Hey there trader… I know!
Merry Christmas you filthy animal and a Happy New Year!
My friend I am in a ratty mood today, I’ve got a headache, I’ve literally just found
a grey hair on my head and I am having to wear this silly Christmas Jumper, which I
am not going to be taking off until after Christmas because I am tired of being called
a scrooge all of the time. But, I thought of something that could put me in a good mood
and that is what I am going to do because I thought first of all I can help you guys
out with something and second of all I can clear some stuff out of my inbox because you
see it must be that we are coming to that time of year where people are planning for
next year and therefore I keep getting some similar questions appearing in my inbox every
day, so I thought rather than having to answer everyone individually, I’m going to create
a video about them and share everyone. So the first question I keep getting asked
is about trading targets and we covered that in the video last week, so if you haven’t
checked that one out go and check that one out we released it last Friday- it might help
you out. And the second question and this is the one that everyone seems to be asking
at the moment, my inbox is full of it and if you didn’t guess already from the title
of the video it is of course; how much money do you need to start trading?
So in this video we are going to focus on Forex trading because there are some differences
between asset classes. I mean generally speaking it is quite similar but for example with equities
you are going to have extra transaction costs, with things like bonds you are going to need
more money in general, so most of you trade Forex so let’s stick to Forex because it
is more simple. So what do you think, how much money do you
need as starting capital in a trading account in order to be able to trade Forex? And I
don’t just mean how much do you need to open an account and open a trade. I mean to
trade sensibly how much money do you think you need in an account?
Now I have to be honest with you some of the amounts that I have seen thrown around in
the comments, in my email inbox asking me if it is a good amount to start trading with
have been completely ridiculous and it may have been you that asked the question and
mentioned an amount and if it was, then please don’t feel offended. You weren’t to know
and everyone has to learn somewhere. But we’re talking about $500 or £200 or how do I take
my paper round money and become a millionaire in the shortest time possible. Deep down both
You and I know that is just not going to work. Believe me, I don’t want to kill your enthusiasm,
I want to encourage you to be trading well but I want to make sure that you are doing
it sensibly and in a way that is realistic, so I have to set you straight. Now see all
of these junk messages coming through on our YouTube channel from people saying they will
take $250 and make you a reliable income every month, believe me it’s not going to happen.
So I don’t want you to feel discouraged but at the same time let’s be realistic
in this video. Let me tell you a little story about how I
got started with live accounts for trading because as always seems to be the case, I
had to learn the hard way with this. Now firstly at the time I probably wasn’t ready to be
trading on a live account my trading was hit and miss at best so I probably could have
saved myself a hell of a lot of headache by actually trading on a demo account. But for
the sake of the story we will forget that I wasn’t actually a consistent trader in
this instance. So all those years ago what I was basically
doing was putting as much money as I could afford into my trading account because I really
believed in it. So that was coming from my monthly wage. Let’s say it was £500 per
month, so every month I got paid and I put £500 into that trading account. Now rather
than saving that money and letting it accumulate into a bigger pot of cash to trade with I’d
actually be so eager that I would get started right away with my trading. So I would take
that £500 and start executing trades in the live markets with that small amount of money
in the account. So there I am with £500 in my trading account, and can you imagine what
happened next? Well let me tell you, I definitely didn’t become a millionaire from that £500.
In order to trade with that £500, just like the minimum contract amount. I had to be over-leveraged
and over-exposed. So yes, sometimes I might have some great performance and start racking
up some more money and be like yes “Ker-ching!” but then all it took was one or two losses,
which is inevitable, you’re going to lose at some point and because my risk profile
was too too extreme then I would burn out a load of that account. Rather than losing
the one or two percent that you should lose at maximum on a trade, I was risking like
big chunks of the account so it only took a few trades to pretty much lose the entire
thing. So I’d lose that £500 then I’d get paid the next month, take that £500 put
it in a trading account, lose that and do it again the next month and again and again.
