Isn’t that the dream? To make money whilst doing nothing, to be able to live your life and at the same time know that you are earning money. But is it realistic? Can we achieve that? Well, first we need to know HOW to do that using different trading techniques.
But what Is Passive Income?
It’s exactly as it sounds. Making money without having to do very much. Winning the lottery for example would be a great example, but we can also have similar outcomes gaining on stock, earning interest on our money while it sits in the bank or a property you own increase in value. But when it comes to taxation offices they have their specific names that we should be aware of and we will go into later.
Active Vs Passive Trading
Is stock trading passive or active trading? Well that depends on you and your style if you invest a substantial amount of time into producing profits and into your trade activity then you would earn the title active trader
A passive trader however is someone that trades part-time, they have another job perhaps and cannot afford to spend their time studying the market and investing all their time into trading. The hope for a passive trader is to earn an extra income that fits around their regular lifestyle. In which case using a trustworthy broker to manage your capital and an automated system may be the way forward.
Pros & Cons of Passive Income
Before we launch into the how-to earn a passive income we should be aware that there are also some drawbacks.
Less time means more pressure if you spend less time working this is a great benefit, however it puts a lot more pressure on you not to make mistakes when you do invest.
Slower profit-Less time spent researching and monitoring the markets could lead to lower profits.
Interfering-on the other hand you may be so worried about your positions that you spend too much time interfering and this will limit your returns.
How To Generate Passive Income
Automated systems although not perfect could be the answer if you want to ease the pressure and still generate profits. Used correctly you can still pull in large profits.
Without having to do the hard work, the calculations and studying of algorithms an automated system can do this for you. As mere humans, there are only a certain amount of trades we can do per day manually whereas an automated system just ahs to wait for the right criteria to be met and can automatically enter and exit positions. Once you have programmed an automated system you can effectively make money while you sleep.
They may not be perfect but in today’s stock market 75% of all trades made in New York are made from automated systems, so they must be doing something right!
The right tools for the job
It is important to put the time into researching the best software for, read the reviews, and check out guidelines, our software page has more information.
Now it is time to program your automated system it is important to bear some things in mind. A useful list is a good place to start:
-When exactly to enter and exit your positions
– the size of your position
-Time frames and time zones
-Your targets and stop losses
First comes the strategy then it is time to write the algorithm if you are technically minded then go ahead and input the instructions yourself, if not invest in hiring a programmer to help you.
You must test your new automated system before running it on the market. Thankfully you can easily take it for a test drive by running the software against past price data, giving you a good idea of how it will perform. If any issues come up you have time to rectify them before going live.
The Monte Carlo simulation is another great tool to try, this will test the different steps of your algorithm by inputting random data into the parameters. This will give you a good idea of how well your new system will perform.
Once everything has been tested in principal you can then take a step back and start earning passive income. However, you must run check-ups on your software frequently as glitches are common.
Copying is the sincerest form as flattery as they say. Well, it could also earn you a pretty penny in the world of trading. Instead of investing a substantial amount of time into researching and educating yourself you could simply pick a successful trader and program your automated system to copy the moves they make. They and the website will likely gain a small profit out of it, likewise, if someone then decided to copy you, you would also gain.
What Are the Cons?
Well, it all sounds easy enough right? Don’t forget there are also drawbacks to this method whether it is with stocks or forex, lets’ take a look at some of them.
- Losing your money- unfortunately, this is the name of the game, there is always a great risk that you could lose all the capital you have invested. If you don’t like taking risks this is probably not the right move for you.
- Choose who to copy wisely– If nothing else you really should invest some time into picking the ideal trader for what you need, and over some time observe their patterns and look up their trade history. You need to find a consistent trader with consistent results.
- The beginner method-Many believe that copy trading is for beginners, one you have more experience and have done more research it is important to bear in mind that it may not be the best form of generating a passive income.
- In general, these methods can be a great way to earn a passive income, and save yourself a lot of time and hassle. Just beware of the drawbacks mentioned above.
Passive Income & Taxes
It is very important to make an educated decision before you start day trading. Let’s have a look at the different tax systems there are and the three categories they have been split into.
- Passive – also known as net rental income, or extra income from a business that the individual does not physically participate in. Covering a broad range of activities including self-charged interest. You must take a step back to fall under this trade bracket you cannot be too involved within trading.
- Portfolio – Capital gains earned trough trading securities and commodities such as gold, currency, and stock come under the bracket of portfolio income, but not necessarily passive income.
- Active –the opposite of passive trading, here you must be involved in intraday trading for a considerable amount of time daily.
The rules and regulations differ from region to region and country to country so it is important to research and find out what is considered to be passive trading in your jurisdiction. Check out the taxes page for more information.
Earning a passive income is of course very enticing. Especially for something such as trading, which traditionally is famous for being high energy, quick thinking, and time-consuming. Thanks to modern technology and the accuracy of the simulators and copy trading options trading is accessible to anybody. As with everything it is important to consider the potential pitfalls, and research well before investing a lot of money.
- “Passive Income and Day Trading” – Ken McLinton, 2016