Theme: Making Your Trading Capital Work For You!
July 31, 2010Contrary to what some may believe, there is no “perfect amount” to start your trading capital with although the more you have, the easier it is because there are some fixed costs involved with trading.
You’ll tend to find that it’s the brokerage you need to be aware of as the vast majority of brokers charge a set fee. Obviously, the more capital you start with, the more affordable the fee will be for you.
To make this a little clearer, let’s take an example where two traders wish to open a trade, using the same broker who charges a fee of $100 per trade. Trader number one has a fund of $1000 while trader number two has a fund of $10,000. In this case, the trader with $1000 will need to make a win of 10% just to break even while the trader with $10,000 only needs to make 1% in order to break even.
Of course you can still start trading if you only have a small float but you do need to realize that you’ll be at a slight disadvantage.
Furthermore, the type of stock trading system you choose will also be heavily influenced by the size of your float.
In my opinion, short term trading systems such as day-trading are far better suited to those with a slightly larger float. Those with a smaller float should rather consider a long term trading system because not only does such a system allow for you to continue with your regular job, but such a system also involves considerably less broker fees. As time goes on and you gain some experience, then by all means start experimenting with short term systems.
If you want to start trading after having saved up a large sum of money then fine. After all, there’s nothing wrong with planning ahead. However, if you’re considering borrowing the money then you need to be extremely careful. Remember, investing a huge sum of money in a property is not the same as trading, and before you consider taking such a risk, you really need to gain some experience first. Whatever you do, don’t be tempted to fund your trading with credit cards. Instead, gain some experience and then if need be, you can always loan money from the bank.
Quitting your regular job for the sake of trading is really not advisable unless you have enough financial backing to support yourself for at least a couple of years. Likewise, it’s not advisable for you to accumulate debt for the sake of trading. If you do, you’ll spend most of your time worrying about repayments rather than having all your focus on proper trading. In fact, Don Miller also covers this in Trading Markets World Meets the Traders when he says the primary interest of new traders should be to trade properly, rather than aiming to make money.
Trading on a part-time basis is by far the best approach to take if you’re a beginner because you’ll be in a position where you’ll earn some money while gaining experience at the same time.
Short and long-term trading systems:
Short-term systems involve trades of 1-30 days and they involve taking part in more trades. While the number of wins will be higher, short-term systems demand a lot of time as well as a high level of skill and expertise.
Long-term systems require considerably less skill that short-term systems. For the most part, those involved in a long-term system focus less on multiple trades and frequent wins, but more on capital growth instead.
Essentially, the amount of money you have available will determine how much capital you start with. Of course, the tools you choose to use and the amount of risk you’re willing to take will also have an impact on how much capital you choose to start with. As I’ve mentioned earlier, there’s no “ideal amount” to but instead, decide how much you’re starting out with and then keep it aside as an individual business.
As a personal bit of advice, I would suggest you have at least $10,000 to start off with, and remember, your trading venture is just like any regular business so please treat it that way.