All Financial Wisdom
Trading: How Much Money Does It Take to Trade?
If there is one thing that impacts the type of trading one undertakes – it is without a doubt your starting capital. And I do not speak only of the known fact that the more capital “moves”, the greater the profits can be obtained.
I mean that the capital that one has decided to dedicate to trading determines which markets can be traded and which ones can not, and with which operational strategies one can deal with them.You have to start changing the classic question of “how much money do you need to do trade?” Rather, yo should be asking “what sort of trading can I do with the X amount of dollars that I have explicitly set aside for trading?”
In fact, you can trade with any amount of money, but what is really important is to be consistent with that initial capital so as not to commit crazy things that result in the annihilation of your account at an amazing speed.
For example, there are many brokers that allow Forex trading (currency pairs) with microlotes. To get an idea, a microlote of Forex implies that each pip of movement of the coin supposes a loss or profit in your trade of 0,10. Considering a more or less reasonable stop for Forex intraday of 15 pips, which would be $1.5 , and applying a 1% risk in each trade, the capital we would need to carry out this tradewould be $150.
Of course, the counterpart of this type of trading is that we can not expect spectacular profits in the beginning, but it is a great way to catch experience and hours of display when we’re learning to trade.
Trading futures, the most capital-intensive option
But as you can imagine, we have taken one end of the trading – the low end spectrum. If, for example, we are clear that we want to trade futures, the figures change radically. In order to trade a futures market, brokers will ask you for a minimum account balance of $500. For example, to be able to trade the future of the German DAX, you can hardly do it with less than $2,000 in your account.
Beyond that administrative detail, you will have to take into account the rule of 1% of the risk that we have already commented on other occasions. How can I then know the minimum amount of money advisable to trade a futures market? Well, it’s very simple. The starting point for any calculation in this regard is the tick value of the market you intend to trade. Let’s take, for example, one of the most accessible futures markets for small capitals, such as Dow Jones Futures Market.
The Dow Jones has a price of $5. That implies that every tick up or down, I am gaining or losing %5 in my account. Considering that the standard stop in futures is usually 10 ticks, and that you have a maximum risk assumed in each trade, you will have to commit at least $5,000 towards the successful management of that trade.
The most important thing, therefore, is to be aware of the limitations of the initial capital that we have. As long as we are consistent with that, we can always find a suitable product for our trade. What should never be done? Trading a product for which we do not have enough capital.
That is, you can not trade the Futures Market of the Dow Jones with $1,000, even if the broker lets you do it. Why? Because with 10-tick stops, you are taking a 5% risk on each transaction, something you can do later, but certainly not in the beginning, because it is too easy to burn through your account. Happy Trading!