It can be difficult to establish an hourly rate as an Independent Professional Traders. We’re not, after all, like other industries. We aren’t selling widgets, and we don’t have specific costs of employees or raw materials to base our calculations on. Furthermore, as friendly as we all are with each other, we often have no idea how much other Independent Professional Traders are making. Consequently, I think the answer for most of us is usually: as much as I can get.
While it may be an acceptable (or at least common) to tailor our rates to the situation, let’s try to nail down a formula here that we can use to establish a standard base rate. Then we’ll talk about how to use this base rate.
How do other industries establish hourly rates?
Many freelance industries use what’s called a target return pricing strategy that may be helpful to us as Independent Professional Traders. With this technique you begin your calculations with what you would like as the end result. For instance, let’s say you want to make $50,000 a year. You simply calculate how many billable hours there are in a year and divide $50k by that number. Bam! - That’s your hourly rate.
In theory, this might (might) be a good way to establish a blanket hourly rate for all of your projects. If you assume a 40 hour work week and 52 work weeks a year, that would equal 2,080 hours. If you want to make $50k a year as an Independent Professional Trader, and if you were working 40 hours a week, you would need to charge $24/hour. But that’s not really how being an Independent Professional Trader works, right?
Target return pricing for an Independent Professional Trader
There is some debate, even in the regular business world, about the number of billable hours in a year. What about vacation weeks? Sick days? Holidays?
It’s probably more complicated in the industry. How many billable hours are there for each year? It’s a difficult question because our schedules rarely adhere to the 9-to-5 standard. I think a better question would be: How many billable hours do you expect to trade each year and how much do you want to make from them?
For example, let’s say you have a steady strategy that pulls in $30,000 a year and takes up 30 hours a week. You wouldn’t mind working another 10 hours a week (520 hours a year) and your target annual income is $45,000. To turn those 520 billable hours into $15,000, you’d have to charge $28.85/hour.
Certainly, many of our trades are not paid on an hourly rate. We are usually offered a flat rate per performance/service/trade and that’s that. However, you can use your calculated hourly rate as a standard against which you are able to tell a GOOD Trade from a bad trade.
For instance, let’s say, again, that you’ve decided you have 4 hours a week to trade and, again, you want to make $15,000 with that time. To start, your 4 hours a week, we should take into account not just the 4 hours you will spend trading, but also the time it takes to prep you’ll need during the week for the trades themselves. You determine that the average of 30 minutes of prep time each week. Altogether, that’s a 5 hour commitment a week. For the 5 total hours your trade profits are $120, or $24/hour overall.
You’ll remember that we already established that you would like to make at least $28.85/hour, so this is less than your ideal. You might still take the trades, of course, but at least this will give you a good idea of generally how valuable the trade is to you.
Let’s have another example. Say you traded. Let’s say the trade is 2.75 hours with minimal prep time. The trade profit is $200.
Altogether - assuming you have not traded again for this day – for $200, that would mean roughly $72/hour. If you have a minimum of $28 per hour that’s a good trade! You can feel good!
