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How much capital do I need to start trading?

I cannot count the number of times I've been asked this question. It seems as though every person who is new to trading asks this question, and sometimes it is asked by people who should know better. It's often the first question that pops up in my email, at seminars, and private tutoring sessions. Right up front I'm telling you I do not know the answer, and I often wonder if it is even the right question to ask? The answer is not as obvious you might think.

Viewed from a conventional standpoint, it seems that all you need is the minimum amount required by your brokerage firm for opening an account. I'm sure this is not the answer.

Authorities come up with minimums that vary according to whether one will be trading stocks, options, futures contracts or perhaps a combination of these vehicles, but in practice the various brokerage firms can, and frequently do, require customers to open accounts with a greater amount than the regulatory minimum. It is important to realize, however, that merely meeting the account-size minimum does not necessarily put you in a good position for beginning a trading career. I'm sure the amount set by the authorities is also not the answer.

It seems to me that a more important question is: "How much money can you afford to lose?"

Asking yourself this is very different from asking how much you need to merely start trading, and answering the question requires much deeper thought and than simply calculating how much to put in a trading account.

Just because your broker allows you to open an E-mini trading account with $5,000 doesn't mean you have enough money to start trading. Suppose you open an account with $5,000, but with not a penny more in you bank account with which to back up your trading account—what do you do if you lose the whole $5,000 during the course of one or more trades? Your trading career would then be finished.

Would you actually be able to trade well under the threat of no reserves to back you up? You would be under-capitalized, which according to statistics is a leading cause of failure in any business undertaking. How could you trade with confidence knowing you are always close to a wipe-out situation? It's like trading with a gun to your head. Yet, I see it all the time! I frequently hear from traders who are barely able to cover monthly household and business expenses while trying to figure out how to trade. It is a problem that trips up so many who aspire to become successful traders, and it makes success far more difficult to achieve when steady profits are needed just to pay bills. It's far better for a new trader to be well capitalized—sufficiently secure so that one year spent learning would not threaten the trader's financial security.

We should not be fooled into believing that minimum account-size requirements are enough. If it costs you $65,000 a year on average to meet all household expenses, then you should have at least $65,000 in reserves to see you through your first year of trading. This, of course, is in addition to the sum you will use to fund your trading account. Having a sufficient sum in reserve to meet a year's worth of living expenses will provide a cushion against things going wrong, as well as psychological fortification against the ups and downs that are a normal part of every trader's learning-experience.



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Saturday, 05 December 2020

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Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.