One of the most disingenuous questions most trading “gurus” answer is how much trading capital should someone start with?
Their answers are always lowball because if you can convince someone that you have a magic pill AND tell them it only takes a trivial amount to unlock financial freedom, you’ll get an army of fresh meat just begging to start trading for themselves.
The reality is most traders go broke or blow up their account within the first 12 months.
This is due primarily to 3 things:
We will touch on the remaining two in another post, but today we are going to talk about capital and what it takes.
Let’s start out talking minimums. The minimum amount it takes to become a trader in certain markets.
Note: Some options/equity markets may require up to $5,000 to join, but as competition from the brokers has risen, the entry cost has fallen.
Now if you don’t know what round trip means it’s just market talk for if you buy something and sell something in the same day.
See what all these markets have in common?
They all have an extremely low barrier to entry.
When something has a low barrier to entry, lots of people will take the shot. Everyone loves the idea of being a professional at something. Professional golfer, poker player, trader–they all have a very low barrier to entry to “try” while they all have a very LARGE barrier to entry to succeed.
By keeping the barrier low, traders can feel in control and if they lose, they can easily shake it off as a learning experience or entertainment. This allows them to easily come back and lose again and again and again.
So while the minimum required is one way to look at this, the right amount required is something entirely different.
Each trader will have a different number in mind. Some traders will have much larger starting balances while others will have to work and build their account up before ever going live.
There are however a few ways to build a baseline.
Rule #1. Whichever market you go with, your starting balance must be at least 10x the minimum required amount.
Rule #2. Do not risk more than 2% per trade.
Rule #3. Do not start with more than a $10,000 account and do not add to an account until it has proven worthy.
These three rules can truly help you find success. Without any of the CTP Services, simply grasping these 3 rules correctly can start you on your way.
Rule #1–Minimum $1,000 to a $10,000 investment. This keeps you from trying to make a fortune on a $100 investment in binarys or a $2000 investment in futures or a $1000 investment in options. How many losing trades can an account that small take before going broke?
What if you don’t have that much money to fund an account?
Even Better! This will force you to build your account slow while working on backtesting and system building. When you’re ready to trade, you’ve done the work and see the blood sweat and tears results first hand. You know what it took to get that account funded and you won’t be tempted to blow it like so many others, this ones going to be different.
Rule #2. The 2% Max Risk. On a $1,000 account, this is $20, on a $5,000 account, this is $100. Keeping your max risk in check keeps you from starting out right but blowing up after 1 loser.
Note: Our Trading 202 Section handles all aspects of risk/reward management. It is an excellent place to turn if you have a system but are struggling on the funding side.
Rule #3–Start Small.
If you start out with a $50,000 account and lose 30%, you’ve lost $15,000. Psychologically–you may be done trading right then and there.
If you start small and prove it, you can get up to the $50,000 you have ready to trade with in under 6 months, but you’re system and management have been proven, you’ll know what to expect as a drawdown and you’ll know how to handle it the right way.
Earn the right to grow the account or you may be earning the right to lose the account.
By following these 3 rules, you will know how much it takes to really get started and WHY that matters–the CTP Way.