How To Get The Most Out Of Your Trading Capital
February 6, 2010 – 4:20 amMoney Management & My Trading Secrets
Contrary to what some may believe, there is no “perfect amount” to start your trading capital with although the more you have, the easier it is because there are some fixed costs involved with trading.
While some may disagree, brokerage is not something one should overlook. Remember, most brokers charge a flat rate, irrespective of the size of your fund.
Let’s just say for example, there are two traders who want to enter a trade. One has 00 in their fund while the other has ,000. If these two traders both choose the same broker and that broker charges 0 per trade, the trader with ,000 will only need to make 1% in order to break even after paying the broker fee. The other trader however, has to make 10% in order to cover the broker fee.
Essentially, all I’m saying is that those who start out with a small fund are at a slight disadvantage.
Furthermore, the type of stock trading system you choose will also be heavily influenced by the size of your float.
In my opinion, short term trading systems such as day-trading are far better suited to those with a slightly larger float. Those with a smaller float should rather consider a long term trading system because not only does such a system allow for you to continue with your regular job, but such a system also involves considerably less broker fees. As time goes on and you gain some experience, then by all means start experimenting with short term systems.
If you want to start trading after having saved up a large sum of money then fine. After all, there’s nothing wrong with planning ahead. However, if you’re considering borrowing the money then you need to be extremely careful. Remember, investing a huge sum of money in a property is not the same as trading, and before you consider taking such a risk, you really need to gain some experience first. Whatever you do, don’t be tempted to fund your trading with credit cards. Instead, gain some experience and then if need be, you can always loan money from the bank.
Quitting your regular job for the sake of trading is really not advisable unless you have enough financial backing to support yourself for at least a couple of years. Likewise, it’s not advisable for you to accumulate debt for the sake of trading. If you do, you’ll spend most of your time worrying about repayments rather than having all your focus on proper trading. In fact, Don Miller also covers this in Trading Markets World Meets the Traders when he says the primary interest of new traders should be to trade properly, rather than aiming to make money.
Trading on a part-time basis is by far the best approach to take if you’re a beginner because you’ll be in a position where you’ll earn some money while gaining experience at the same time.
The differences between short-term trading and long-term trading:
Short-term systems where trades are typically from one to thirty days require a great amount of expertise and experience, not to mention the fact that they’re extremely time consuming as well. In this case, traders seek to accomplish a high number of wins by taking part in more trades.
Long-term system ‚ In this case trades are at least a month or more. Of course this means fewer trades and less wins but then again, you don’t require as much capital and you don’t require as much skill.
As I mentioned earlier in this article, nobody can say what an ideal starting amount is because it depends on a wide range of factors. These include, but are not limited to, the amount of money you have available, how much risk you can cope with, and which sort of market you’re looking at. However much you decide to start with, set that money aside as a stand-alone business. Doing it this way will help to prevent you digging into profits which in itself results in one loosing focus.
While there isn’t an “ideal amount”, I recommend you have at least K set aside as a trading capital. Don’t forget, this is also a real business so it should be treated as such.