The 3 most important aspects when considering trading capital requirements

A frequent statistic often found floating around on the horizon of most inexperienced traders is the alarming number of trading accounts closed during the first year of inception due to circumstances that are well spoken of in the literature of professionals and mentors yet haphazardly encountered from those who lack the exposure, control and time spent honing their skills.

Not many of us are fortunate enough to have an abundance of capital lying around seeking a place for great returns and performance.

However contrary to this belief, the effort put into most trading ads displays a much different side of things with some brokers lowering the minimum capital requirements to a measly $20(a new level of absurdity)claiming fortunes higher than the richest individual in the world all from the comfort of your own home.  

The truth can't be anymore distorted when faced with the harsh reality of trading in the flesh. The many obstacles that lie in your path will test your determination, persistence and patience around every bend you turn onto and insistent on finding a solution that works for YOU.

But if a farcical amount of $20 in trading capital is considered ridiculous beyond doubt then what would an appropriate quantum necessary to operate with?

What considerations should be noted?

Costs

The number one priority when striving to create a profitable trading business is to have a clear understanding of what expenses will be incurred in allowing for functionality and operability of doing business.

When it comes to trading the primary expenditure that makes up the bulk of costs is trading commissions, the charge paid to the broker for entering into and exiting from a trade.

There are various ways your broker can charge you commission that I won't get into too much detail here, but I will say that it's imperative that you understand how you are charged and if the level of exposure you're taking or timing of the trade is optimal for both a profit and loss.

Examples

• ABC broker charges a fixed commission of 0.25% per trade but charges a minimum of $25 for trade exposure lower than $10 000. The round trip percentage cost will be 0.5%  however if you were trading with a lower exposure of $5000 your costs would double to 1% ($50/$5000).
• XYZ broker deals in foreign exchange trading and sets the spread of a particular currency pair at 5 pips making the cost of trading optimal. However due to an economic event the spread increases to 20 pips because of uncertainty hanging over the event.      

Risk Management

Continuing on from the point made above, risk management can be defined as set of rules which guides a trader in regards to the way in which he/she handles the level of risk for each trade. The general idea is to limit the extent of losses taken in order to apply less stringency on the trader's ability to recover.

This would be dependent on the set amount the trader is willing to risk per executed trade and would require a sustainable figure that can be divided up to favourably suit the odds of the trader.

For instance a $1000 in trade capital can be expressed as:

$50 x 20 trades
$20 x 50 trades or
$10 x 100 trades

A trader who risks a higher amount eg $50 per trade has a greater chance of losing all his trading capital than a person using a smaller amount eg $10 per trade.

In assessing the two figures it would seem prudent to accept the latter over the former due to the fact that as a novice your inexperience and lack of trading plans will ultimately work against you which requires you to manage your trading capital carefully.

Realistically setting a limit of $10 won't yield much reward meaning you'll have to slog hard to earn decent profits. There needs to be a balance between the ideal amount risked and trading capital put forth to enable a trader the chance of generating good profits.

Leverage

Amongst the list of many advantages(and sometimes a disadvantage)of trading stems from the capability of borrowing securities from the market for a fraction of the exposure which cost effectively adds all the lift needed to produce results with the least capital committed.

But often the weight of over reliance and extension of this aspect attributes more risk onto the trader than optimally needed which eventually leads to financial disaster.

Gearing works hand in hand with Risk Management and shouldn't be overlooked when deciding how much exposure is necessary to ensure the right balance.

Similarly the cost of trade decreases with a higher exposure but then again there's a greater proneness to huge losses should the trade not work.    

Conclusion

The three main mechanisms turning the trading cog are so dependent on each other that if the one is misbalanced the remaining two will be the same. It cannot be stressed enough that the attention given to these are absolutely necessary especially when if you're looking to seriously commit yourself to the long term.