Traders Ask: How Much Capital Do I Need to Trade?

BellaGeneral Comments22 Comments

I’ve lost tremendous amounts of money in various markets and I think that that’s something that makes you better at my job, not worse.
Jim Cramer

I received this email from reader Danielle. My sense is that our blog readers would have strong opinions that would help Danielle.  So I open up this blog asking for your advice to Dan. What are your thoughts?

Dear Mike,

I recently blew up a $3,000 to $200 trading options in my Think or Swim account. I opened the account so I can build up a capital base sufficient enough…… to trade my own funds thereafter.

Obviously this didn’t happen, and wont happen, at least for some time. I’m taking a part time gig as a chauffeur to start the process again and build a base with which to learn to trade with.

I’m reaching out to you to find out what you think would be a decent amount of money to start trading with.

BTW, I kept a journal; although not structured or consistent, I was able to enter down most of my bad trades and why I did them. My losses took place when I overtraded, traded to make up previous losses, enforcing my opinion of the market on my trade and being plain old greedy when I had FAVORABLE GAINS!!!.

I would appreciate your help Mike. Still looking forward to training with you guys…at some point down the road.

All the Best.

Danielle

 

22 Comments on “Traders Ask: How Much Capital Do I Need to Trade?”

  1. It depends on the trader. If one is just starting out, it’s probably best to start with a small amount because, as almost every one eventually finds out, it will be lost. The good news is that what makes one realize how difficult it is to trade. One can not learn by paper-trading because there’s no exposure to the true emotions one experiences when trading with real money. Only by “jumping in the fire” and getting burned does one learn to put ego and emotions aside (or at least very truly try to do so). This is an important lesson I feel all traders must (and eventually do) learn. After that account size doesn’t matter. I would recommend starting small again and practicing preparation, patience, and discipline to build up small gains consistently. If the question is “how much capital do i need to begin trading on my own for a living” I would suggest 6 months worth of savings and at least $100k. But I wouldn’t suggest even trying without trading a small account for at least 12 months.

  2. It depends on the trader. If one is just starting out, it’s probably best to start with a small amount because, as almost every one eventually finds out, it will be lost. The good news is that what makes one realize how difficult it is to trade. One can not learn by paper-trading because there’s no exposure to the true emotions one experiences when trading with real money. Only by “jumping in the fire” and getting burned does one learn to put ego and emotions aside (or at least very truly try to do so). This is an important lesson I feel all traders must (and eventually do) learn. After that account size doesn’t matter. I would recommend starting small again and practicing preparation, patience, and discipline to build up small gains consistently. If the question is “how much capital do i need to begin trading on my own for a living” I would suggest 6 months worth of savings and at least $100k. But I wouldn’t suggest even trying without trading a small account for at least 12 months.

  3. Danielle, it sounds to me like you’re putting too much pressure to perform. You probably know this, but have you tried paper trading to smooth things out first while raising your capital some other way? You don’t really need any money to start learning to trade.

    Here’s the plan that I follow when entering a new market. Once I have proven myself on a demo account (i.e. no more big drawdown), then I put down a chunk of money that I am comfortably able to loose. I don’t look for how much I can make yet. Rather, I focus on how much I can loose simply because the probability of losing is higher unless proven otherwise.

    With regard to your question, I calculate how much real money I need to start with by assessing the cost basis. What are your fees? What’s your return expectancy (from recent performance log, either demo or real)? How much will a round trip’s fees eat up your average return. Say if you expect to make $100 on each trade based on X principle. That’s bad if the fees are $10 for a round trip trade, for example. You’ll be set back by 10% on every single trade. Which means your principle isn’t enough. Up your principle until your cost per trade is acceptable (but within your comfort zone). At least that’s how I do it. I hope you find this helpful.

  4. Danielle, it sounds to me like you’re putting too much pressure to perform. You probably know this, but have you tried paper trading to smooth things out first while raising your capital some other way? You don’t really need any money to start learning to trade.

    Here’s the plan that I follow when entering a new market. Once I have proven myself on a demo account (i.e. no more big drawdown), then I put down a chunk of money that I am comfortably able to loose. I don’t look for how much I can make yet. Rather, I focus on how much I can loose simply because the probability of losing is higher unless proven otherwise.

