How much money do I need to start trading?
This is a kind of “how long is a piece of string” question. If you’re serious about starting trading, then here are some things to consider. The first is why do you want to trade? How serious are you about trading? Are you looking to create a lump sum in the future, or looking for an income? Or both? If you give a higher priority to income, it is likely you will need a larger sum of money.
This doesn’t have to be and probably shouldn’t be on your first day of trading, but do take this into account when deciding your trading fund. How much can you afford? It is generally said that you should only trade with money you can afford to lose. That doesn’t mean you ARE going to lose it. Are you planning to be trained? Do you already have trading experience in a different market? As a rule of thumb, a large pot of money and no education is not a winning combination. Better to start with less money and a whole heap of education. The next consideration is risk. Both your own attitude to risk and the risk you will take in the market trading.
You will be taught to trade with a maximum risk of 1% of your account on any one trade and frequently, just a fraction of this amount to limit the potential for losses. In numbers terms, 1% means you will risk no more than £20 on a single trade assuming you start with £2000 in your trading account. Low risk is the best approach to trading. Of course, overall, the lower the risk, the lower the return.
The old saying “Rome wasn’t built in a day” comes to mind. Trading is about get rich steadily, rather than get rich quickly. You’re learning and practising a new skill. Let’s get the learning and skills development accomplished at the lowest risk we can. As your skills and confidence build, we can look at gradually increasing the risk. Impatience can be a problem, particularly when looking for income rather than longer term capital growth. There will always be a temptation to chase profits. Don’t. Capital growth of 20% per annum is pretty good – it means just 1½% a month on average. Income of 1½% a month is less appealing, particularly on a smaller account.
Don’t be greedy. Think about it – where else can you achieve a return of 20% per annum? With a little more experience, doubling that figure to achieve a return of 3% each month is not unrealistic. If your partner asks “how are you doing”, always answer with a percentage. For example, a 3% return in a month is good when you struggle to get that in a year on your savings. But a return of £60 for a month’s work on a £2000 account doesn’t sound too exciting. Yet if you compound a return of 3% a month, you will be achieving about 50% in a year.
How will that look in a few years time? There’ll be some months when your returns exceed 10%. But expecting consistent returns of 10% or more each month creates pressure, which normally progresses into impatience and taking on far too much risk. Another factor to bear in mind is the time of day you will be trading and the strategies you will be using. If you are trading longer term strategies for a few minutes a day, you can achieve excellent returns. But you will normally need slightly more capital to allow for price fluctuation and risk. Some rules of thumb for the suggested MINIMUM amounts you should consider in a trading account. First of all, let’s consider Forex accounts. The amounts suggested here are the minimum to allow you to take most trades without breaking the rules on risk. In a mini account, which allows you to take trades of a tenth of a lot upwards, you should consider £6000 to be a realistic minimum. For a micro account, I suggest £2000 as a minimum.
You could start with half this amount, but for most people, the monetary return on investment starts to become inadequate as the capital drops from here. In a spread betting account, assuming you can trade with a minimum of 50p per pip, £5000 is a realistic starting account. Again, you could start with less than this, but the number of trades that you can take will start to reduce. If you could trade at just 10p per pip, your minimum account size drops proportionately to £1000. We are happy to recommend brokers who allow trading at 10p per pip. If you’re not sure of the difference between a spread betting account and a Forex account, Plan B have further FAQs describing the nature of the two types of account. Don’t get hung up about spread betting being tax free and Forex accounts being taxable.
The first few thousand pounds of profit each year is exempt from tax anyway. You can start with a micro Forex account and migrate to spread betting when you have a larger account, or choose a spread betting provider where the minimum trade size is less than 50p. Just to re-iterate, these amounts are suggested minimum. There is no issue with sums greater than these amounts. I know of organisations that say you can start with as little as £500. That doesn’t mean you should. Think about it, if you achieve an annual return of 50%, which by any measurement is pretty good, that equates to £250.
Psychologically, it makes progress very difficult and leaves no margin if you happen to hit a few losing trades, which should be considered when you are starting out.