Hi guys, Andrea Unger here. A question that I’m often asked is how much capital do I need? How much do I need to start with or generally if the capital that we want to dedicate is enough or not?
In many cases, obviously, people are not willing to dedicate too much capital to trading and want to start with a small amount or something that is not dangerous. This is absolutely fine, so my question is, how and what can I trade obviously? The path has to start from the concept of risk.
And here we mean only the downside risk because talking about the upside risk is very nice and beautiful but it doesn’t help us here because downside risk is how much we are going to risk to lose when we open a trade and those losses need to be compatible with the amount of money we have and don’t have to impact too much on our equity which means for example if we are hit with stop loss which is obvious and can happen we should not lose more than 2% which is not small, 2% is fine. So actually we don’t have to adapt our stop losses to stay inside the 2% because we do not want to change the nature of our trading system, it would be crazy to trade for example with a stop of two ticks for example it doesn’t work. So we need to have a system that makes sense and considering that it makes sense, see if the loss that derive from the stop loss is compatible with the risk profile we have.
So, risk is a starting point and so we have to decide what markets can we trade to trade small enough if we don’t have a huge capital. First thing that comes to mind is Forex.
Forex offers a tremendous scalability downside. You can scale down to mini and micro lot so actually you can trade as small as you need to stay within your risk parameters. So this is an opportunity to start and above all opportunity is obviously the contracts for difference which are not allow everywhere but where they are they can be considered provided the instrument you choose offers a decent spread, the bid ask spread. As sometimes they are so wide you cannot actually really trade with that stuff.
This two and another point in common, normally they are offered through the platform Metatrader and this platform is normally free offered by a broker you can program it, it’s not easy to program but you can learn what is necessary to do but you have a set of instruments and software that can help you to start with a small amount of capital and keeping your risk parameters within what you need. So this is an interesting opportunity when is possible if you are willing to do it, if you have a little bit more money. Here there is no downside limit actually, $1,000, perfect you can do it, very small, but you would never turn $1,000 into something that you could live out of, it is impossible. Believe me, you could have some luck but we don’t consider that. It is not the way to get rich, it is the way to trade, to have your hobby, to learn something and so on. It’s not something that you can live off but why not?
But if you have more money, $20,000 for example you could consider some more options for example Live Cattle. Live Cattle is a market for example where you can trade for example with a $400 stop and for $400 in an account of $20,000 is more or less 2% so actually this is something that could be compatible so if you have as strategy on Live Cattle that trades with $400 stop is something that you can consider on an account of $20,000.
Other markets, heavier markets, DAX for example is a nice market but it’s too expensive but there is a mini DAX which is 1/5 of the DAX so a stop of €1.500 on the DAX becomes a €300 stop which is again compatible with the kind of account that was mentioned. Gold I mentioned in some other video but Gold is a great market to develop systems on but it’s expensive. I mentioned stops of $1,000, $1,500, $2,000 that is not obviously applicable to a $20,000 account but I tell you what, there is mini Gold which I don’t suggest because of the volumes but micro gold again offers a very interesting opportunity. Micro gold is a good market to trade small. It works. Don’t consider Mini Silver it’s too illiquid. Mini crude oil is feasible but it does not scale down that much from crude oil but it’s something that is liquid enough to trade.
So all the Mini futures if they offer a good possibility, are usable. Even the MiniS&P for example have strategies where you can apply a $600 stop for example some more works with that but my idea on a $20,000 is still too aggressive but on a $30,000 this is something that could be used.
I don’t mean that you cannot trade it on a $20,000 account it’s simply too aggressive, because if you trade with your risk higher than your 2% you are very aggressive and believe me, it is dangerous. I don’t say that 2% is fair, I say that more than 2% is too aggressive, in my personal opinion. So this is a set of information if you don’t want to put too much money into your trading account, you want to trade small, if you want to trade small with some more money but not wanting to risk too much these are solutions to start with and then once you learn you could have more opportunities.
Stay tuned, more to come ciao!