Do you know Einstein’s definition of insanity is doing the same thing over and over again
and expecting different results? Well for those of you who had an inkling that I might
be a little bit mental- that confirms it for you.
So after a while of being stupid and doing this over and over again, I started to realise
that I must have burned through a few thousand pounds and if I had just waited I would have
had that big chunk of cash to trade with in the first place. Not only would this have
been more beneficial to me because as we both know, the more money that you have the more
money that you can earn. But also it would have allowed me to have a more conservative
risk profile and more in line with what we always say which is that you should only ever
have one to two percent of the account at risk. Now you get the chance to learn from
my mistake there and not do the same thing. Because of course if you are really eager
to get started you can throw a few hundred pounds or a few hundred dollars into a trading
account, of course you can. But eventually you will lose that money and if you can’t
afford to put more money than that into a trading account now then I am pretty sure
you can’t afford to lose that amount either. So alright then, so how much do you need in
a trading account? Well let’s work backwards and see if we can figure it out.
Our starting point is going to be that we know that we want to risk a maximum of one
to two percent of our account per trade. If we use an example of EUR/USD and use one standard
lot, so one contract for EUR/USD. We can start to figure out how much money we need in the
account. I believe at the moment that one standard lot for EUR/USD is about eight pounds
per pip / ten euros. So lets say from your testing of your strategy, you’ve figured
out that the maximum stop loss size from any of the trades that you have done in the past
was about fifty pips. So if we are going to be really conservative about how we are figuring
things out, we need to budget for that fifty pips to be one percent of the account. Fifty
pips at eight pounds per pip is of course £400. So that £400 equals one percent of
the account. That’s what the stop loss is for the one percent at risk for the account.
So in order to find out what the whole account size is therefore we need to times that one
percent by one hundred to make it one hundred percent, which is of course £40,000.
I know that £40,000 is going to sound like a hell of a lot of money to most people but
we are being realistic here. I don’t want to sell you a dream of thinking that you can
turn peanuts into a mansion. I want us to be sensible about this and get you on the
right track. So if that amount of money is too much for us, so we’re never realistically
going to save that amount of money then what can we do to reduce that? Well of course we
need to make adjustments, but when we make those adjustments we need to make sure that
we are not adjusting our risk profile. We don’t want to get high risk with our trading
just because we haven’t got the starting capital so we are making adjustments to everything
else except our risk profile. So, to start with we said that we want to
risk one to two percent of our account maximum per trade, but when we calculated that £40,000
that was based on one percent at risk. So what happens if we put it as two percent at
risk per trade? Then of course the starting capital requirement drops by fifty percent,
it becomes £20,000 that’s needed. But if we are going to do this we are going
to do it in a smart way. So we are not just going to say that we are going to put two
percent at risk on all trades full stop. No. What we mean is that if you have a basket
of trades, a basket of opportunities and there is some that you would have risked 0.5% Or
your account or one percent of your account because they may be slightly more risky, and
then there is the ones that are less risky so that you are willing to risk more of your
account on them like the two percent ones. What we are going to do is, reduce that basket
and say you can only open those low risk opportunities where there is a high success rate, less chance
of it going wrong and you were happy to put two percent of the account at risk on those
ones. And all of the other trades the one percent ones, the 0.5% ones they’re gone,
you can’t trade them because you don’t have the capital to do them in a low risk
way. So, in other words we are restricting our trading and we are being very, very cautious
because we know that capital is a problem for us here.
