Trading Capital

One question every trader has to ask is "How much capital should I commit to trading?"  The answer is dependent on the type of trader you are.  If you are a part time trader, you should commit all your capital except for your emergency and reserve funds.  Also, you should NOT commit any capital that is being saved for a specific purchase that is less than 1 year away.  For example, if you will be purchasing a house within 12 months, DO NOT trade with your down payment.  Keep the down payment in a nice, safe, secure CD or money market account.  As a part time trader, if you want to trade stocks or ETFs, you should have a minimum of $5,000 but $10,000 would be better.  If you don't have $5,000 start saving and paper trade until you reach that point.

Why should a part time trader commit all his capital to trading?  Because everyone with money in the market is a trader.  The only difference is their time horizon.  Long term traders, also know as investors, make trades that can last years.  Swing traders make trades that can last days, weeks or months.  Day traders make trades intraday. 

Trading capital required for part time traders is the easy part.  Now for the hard part.  How much capital will a full time trader need?  The amount of capital that a full time trader needs will be solely dependent upon the lifestyle that they want or need to maintain.  What do I mean by this?  If you are a beginning full time trader or a part time trader with limited experience who wants to make the jump to a full time trader, you have to have realistic goals.  If you have $25,000 of capital and think that you can make $75,000 a year, you are sorely mistaken.  Have some people done it?  Yes, but some people have also hit the lottery or survived being struck by lightening.  The odds are not in your favor.  So what is a realistic expectation of the return you can achieve on your capital?  If you don't over trade, balance reward vs. risk by making only high probability trades, use proper position sizing, properly diversify your positions, ALWAYS use stop losses, have target prices and use margin properly, you could make 50% or more per year on your capital.  However, it would be more realistic to expect anywhere from 20% to 35% depending upon your skill level, discipline and commitment.  So a conservative expectation would be that if you want to make $80,000 per year, you would need between $230,000 and $400,000 of trading capital.  Due to current regulatory requirements, pattern day traders need a minimum of $25,000 of capital in their account.

If you donít have the initial capital necessary to earn enough income to support the lifestyle you desire or to meet the minimum regulatory capital requirements, you will need to trade part time and work at your current profession to build your capital before you can make the jump to full time trading.  Or you will have to align your income goals and lifestyle to your trading capital.  I cannot stress this enough.  It is a rare individual who can become a full time trader while being under capitalized and succeed.  Most likely, you will start pressing and taking trades that have bad odds in order to "make money."  In reality what will wind up happening is that you will lose money.  The bottom line is just like in any other businesses, if you are under capitalized, you will fail.