    With regard to your question, I calculate how much real money I need to start with by assessing the cost basis. What are your fees? What’s your return expectancy (from recent performance log, either demo or real)? How much will a round trip’s fees eat up your average return. Say if you expect to make $100 on each trade based on X principle. That’s bad if the fees are $10 for a round trip trade, for example. You’ll be set back by 10% on every single trade. Which means your principle isn’t enough. Up your principle until your cost per trade is acceptable (but within your comfort zone). At least that’s how I do it. I hope you find this helpful.

  5. If you want to make it as a trader start with a capital that includes at least 5 times your complete living expenses. Then you have enough time to learn on the sim and later start trading very small. Anything less is to much pressure and not enough time to learn.

    Cheers,
    M

  6. If you want to make it as a trader start with a capital that includes at least 5 times your complete living expenses. Then you have enough time to learn on the sim and later start trading very small. Anything less is to much pressure and not enough time to learn.

    Cheers,
    M

  7. Only trade spreads if you’re sub 5k with options. The high gamma, unlimited reward-type plays advertised by many option players tend to ignore time decay.

  8. Only trade spreads if you’re sub 5k with options. The high gamma, unlimited reward-type plays advertised by many option players tend to ignore time decay.

  9. You are making beginner mistakes. Are they due to emotional reasons or lack of skill? Keeping a journal helps you distinguish if you need more training to prevent emotional trading or you need more time practicing skill development. Even a small stake such as $3000 can be enough to overcome these beginner mistakes. Trading a paper account can be the same as real money trading if you set goals to achieve because then your emotions will be involved. For example, tell yourself you can only buy 1 contract or 25 shares and you cannot move up to 2 contracts or 50 shares until you have 4 out of 5 winning trades, or some other metric. Then slowly advance up to your expected average size of trade. You can do this paper trading so you don’t have to cover your costs.

    Know when you will get in and when you will get out and force yourself to calculate the risk to reward. Then calculate the probability of the trade working out — difficult for a beginner to do but you can use statistics for certain plays. Does the math work for the trade? Don’t take it if the math doesn’t work. This approach can prevent overtrading.

    Record in your journal your good trades along with bad. You need to know what you do right, do more of it, and check you are trading for the right reasons on your good trades. Were you just lucky on the good trades or do you have a special skill that you can concentrate on developing? Your journal reveals the answer.

    I recommend Steenbarger’s Daily Trading Coach. You must take a disciplined approach and his book will help you do that. Using Steenbarger’s tips, you’ll become more self-aware and alert for the real reasons you are taking a trade. Good luck!

  10. You are making beginner mistakes. Are they due to emotional reasons or lack of skill? Keeping a journal helps you distinguish if you need more training to prevent emotional trading or you need more time practicing skill development. Even a small stake such as $3000 can be enough to overcome these beginner mistakes. Trading a paper account can be the same as real money trading if you set goals to achieve because then your emotions will be involved. For example, tell yourself you can only buy 1 contract or 25 shares and you cannot move up to 2 contracts or 50 shares until you have 4 out of 5 winning trades, or some other metric. Then slowly advance up to your expected average size of trade. You can do this paper trading so you don’t have to cover your costs.

    Know when you will get in and when you will get out and force yourself to calculate the risk to reward. Then calculate the probability of the trade working out — difficult for a beginner to do but you can use statistics for certain plays. Does the math work for the trade? Don’t take it if the math doesn’t work. This approach can prevent overtrading.

    Record in your journal your good trades along with bad. You need to know what you do right, do more of it, and check you are trading for the right reasons on your good trades. Were you just lucky on the good trades or do you have a special skill that you can concentrate on developing? Your journal reveals the answer.

    I recommend Steenbarger’s Daily Trading Coach. You must take a disciplined approach and his book will help you do that. Using Steenbarger’s tips, you’ll become more self-aware and alert for the real reasons you are taking a trade. Good luck!

  11. he hasn’t said what he wants to trade. he told us he trades options now, but implies that he might want to trade the cash markets. i guess he won’t need much to trade options but will need at least 30k or so trade the cash markets in order to overcome the pattern limits unless he is with a firm that offers a different alternative.

    furthermore i think its somewhat lousy to start trading options, especially if he is trading them directionally. in that situation he has to manage several variable most of which he doesn’t understand. i suppose if he wants to trade options he could learn to trade for the spread, most of the contracts have rather large spreads.

    he shouldn’t worry about losing 3k, not that big of a deal. it might be to him, but in the grand scheme of things, as long as he returns to the market with the determination and resolve to find his edge then the three grand is well spent.

    its fine to overtrade as long as you have a reason to trade. are you finding the buyer? the seller? doesn’t sound like it. once you can read the order flow then each loss happens for a reason and will teach you something new about the tape. when you are at that level then losses because extremely valuable simply because you are learning to read a new market condition, one you haven’t been exposed to.

    i hope you make it back to the market. in the mean time, stay on the sim. there is no shame in the sim and let the wannabes flaunt their big after-the-fact trades and “oh yea i was in that trade” bullshit.

    good luck buddy, hope you make it back to the market.

