Starting Capital: Important Considerations for Trend and Systems Traders
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There is no stated minimum capital to trading as a trend trader. There is no magic number. There are many factors related to starting capital not the least of which is your own personal discipline and ability to stick with a system. Immediately question anyone that promises you a magic number of how much you need to win. No one can guarantee you profits. Rather than focusing on starting capital, decide how you are going to trade since you can trade a wide variety of instruments from stocks to currencies to commodities across exchanges in nearly every major city in the world. A top trader was asked how much money must one have before starting to trade. He responded:
I'd ask a trader who thinks he needs a certain amount before he can trade exactly what amount he would need to stop trading.
His point? There is no dollar amount too little nor dollar amount too much.
More Quotes, Anecdotes and Thoughts on Capital
- "What you're asking about [are] rates of return, what you can reasonably make. And I’ve found that my trading style with small amounts of money allows around a 300% return." [source: Richard Dennis]
- Ed Seykota, profiled in Jack Schwager's Market Wizards, is a Trend Follower. He traded $5,000 into $15,000,000 in 12 years in his model account.
- "I know of a few millionaires who started trading with inherited wealth. In each case, they lost it all because they didn't feel the pain when they were losing. In those formative first years of trading, they felt they could afford to lose. You're much better off going into the market on a shoestring, feeling that you can't afford to lose. I'd rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions....This is one of the few industries where you can still engineer a rags-to-riches story. Richard Dennis started out with only hundreds of dollars and ended up making hundreds of millions in less than two decades - that's quite motivating." [source: William Eckhardt]
- Trading equities (through the Nasdaq market) and LEAPS options are viable options for trend trading. Obviously, tech stocks have provided some of the greatest trends of all time.
- FX or currency markets allow traders to use up to 50:1 leverage. You can execute trades up to $100,000 with an initial margin of $2000. However, while leverage allows traders to maximize their profit potential, potential for loss is just as great. A more conservative margin trade would be 5:1 or 10:1, but ultimately it is based on your tolerance for risk.
- Trading commodities can involve high leverage, giving high profit potential (and risk potential). A $1,350 security deposit will control a Silver futures contract which contains 5,000 ounces of silver. So when the price of Silver is at $5/oz. the contract is valued at $25,000. A change in the price of Silver by 1 cent results in a $50 change in the value of your futures contract either for or against you. A Silver price move of 10 cents in your favor makes you $500 in profit.
- Read the bios of the many famous traders listed on TurtleTrader.com. Most got started with very little capital. Ultimately, it's your passion to win and your self-discipline to stick with it that makes a difference. Starting capital has very little impact on your success.
Common Sense: A View on Starting Out
If you don't have enough confidence or capital to start trading, learn how to trade successfully by spending some time each day performing paper trade analysis. Armed with paper instead of your hard earned money, teach yourself the rules and hold off actually trading until your bankroll is sufficient. This is a sensible alternative to wasting money on sub-par trading systems or worse, trading with no system at all. Go to school.
Summary
We don't pretend trading isn't risky. It is risky. You win and you lose. But, trading is a zero-sum game. That means the winners take from the losers. A solid plan is the first step toward winning from the mistakes of the losers.
1 comment:
Always amount is too small, joke :) We should learn on our mistakes fastest as we can. This is very important i think. Anyway great post and fine blog here. Good day.
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