Next, we said from our testing we may have seen that for example the maximum stop loss
that we needed on any of the trades was fifty pips. Now what if we reduced that by half,
so we actually make it twenty five pips as the maximum stop loss. Now, in the same way
as we did with the one and two percent of the account at risk, this doesn’t mean that
we set our stop loss as static for all trades. The stop loss is still always associated with
the setup, so the setup dictates the size of the stop loss. But what it means is that
if there is an opportunity that requires a stop loss for above twenty five pips it’s
a no go for us we can’t execute that trade because we haven’t got the capital that
we need. So we are only allowed to go for opportunities that are twenty five pips in
the stop loss and below. So now by restricting ourselves with those
two rules that we have just discussed, we’ve managed to reduce our capital requirements
to £10,000. But, what happens if you lose some trades? It is inevitable that you are
going to lose some trades and if that £10,000 is the minimum capital requirement; if you
lose a trade you are below the minimum capital requirement. So we need a buffer.
Let’s get ready to… In a previous video about drawdowns, we agreed
that we aim to have a maximum drawdown ever of twenty percent of our account. So if we
take that twenty percent and try and figure out then what capital we need, we end up with
£12,500 because a twenty percent reduction on £12,500 will equal £10,000 which of course
is the minimum capital requirement for us, so that gives us our buffer to have the drawdown
of twenty percent. Now realistically, these are the only restrictions
that we can make. So based on these that leaves us with the minimum amount that we need to
trade one contract of EUR/USD as £12,500. That’s if we were going to be risking two
percent of our account on each trade for a maximum stop loss size of twenty five pips
and that means that you are very restricted in the opportunities that you can take. Which
is not ideal for trading because sometimes you are going to get tempted by the other
opportunities. So what else can we do instead? With a lot of major brokers these days, you
don’t actually have to open a full contract. They also will let you open portions of a
contract. So for example, you can open 0.1 of a contract for EUR/USD and some brokers
even let you go as low as 0.01. So what we do in this case if we want to trade 0.1. We
take our starting capital of £12,500 needed to trade one contract for EUR/USD and we divide
it by ten, which gives us £1,250 as the starting capital as a minimum with that buffer to trade
0.1 of a contract per trade. Obviously, we can go lower to 0.01 of a contract but I strongly
suggest you don’t do that- let me tell you why.
To put it very simply you need to be remunerated for your time. If you are trading 0.01 of
a contract and you are making your 8p per pip in the market then you would make more
money working minimum wage somewhere for the amount of opportunities that you are going
to get. So you might as well go and spend that time working somewhere, using the money
that you have earned and putting it aside so that you can build up a larger trading
account. You see, 0.1 of a contract that is one thing you know it’s still quite low
but you can make a decent second income from that. You can have some decent pocket money
to go and spend and have a nice life by trading 0.1 of a contract, or use compounding returns
and build it up. But see you could do compounding returns with 0.01 of a contract but the thing
is, it becomes such a small amount then that you are trading that it is almost like it
is negligible. Which means that you are going to be willing to put on more risk, because
you see it as ‘oh, it’s only 32p that I’m losing or something like that’ and
it means as well that you are not going to be taking it as seriously. After a while as
well you are going to get sick of earning 63p per trade that you are going to be like,
‘Okay lets max out this account, let’s see how big I can go, how overexposed and
how much money I can make from a trade from a small account.’ And when you start doing
that… Your money is going to be gone. So my friend,
this is just my way of calculating it, other people have their own ways of calculating
what the minimum capital requirements are but based on my experience, based on what
I see as being sensible, based on the rules that we discuss all of the time about risk
and that kind of thing and based on what I have seen other people doing, this is what
I truly believe is the right way to go about calculating it if you want to understand the
minimum requirements. Now if you didn’t understand anything in
this video, please send me and email or leave a comment below to ask for clarification because
this is a really important subject and I want to make sure that you really understand it
properly before you start trading live because I don’t want you to risk burning out any
accounts unnecessarily. If you have any comments if you disagree with
anything that I have said, leave a comment below- let’s discuss it. If you like the
video make sure that you hit the like button down there. If you do hit the like button
you are going to be on Santa’s good list and we are right by Christmas now so let’s
get some festive cheer going. If you want more videos about learning to trade make sure
that you subscribe to the channel and if I don’t see you before Merry Christmas you
filthy animal and a Happy New Year!