money from your trading account to replace living expenses? Is this done annually or when the trading account exceeds a certain amount?

In your experience what do you consider to be a realistic expectation for returns?

Did you have years where you wouldn't have made enough to live on?

DD.

I appreciate the good questions, and I've spent the past hour or so figuring out a way to answer them, without getting into personal details. And for most of the questions, the answers I came up with become too personal too fast, and probably would not help most people here anyhow.

So, I apologize for not fully answering your questions.

I will say that having to draw a monthly "nut" from your trading account is huge psychological burden for most people. I'm glad I did not do it that way. I recommend everyone keep expenses and trading separate, at least in the beginning.

As for realistic rates of return, it really depends on how much drawdown you are willing to endure. Many professionals aim for a 1:1 ratio. So, if they want 10% annual returns they need to be willing to endure 10% drawdowns.

In my mind, any retail trader with a ratio over 2 over a long period of time is doing pretty good.

Note what ratios of 1-2 imply for people hoping to earn 100%+ return annually. Boom or bust...

Sorry again for this incomplete answer.

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 mattz   is a Vendor
 
 
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I think that to get a realistic view of returns, you should look at successful CTAs and Real-Time Performance of good automated trading programs. Systems, for example, will show you how inconsistent returns could be over time and the fact that they can go through drawdowns that last for months, therefore, to expect income is unrealistic.

CTAs(Commodity Trading Advisors) is another interesting model because (most) have the 2/20.
In essence, they have to hit new highs, "high water mark", in order to take any funds out as incentive compensation.
This is essentially their income and it does reduce their equity. Again, you would see that those who have 10 years or longer, as far as track record, have many periods where they can not get paid.
This is why "average" return per month is misleading, you need a micro approach to see the full picture.

Stop asking "what is reasonable per month" because this is strategy specific.
Only time, and a long time gives you reasonable factors as far as what to expect.
I assure you that even those who you consider "super traders" do not make it every month.
They too go through very lengthy rough periods.

Matt
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 grausch 
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Larken View Post
Thanks everyone for sharing how you've approached this subject, it has given me a lot of food for though. What surprises me a bit is that this subject, which in my opinion is the foundation of successful trading, isn't discussed much in the trading community. In my search on the internet I only found a couple of threads on this matter.

Undercapitalisation discussions to pop up now and then, but most people do not really want to discuss these issues. I guess most people want to believe the dream, i.e. I will learn to trade in a short amount of time, grow my capital really aggressively and retire in 5 years (or less). When discussions go in this direction, most people never get to the point of discussing growing your capital base while needing to withdraw living expenses. Although, I would say that becoming profitable is a prerequisite before one can go about thinking about withdrawing cash from the account.

@kevinkdog gave a ratio of returns:drawdowns of 1:1. I was reviewing CTAs for a couple of years - Autumn Gold CTA INFO was a good source of data and once the track records became longer, CTA performance tended to have a ratio of 1:2, sometimes even 1:3. Not sure where Bill Dunn's fund stands now, but when he was still reporting numbers publicly he had returns of under 20% with a max drawdown in the 70% range. That drawdown had lasted a couple of years already (in 2008) and even a 80% return for 2008 did not get him out of that drawdown. Granted the longer track records tended to be mostly trend-following type traders and classical trend-following returns have been very bad lately, but this gives an indication of what an equity curve can look like - lumpy returns with lots of drawdowns in-between.

I am not sure what type of returns you are looking at, and what your living expenses are, but you can do the math quite easily. If you need $5k a month to live off, then you would need to earn $60k per annum from your trading. On a $100k account that means returns of 60% not taking into account taxes. Assuming an effective tax rate of 33%, you would need to make ~90k (60k /0.67 to get to pre-tax returns) just to break even after taxes. 90k on a 100k account means 90% per annum. Definitely possible, but pretty improbable.

However, if you had a million dollar account, your required return would only be 9% per annum. Much easier to accomplish over the long run and drawdowns also won't hurt as much. $500k and returns required are only 18% per annum. Again much better than 90%. Thus, proper capitalisation and the ability to withdraw funds from the account go hand-in-hand.

With all of that in mind, the reality is that unless you already have a pretty significant bank-roll, you need an alternative source of income to grow the account. Otherwise you will just spin your wheels until you blow up when the big drawdowns come. This is not what people want to hear, but unless someone is extremely lucky, this is the most likely outcome.

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 dbarno 
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Pay myself weekly. Makes it easier to keep up with the household budget. Keep in mind having to pay quarterly taxes. Came close to just missing some close calls with brokers doing some stupid stuff. Since then keep just enough in the accounts for the grey matter to be comfortable to trade with. Everything over that amount goes into savings quarterly.

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 deaddog 
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dbarno View Post
Pay myself weekly. Makes it easier to keep up with the household budget. Keep in mind having to pay quarterly taxes. Came close to just missing some close calls with brokers doing some stupid stuff. Since then keep just enough in the accounts for the grey matter to be comfortable to trade with. Everything over that amount goes into savings quarterly.

Even on down weeks?

Do you draw the same amount each week? How do you determine the amount?

"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
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 dbarno 
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It's been a while since had a down week. Do get my teeth kicked in once in while tho. 2015 was not as good for me as other years. Mostly day trading this year. Don't trust a bunch of the markets. Not as much position trading.

Draw same amount. Determined by what it takes to keep budget happy. Fortunately don't have a lot of bills.

To me this is a job. Not a video game.

A mental trick that works for me is write down a reason why trading for that day. Example, the car needs tires.

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