Trading Capital And Costs

Trading capital

When it comes to how much to use as your trading capital, be sure that the money you deposit is money you can afford to spare. As we will mention several times throughout the course, no one can guarantee future results, regardless of the strategies or methods used. However, we can be as prepared as possible by using only strategies that have worked well in the past and having been verified on historical data. This, of course, is what we offer in the course.

Regarding the exact minimum capital you can start with, aim to trade the number of contracts you can afford, considering the margin requirements that brokers charge and enough buffer in case your account should go down in the beginning.

What is a margin requirement?

When trading futures, you usually can trade a much larger worth of the underlying asset than the amount your trading capital can ordinarily take care of. In order words, you can borrow from your broker to make up your trading capital. In trading terms, this is known as leverage.

An example of leverage is that we can open a position that is worth $1,000 when we have only $50 in the account. In this case, we are using a leverage of 20:1.

That small amount we need to have in our account to be able to borrow from the broker is known as the margin. To put it differently, a margin requirement is the capital that you must have in the account to open a certain position size. It is usually somewhere between 5-15% of the total worth of the position size, depending on which contract you trade.

In the links below, you will find the updated security requirements and TradeStation:

• TradeStation

Margin Call

When the market goes against your position by a lot, you may get a so-called margin call, which is a demand to top up your account equity or have your position closed. In other words, your account equity is getting too low that you do not have enough margin to keep your position open, so the broker can automatically close your position if you don’t add more money to your account.

However, if you have enough money in the account, this is usually not a problem, as the margin required to keep a position open (maintenance margin) is always lower than that required to open a position (initial margin).

In the case of futures contracts, the “maintenance margin” is used to describe the amount you need in the account for the position to remain open, while the “initial margin” is the amount required to open a new position.

Summary

The content of the lesson is best summarized in the following three points:

1. Always start with paper trading until you master the trading process. Then, you can gradually move on to trading with real money when you see that everything is going well, and you are making money. The advantage of this is to reduce the mistakes you are most likely to make in the beginning and, more importantly, make sure that it doesn’t cost you much money.
2. Make sure you start with an amount that can allow you to endure some losses initially reaching the limits of the margin requirement and triggering a margin call.
3. Remember that the capital you commit to day trading can make you some profits but can also be lost. So, trade with only an amount you can do without.