How Much Capital Do Yo Need To Trade?

In order to trade, whatever time frame you have, you need a certain amount of capital to make it worthwhile. The question is: how much?

Below we discuss some issues that need to be considered before you start out:

Acceptable account risk

One of the key factors to consider when deciding the amount of money you need to start trading is your acceptable account risk.

What this means is the percentage of your account you are willing to risk in each trade. It is often advisable to keep this low — around 1-3% — especially if you are a new trader so that you reduce the risk of getting into a huge drawdown or even blowing your trading account.

But here’s the thing: the lower the percentage of your account you’re willing to risk per trade, the higher the amount of money you will need to start trading if you are to trade reasonably priced stocks and give enough room for your money management risks.

The price of the stock you want to buy

Another factor that also determines the capital you need is the price of the stock you want to buy. A stock can cost anything, from a few pennies to thousands of dollars. If you want to trade the expensive stocks and keep the percentage of your account risked in each trade at an acceptable level, you’ll need to have a sizeable capital.

For example, if you want to buy a stock that costs $700 but intend to risk only 1% of your account size, a $1,000 account won’t be enough for that. You will need a $7,000 account.

Trading commission

The commission is the price that your broker charges for the execution of your trade, and this could quickly eat into your profits or increase your losses. Most times, commissions are fixed dollar amounts, so you need a bigger trading volume to keep the cost of commission low, but you would also need more capital to trade more shares per trade. Search for brokers with a lower commission. In fact, there are now brokers who offer trading without any commission whatsoever.

Other costs to consider

Here are some of the other costs that you will affect your minimum capital requirement:

• Slippage: This happens when there is less liquidity and more volatility in the market, making your order to be executed at a worse price than intended. It affects your risk management.
• Trading software: You will need to consider the cost of your trading software.
• Live data: This depends on the market you are trading and your broker. The cost of live data can range from zero to several hundreds of dollars each year.
• Historical data: If you want to develop your own swing trading strategies, you might have to buy historical data to backtest the strategy.
• Taxes: You have to pay taxes on your profits too.

Summing it all up

Considering the arguments above, we would argue the absolute minimum account size is 10 000 USD. Anything less, and we believe you increase the risks of ending up penniless.

(If you are investing, you are not dependent on having any kind of starting capital. For example, you can save a certain amount from your monthly paycheck and use dollar-cost averaging.)