How To Get The Most Out Of Your Trading Capital

In Credit Score of CreditGuru (September 7, 2010 4:52 pm)

Contrary 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.

Because most brokers charge a set fee, those starting out with a large fund will find the fee easier to pay. For those with a limited budget, brokerage is something you need to look at closely.

The advantage of a large fund becomes apparent when we for example take two traders, each using the same broker and each facing the same fees. While one trader has $1000 to trade with, the other has $10,000. If they are both being charged a fee of $100 per trade, the trader with $1000 would need to make at least 10% in order to break even. The trader with $10K on the other hand, would only need 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.

Yet another factor determined by float size, is the stock trading system you choose to use.

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.

Of course it goes without saying that your focus should be on your trading, without the added burden of debt from credit cards. Max out your credit cards for the sake of trading and you can be rest assured that you biggest concern will be the card repayments, rather that good trading. In Don Miller’s “Trading Markets World Meet the Traders”, he sums it up nicely by advising new traders to focus on good trading rather than making money. Furthermore, it’s generally accepted that unless you have enough money to live off for at least two years, you shouldn’t consider trading as a full-time business.

Take a bit of advice from the professionals and start trading part-time only. This way you’ll be gaining some experience and at the same time you’ll start to see some returns coming in.

Short and long-term trading systems:

Short-term systems where trades are typically from one to thirty days require a great amount of expertise and experience, not to mention the fact that they’re extremely time consuming as well. In this case, traders seek to accomplish a high number of wins by taking part in more trades.

Long-term systems involves trades of a month or longer, hence the need for fewer trades. While this means less wins, it also means you require less capital and it’s all round a better system for those who lack trading experience.

As I mentioned earlier in this article, nobody can say what an ideal starting amount is because it depends on a wide range of factors. These include, but are not limited to, the amount of money you have available, how much risk you can cope with, and which sort of market you’re looking at. However much you decide to start with, set that money aside as a stand-alone business. Doing it this way will help to prevent you digging into profits which in itself results in one loosing focus.

My advice is that you should start out with a minimum of $10K and remember, treat your trading as you would a regular business.

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