How Much Capital do You Really Need to Begin Trading?

In our experience working with thousands of traders worldwide, it is surprising how often we get asked this question! While we do not have a specific amount that works for everyone (it varies from trader to trader), it is interesting to delve deeper and look at the emotions in play that cause so many to be hung up on this one particular issue. You need to address these emotions before you can decide on the amount of capital suitable for you.

Emotion No.1 here, is FEAR.

Like any other business endeavor, there is risk involved in trading. Many people come to trading worried that they are going to lose money, so the consensus is to try to use as little capital as possible to minimize the potential loss. However, a small capital base combined with unrealistic profit targets often lead to over-leveraging and over-trading.

In their eagerness to make a full-time income from trading, poorly capitalised traders tend to maximize leverage and aim for wide profit targets. This does not end well as wide targets generally coincide with wide stops or even no stops for some traders. Many traders are caught out by market volatility due to excessive use of leverage and when what is already a small capital base is quickly eroded the feedback loop of fear kicks in, causing some to stop trading altogether or double-down in the hopes of making back what they have lost in the previous trading session.  

The best way to overcome fear and protect your capital is to set stop loss orders and trade small before you are comfortable with market risk. Here at Trade with Precision, we strongly suggest you place a stop loss order on every trade you take and recommend that all stops be placed at a technically protected price level.

Emotion No.2 here, is GREED.

Greed is another reason why many traders are lured into aiming for wide profit targets. When considering how much capital to use, inexperienced traders make their decisions based on what return they’re likely to “earn” from trading. These traders, no doubt inspired by stories of traders making six-figures a year, are overly concerned with achieving their unrealistic expectations and this usually causes inaccurate position size with large exposures to market risk.

Greed can also be reframed as “the fear of missing out”. Greedy traders are so afraid of missing out that they become predisposed to subconsciously preferring big-winning trades and so called “home-runs”. Rather than focusing on consistently making 1% off each trade, such traders chase the market and if they are lucky enough catch a winner, they often wish they had invested more. That’s not how the professionals approach trading!

The trading team at TWP believe that the secret to long-run success lies with achieving consistent wins of 1% regardless of what your capital base is. Consistently picking good trades in accordance with your trading strategies and taking profits out of the markets are the safest ways to grow capital.

Our professional recommendation for you:

So coming back to the question of “How much capital?”… Risk capital is so termed because it is “capital-at-risk” i.e. there is a possibility that you may lose some or all of it. Without risk, one cannot hope to make a return and therefore the first step is to get comfortable with taking calculated risks in the market.  The amount you choose to trade with depends entirely on your risk tolerance, and your commitment to executing your trading strategy flawlessly. You should never trade with funds that you cannot afford to lose.

Happy trading!

Regards,
The TWP Team