Time Crunch Trading

One of the most common questions that is asked by those getting in to the markets is, “How much money do I need in order to trade?”. Not all that long ago the answer would likely have been several thousand. These days however, trading does not necessarily demand such high starting amounts.

Day trading and the whole idea of trading for a living, as we have noted before, tends to dominate the world when it comes to media coverage and discussion. Such endeavors certainly require more capital. It does take money to make money, after all, so one who is intending to live off their market profits must make enough actual money to do so, regardless of what that means in percent returns.

Part-time traders, though, need not concern themselves with that sort of thing. These days, you can open accounts with little or no minimum deposit, and make trades in very small sizes. That makes the answer to the “how much” question more a response of “How much do you have?” rather than some minimum given value.

All that said, trading should only be done with risk capital. Risk capital comprises funds which, if lost, would not negatively impact your financial well-being. In simple terms, you should not put at risk what you cannot afford to lose.
This is an incredibly important point. A trader who is playing with money he or she needs to live on does not operate from solid footing. There are many issues with this, not the least of which is the stress it creates and the impact that can have on decision-making.

Once the question of how much money you can afford to lose is addressed, another similar question must be asked. How much are you willing to lose?
At first glance, one might think this is the same question. There is an important difference, though. While some folks are risk takers who would answer the same to both questions, many people would not. An example would be the trader with $10,000 in available risk capital who is only willing to lose $5,000.

This second question moves us from the realm of the practical to the world of the emotional in that it addresses the individual’s specific feelings toward money. Different people will place value on different sums in varying ways.

In the example mentioned above, the risk capital was $10,000. One trader might be fine losing 100% of that amount, while another would consider a 50% loss devastating. It may be hard to look at it in that manner with such a relatively small sum, but what if the risk capital was raised to $10 million? That changes things, doesn’t it? That first trader might not be so willing to lose 100% now.

That’s an awful lot of money!

The point being made here is that before one begins trading, it should be clear from both the objective sense and the emotional one what is at stake. This is Step #1 in the trader’s on-going process of risk evaluation and management, and it needs to be re-evaluated periodically.

Knowing what you have available to trade and what you are willing to put at risk loops back into the discussion regarding picking the right market to trade. While there are low minimum accounts and small trade sizes available in some markets, that is not necessarily true for all markets and all instruments.

There is also the question of transaction costs to keep in mind. A small account is impacted more significantly by transaction costs like commissions than is a larger one. Consider a trade with a $20 commission. That would be a 2% hit on a $1000 account, but only a 0.4% impact on a $5000 account.

What’s more, non-flat rate commissions (which still exist) tend to operate on a sliding scale where larger trades incur smaller commissions on a percentage basis. For example, in options trading there is often a fixed base fee, then a small per option fee.

Also, if one trades the futures market the account size becomes an issue in regards to margin requirements. If one is to trade E-mini S&P 500 contracts, the account must have at least enough to cover the initial margin requirement (approx $2500). It’s also a good idea to have some cushion so one small loss does not mean having insufficient funds for future trades.

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