  12. he hasn’t said what he wants to trade. he told us he trades options now, but implies that he might want to trade the cash markets. i guess he won’t need much to trade options but will need at least 30k or so trade the cash markets in order to overcome the pattern limits unless he is with a firm that offers a different alternative.

    furthermore i think its somewhat lousy to start trading options, especially if he is trading them directionally. in that situation he has to manage several variable most of which he doesn’t understand. i suppose if he wants to trade options he could learn to trade for the spread, most of the contracts have rather large spreads.

    he shouldn’t worry about losing 3k, not that big of a deal. it might be to him, but in the grand scheme of things, as long as he returns to the market with the determination and resolve to find his edge then the three grand is well spent.

    its fine to overtrade as long as you have a reason to trade. are you finding the buyer? the seller? doesn’t sound like it. once you can read the order flow then each loss happens for a reason and will teach you something new about the tape. when you are at that level then losses because extremely valuable simply because you are learning to read a new market condition, one you haven’t been exposed to.

    i hope you make it back to the market. in the mean time, stay on the sim. there is no shame in the sim and let the wannabes flaunt their big after-the-fact trades and “oh yea i was in that trade” bullshit.

    good luck buddy, hope you make it back to the market.

  13. Danielle,

    Personally I blew up several trading accounts when I was learning. It’s part of the learning process. Though the actual dollar amounts were small, they represented a significant percentage of my net worth at the time, and the experience was painful. However, the lessons I learned on very small sums of money were extremely valuable and have stuck with me.

    I would gently suggest you reconsider your decision to trade options. To me, that’s just silly. Options are harder to trade than the underlying, and unless you understand volatility, delta, gamma, time decay and how to build spreads, you frankly have no business trading options. If you are simply using options as a proxy for the underlying and hoping to profit via the leverage… 99.99% chance that’s not going to have a happy ending.

    If this is how you’re trading options and you feel you must continue, I think the best advice is to remember you’re trading the option and not the underlying. When you have a 150% profit on the option, you’re absolutely certain the stock can go higher (probably), and there’s a week and a half left to expiration… you really have to know how to manage that position.

    There’s no simple answer to your question, but I would say that your chances of making it, on your own, with a bank less than $50K are very, very, very small indeed.

  14. Danielle,

    Personally I blew up several trading accounts when I was learning. It’s part of the learning process. Though the actual dollar amounts were small, they represented a significant percentage of my net worth at the time, and the experience was painful. However, the lessons I learned on very small sums of money were extremely valuable and have stuck with me.

    I would gently suggest you reconsider your decision to trade options. To me, that’s just silly. Options are harder to trade than the underlying, and unless you understand volatility, delta, gamma, time decay and how to build spreads, you frankly have no business trading options. If you are simply using options as a proxy for the underlying and hoping to profit via the leverage… 99.99% chance that’s not going to have a happy ending.

    If this is how you’re trading options and you feel you must continue, I think the best advice is to remember you’re trading the option and not the underlying. When you have a 150% profit on the option, you’re absolutely certain the stock can go higher (probably), and there’s a week and a half left to expiration… you really have to know how to manage that position.

    There’s no simple answer to your question, but I would say that your chances of making it, on your own, with a bank less than $50K are very, very, very small indeed.

  15. Danielle, I am guessing you want to know much you need to start trading comfortably and have some chance of becoming profitable without trading with “scared” money. Not necessarily to quit your job and trade full-time, but to have enough money to start trading with and slowly build up capital (with your trading profits) to eventually be able to trade full time in the future.

    At the very minimum, you need enough to cover approximately 10 losing trades in a row to start trading. Yes, I pulled that number out of thin air. If you back-tested your system properly, or even paper traded long enough, then you would have a better idea as to how many losing trades you could expect in a row, but even then you would not know exactly. It is very individualistic and no one can tell you precisely -it depends on how you trade. You need enough to cover a large number of consecutive losses due to Murphy’s Law and for your own psychological confidence.

