Entering the world of trading inevitably leads to the pivotal question: How much capital does one need to start? It's the initial query on the lips of every trading novice, and its a question that I have received hundreds of times. Yet, is this the right question to propel us into a successful trading career? The answer, as we delve into the intricacies, may not be as straightforward as it initially appears.
From a conventional standpoint, the assumption might be that the minimum amount required to open a brokerage account is all that's necessary. However, regulators and brokers themselves set varying minimums depending on the trading vehicles—stocks, options, or futures contracts. In practice, brokerage firms often exceed these statutory minimums, requiring customers to open accounts with more significant sums. Yet, meeting the account size minimum doesn't guarantee a solid start to a trading career. The crucial inquiry should address not just the trading account but also the bank account: How much money is needed?
This question transcends the rudimentary aspects of starting trades. Answering it demands a personal reflection that surpasses the mere calculation of funds for a trading account. For instance, consider the theoretical possibility of making $300 to $500 or more in daily profits by trading the S&P E-mini contract with just $1,000 in an account—currently double the minimum requirement for trading E-minis through Tradovate. However, meeting, and even exceeding the minimum doesn't automatically translate to a well-prepared trader.
Imagine a novice trader with precisely $1,000 to open an account and no additional funds to inject in case of losses due to poor trading decisions. The potential loss of this sum, even for someone using conservative strategies, could spell the end of their trading career. Trading under such circumstances is akin to having a gun to one's head, metaphorically describing a trader barely covering monthly expenses while honing their skills—a situation that significantly undermines confidence, a critical element for success in trading. I frequently tell one-on-one mentorship clients that if you “need money” (for bills, life, etc) you will not trade well. It is quite paradoxical, but if you feel pressured to produce income, you simply will trade poorly and make trading decisions that don’t have your long-term interests in mind.
This challenge has ensnared many beginners, making success elusive when consistent profits are necessary to meet basic financial obligations. The optimal approach for a new trader is to begin with financial security—having enough resources to withstand a year without trading profits impacting their lifestyle or financial stability. This is why prop firms like Topstep can be so beneficial for the developing trader. From a risk management perspective, they are a great tool (Note: If you’re unfamiliar with Topstep and prop firms in general, click here to read my write-up.)
Merely meeting minimum account-size requirements is not enough. If annual household expenses average $80,000, having at least $80,000 in liquid savings is crucial. This additional sum acts as a financial cushion, providing protection against adversity and a psychological bulwark against the inevitable ups and downs of the trader's learning experience. Can a developing trader make it without this cushion? Of course - But they should expect that the learning curve will be lengthened.
In conclusion, the key to trading success lies at the intersection of adequate capital in both the trading and bank accounts. Recognizing the importance of financial resilience and psychological strength from the outset forms the bedrock for a secure and prosperous trading journey.