The Importance of Your Trading Capital

Discussion in 'Professional Trading' started by alex.samant, Jan 4, 2010.

  1. (courtesy of TheFXAdvisor.com)

    http://www.thefxadvisor.com/posts/2010/01/the-importance-of-your-trading-capital/

    ----------------------------------------------------------------
    Never underestimate the power of money. A lot of brokers offer you the possibility of opening up an account for only $250, but that’s only a good sum to start learning with. And I do recommend you start learning with your own money.

    However, there are some traders who think that putting $1000 or $2000 in their trading account is going to bring the millions. Now, this might happen if you are patient enough, but it’s gonna take a looong loooong time. The thing is that these traders want to get up as quick as possible and assume huge risks. And one attempt after the other, they fail.

    The facts are simple. If you are a good daytrader and you manage to get about 10-15% of profit on a monthly basis you can consider yourself lucky. In this case, your risk is still high, but for someone that knows what he’s doing, it’s acceptable. Now, you realize that in order to make a living, you gotta split these 10% of revenue per month into money that pay for your expenses and money that returns to your trading account for a good compounding ratio. If you have $1000 in your account, then $100 revenue won’t do you any good.

    So think about it. Think about your expenses, how much you need to cover, and then think that in order for your account to grow and compound, you need to have at least 80% of your revenue return to your trading account. So, you spend $2000 per month? Ok, then $8000 needs to return to your account, meaning that $10.000 has to be your revenue for the month. Now, if $10.000 is 10% of your account, then your account should be somewhere at $100.000. This is an account that CAN but it’s not guaranteed TO, help you make a living out of trading. A far cry from your $250 starting out account. The higher you go, the better it is, the smaller your risk, the happier and more relaxed you get, which in turn makes your trading worthwhile and fun.

    Now, if you’re serious about trading, you need to learn with your own money. So start out with a small sum, but when you get consistently profitable and consider trading for a living, then the next step is to find a way to get really big money in your account.

    For this, you either do something else, like a business of some sort while keeping in touch with your market, or if you have considerable monthly income, start saving. Hope this helps you in the long run.
     
  2. Johno

    Johno

    Well said, but being realistic most of us require far more than $2k / month to live so the starting balance needs to be adjusted proportionately. I tried to explain this concept to someone who PM'd me recently, to me the issue is making money first and foremost, therefore, in the process of gathering working capital you may find that alternative businesses/ investments offer a far better comparative RR. Why trade for trading sake if there are better asset building alternatives, trading can be one component of a sound structured approach it doesn't need to be the entire strategy. Also, never mortgage your home to the hilt to raise the necessary margin, no successful business person would lay solid assets on the line in such a way, the business / investments need to produce the assets put at risk, all you need to do is follow the behavior of successful people who usually lead very unexciting/ low stress business lives.
     
  3. Well put. I'm glad someone else is sane around here today! :) The 2K was just as an example ... I live in Eastern Europe now, so the figure is quite precise ... And think that some people live in some parts of asia that require a lot less for a living ... :)
     
  4. Johno

    Johno

    Fair comment, I was probably being a bit one dimensional, surprising considering I was just talking to Polish relatives on skype this morning.
     
  5. lol :)
     
  6. achilles28

    achilles28

    10-15% a month, is peanuts.

    A good daytrader churns 5-10%, a day.

    That's realistic.
     
  7. oh well.... maybe (i seriously doubt but hey..) still ... the topic is not really how much a daytrader makes / day....
    :)
     
  8. Johno

    Johno

    Reminds me of the story about the old bull and the young bull -

    An old bull and a young bull were walking along when suddenly the young bull spotted a herd of cows. He immediately turned to the old bull and said "lets run down there and shag a cow", to which the old bull replied " better to just stroll down and have them all".
     
  9. :D roflmao
     
  10. achilles28

    achilles28

    suit yourselves :)
     
    #10     Jan 4, 2010