    That being said, do as JCaldwell and others above have suggested; start paper-trading and journaling properly. That will give you a better idea as to how much capital you need and if you even have a good enough strategy to be trading with real money yet.

  16. Danielle, I am guessing you want to know much you need to start trading comfortably and have some chance of becoming profitable without trading with “scared” money. Not necessarily to quit your job and trade full-time, but to have enough money to start trading with and slowly build up capital (with your trading profits) to eventually be able to trade full time in the future.

    At the very minimum, you need enough to cover approximately 10 losing trades in a row to start trading. Yes, I pulled that number out of thin air. If you back-tested your system properly, or even paper traded long enough, then you would have a better idea as to how many losing trades you could expect in a row, but even then you would not know exactly. It is very individualistic and no one can tell you precisely -it depends on how you trade. You need enough to cover a large number of consecutive losses due to Murphy’s Law and for your own psychological confidence.

    That being said, do as JCaldwell and others above have suggested; start paper-trading and journaling properly. That will give you a better idea as to how much capital you need and if you even have a good enough strategy to be trading with real money yet.

  17. Danielle, Good question. I did something similar with my TOS account and now I’m at SMB.

    One of the first lessons we learn at SMB is to focus on “One Good Trade” (which not coincidently happens to be the title of Bella’s new book). I think the goal, at least for us new traders, is to focus on learning the skill set required to 1) find in-play stocks, 2) find their important support and resistance levels, 3) determine good entry points, 4) calculate our downside risk and 5) know when to get out of the trade.

    We also focus on finding ‘checks’ in our favor that will make the trade a successful trade. For example, is your bias consistent with the trend, how is the overall industry doing, is this a strong stock within the industry, what is the short interest on the stock, is there the potential for a pullback, when is the earnings report or how were their earnings, etc…

    Using these steps, and ensuring you have ‘checks’ in your favor, to make One Good Trade over and over and over is what will lead to our success. Keeping a very detailed journal is a great idea. I also benefit a lot from reveiwing my good and bad trades, this is another form of practice.

    So don’t worry about how much money you have or don’t have, just focus on One Good Trade.

  18. Danielle, Good question. I did something similar with my TOS account and now I’m at SMB.

    One of the first lessons we learn at SMB is to focus on “One Good Trade” (which not coincidently happens to be the title of Bella’s new book). I think the goal, at least for us new traders, is to focus on learning the skill set required to 1) find in-play stocks, 2) find their important support and resistance levels, 3) determine good entry points, 4) calculate our downside risk and 5) know when to get out of the trade.

    We also focus on finding ‘checks’ in our favor that will make the trade a successful trade. For example, is your bias consistent with the trend, how is the overall industry doing, is this a strong stock within the industry, what is the short interest on the stock, is there the potential for a pullback, when is the earnings report or how were their earnings, etc…

    Using these steps, and ensuring you have ‘checks’ in your favor, to make One Good Trade over and over and over is what will lead to our success. Keeping a very detailed journal is a great idea. I also benefit a lot from reveiwing my good and bad trades, this is another form of practice.

    So don’t worry about how much money you have or don’t have, just focus on One Good Trade.

  19. Thanks guys. From reading the comments above everyone has really hit on one thing or another that I recognize to be a potential problem that can and will be corrected. I also agree with Paul’s comment above. I was completely pressuring myself to perform, in addition to doing very well my first month, I completely blew up, made everything back then blew it up by being comfortable.

    I’m starting to keep a journal now, not just my bad trades but my good ones as well. I also think holding positions on these options overnight is not something I will NEVER DO AGAIN. I had a limit of 3 day trades per 5 business days so this really helps one from pulling the trigger all the time.

    BTW, I’ve picked up Dr. Steenbargers book in addition to books I have read(and continue to read) by Ari Kiev who used to work with Steven Cohen at SAC Capital.

    Thanks all for your comments, and thanks Mike for the help. Looking forward to the book!!

  20. Good advice above. I will add that if you do more than 3 day trades in any 5 day period you become a “pattern day trader” per SEC rules. That then requires a minimum of $25,000 cash or equivalent at the close of every day. There are lots of ways to participate without being classified as a pattern day trader. There is a lot to learn and paper trading is a good way to get started.

  21. Good advice above. I will add that if you do more than 3 day trades in any 5 day period you become a “pattern day trader” per SEC rules. That then requires a minimum of $25,000 cash or equivalent at the close of every day. There are lots of ways to participate without being classified as a pattern day trader. There is a lot to learn and paper trading is a good way to get started.

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