by Gavin M.
One of the questions I get asked almost constantly is how much money do you really need for trading. I'll give you a quick answer:
For Futures: $5,000
For Forex: $10,000
For Stocks/Options: $5,000
In the realm of stocks/options, you have to deal with PDT (look it up if you don't know). PDT requires you to have $25,000 in order for you to daytrade stocks. Yes, the SEC are jerks that way. If you have less than $25K, you're going to be restricted IF you have a margin account. If you have a cash account however, do whatever you want, there is no minimum account size.
Why is Forex more expensive? The reason for this is because you're dealing with leverage. Most forex brokers will give you 1:25 or 1:50 leverage to start. So with a $10K account, you get $500,000 buying power. It's important that I emphasize that these are my recommended account sizes to ensure that you're in a good spot to take losses when they inevitably happen. Most forex brokers will allow you to have a $1,000 account size but what happens when you are in a trade with 1 lot and you lose 100 pips? Your account is toast!
Futures at $5,000 is satisfactory. You'll be able to daytrade a wide range of futures products with $5,000. It would also be desirable to trade during the US markets open as that's when there's most volatility and liquidity.
Of course, more is better than the recommended amounts above. I have seen a lot of people open micro-accounts and end up burning all of it up. The reason for not being to get back up on your feet with small accounts is exactly in the description of the account - small. Imagine having a $1000 account and you took a $200 hit on an options trade. So you have $800 left. You try to make that back up but now you're at 80% firepower.
Take the other scenario: If you have a $10,000 account and you took a $200 loss on a trade. You have $9,800 left to get that money back. So you still have a bigger chance of recovery than the fellow with $800. It all seems so easy to go over all of this from an analytical perspective. What most traders do lack is the WILL to take a loss when the trade is going against them. This is why you see people lose $500, $1000 or even higher. In this day and age of HFT stop-hunting that sees your stock move $5 in just 2 mins, your stop limits may not even be triggered.
In the end, I am going to be brutally honest with you. If you don't have enough capital: DO NOT TRADE. Raise as much money as you can before going into this business. This business can seriously make you rich or make you poor if you don't have good self-control.
Traders from Equity Sense will be writing on this blog on positions and other market-related things.