How Much Capital Is Required To Begin Trading?

How much capital do I need to start trading?

This is a question I receive all the time in one form or another. If I had a dime for every time someone asked this, the return on investment could easily compete with my trading revenue.

This question should not even be crossing your mind if you do not know how to trade. If you are dabbling, tinkering, and losing money because you do not know how to read order flow in your content, then you should NOT even have access to a trading account – yours or anyone else’s.

I am serious.

If that is you and you haven’t achieved consistency, then read this.

If you are consistent, however, the question is a valid one.

Like just about everything else, the market turns conventional wisdom on its head. The LESS capital you have, the GREATER your trading skills must be. Why?

There are two (2) methods for running an account assuming your objective is directional trading:

(1) Ballistic Compounding

Ballistic Compounding holds 1-3 (leveraged) positions regardless of account size. Proceeds are leveraged into each subsequent position until the account has tripled or quadrupled in size; or more.

I have used this method to turn $5,000 or $10,000 into $100,000. It is ideal for smaller accounts in the $2,500-$10,000 range.

The hook is that you must bring your A-game. You MUST be consistent, have a highly-developed intuitive response with advanced pattern recognition skills, and you must be proactive, not reactive.

If you are scanning disparate time-data series, your scan layout must be focused on the highest possible reward/risk skews.

(2) Statistical Arbitrage

The statistical arbitrage method holds anywhere from 10-40 positions regardless of account size. Positions may be sized for risk, where risk is static and position amount is variable; or they may be sized for amount, where risk is variable and the amount is fixed.

Arbitrage takes advantage of the law of large numbers whereby bigger samples inherently benefit from randomness in the form of large winners.

It also takes advantage of both correlated issues and non-correlated issues because the trader may hold a mixed batch of long and short setups.

To this end, a well-managed arbitrage fund is an organic hedge against market meltdowns, economic collapse and contagion. Long/short ratios tend to naturally skew one direction or the other given broad market trends.

Arbitrage requires capital: $50,000-$100,000 or more in my opinion.

Now that we have a background on how this works, let’s answer your question.

Trading and the business of trading must be worth the time and effort required to administer your layout (strategy) and cover the cost of expense (margin interest and commissions).

It is not an all-or-nothing dilemma. You might be able to fall somewhere between the two methods, but much depends on the type of commissions you are paying – either fixed-tier or per-share.

Also, you will need to run additional sort/selection filters in your layout if you cannot take all qualified scan hits. Just something to think about.

Market lore is filled with stories of traders who began with small sums and amassed fortunes.

Nicolas Darvas is an example. He supposedly began with only 8,000 or 10,000 and retired with 2 million. His method…ballistic compounding.

Chances are if your account is small you will have to delay gratification until you can (1) learn how to trade and properly leverage your account with control; or (2) learn how to trade for a time in your life when you are better capitalized.

Either way, it beats what everyone else seems to be doing: frustrating themselves and losing money.

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