Funding Your Trading Account: How Much $ Do You Need?

Bootstrapping a trading account: Is it Possible?

We often hear the term bootstrap associated with entrepreneurs and start-up ventures, so how does it apply to trading?

There are many similarities between entrepreneurs and traders, the most significant being the ability to leverage your assets while managing risk. Money used to fund a start-up or a trading account should be money that, if lost, wouldn’t change your current lifestyle. This is what is known as “risk capital.”

It is all too common for traders to fund an account with “scared money.” This is an amount of money that, if lost would have an impact on your lifestyle and thus, causes traders to act irrational and fail before they even get off the ground. Don’t let that be you.

Fail Fast, Fail Often

Overleveraging, trading with “scared money” is not sustainable and will cause you to lose your money faster than playing the craps tables in Vegas. Entrepreneurs like Thomas Edison, Donald Trump and Steve Jobs will often say fail fast and fail often, I’d like to add that in trading, you must fail small.

“Failure is nothing more than temporary defeat, we learn from our mistakes and come back stronger.”

This is where we learn the most, but if you want to succeed in trading, you must be able to limit the damage of your mistakes.

I cannot stress enough the fact that a trading account should be made up of risk capital. You can read my post on why you shouldn’t waste your time trading a small account here.

If you feel you must trade and your trading account is made up of money that would impact your lifestyle I recommend taking a step back and outlining what your goals are for trading. If you’re looking to make quick buck your time spend as a trader will vanish quicker than you can say Ferrari, Maserati or Lamborghini.

If you must trade with scared money, just know that the odds are significantly stacked against you, but there are a few measures you can put in place to prevent from blowing up your account.

3 Ways to Prevent a Trading Catastrophe

Have your broker set daily loss limits –

I use 5% of my account balance but never had to use it, it’s there just in case my computer crashes or something really bad happens. For a newer trader a daily loss limit is a must, and you can’t just write it down. You must have your broker place a hard daily loss limit on your account.

Sue is a veteran trader, she places a stop loss on every trade, 1.5% of her account balance. One day she has a couple stop outs, instead of stopping Sue continues to keep trading in hopes to make back what she lost, she becomes anxious and starts taking rapid fire trades entering on setups she wouldn’t normally take, flipping from long to short to long. 30-mins later she went from being down $500 to down $5000. Daily loss limits are a MUST.

In addition to the daily loss limit place a 10% max weekly drawdown on your account. Don’t let one day or week end your trading career.

Limit yourself to two full stop outs for the day –

Go back and look at your biggest losing days, this rule alone can probably eliminate most, if not all of those days from your trading. The hardest part about becoming a consistently profitable trader is being able to stop trading after you’ve had a series of losing trades.

On the good days when setups are working, don’t be afraid to keep trading. On the bad days when things just aren’t working, stop immediately. You’ll come to find that this also helps your mental state of mind, because you know you are limiting your max daily loss long before your broker would have to step in.

Looking at it from the risk side, think of it as a game of mine sweeper only it takes 2 mines (stopouts) to end your trading day and 3 consecutive losing days to end your week. With loss limits locked in by your broker you are unable to do more damage to yourself when you’re at your weakest moment.

Risk no more than 1.5% per trade –

This number is high, in my opinion, but it’s also only relative to the trader. The goal here is to be able to find yourself in the same state of mind where you feel calm and objective before you place the trade as well as when the trade is on. This is the point where you know the money you are risking is no longer “scared money” and truly risk capital.

So How Much Do I Need?

The amount of capital to place in a trading account is crucial part of whether or not a trader succeeds or fails right from the beginning. It’s okay to start small. In fact, if your chances of mastering the techniques on a small account are much greater for the sole fact that you ARE using risk capital and not “scared money.” The exact dollar amount varies for everyone, but to have a good shot, you will need to have your expenses covered for at least one year. Managing a flexible or part time job while learning to trade is a good way to give trading a test drive.

Earn Your Way to the Top

One option to funding your trading is the graduated approach; earn your way to trade larger. After trading a simulated account for at least a month open your first trading account with the minimum account size. This can be as low as a couple thousand dollars with Infinity Futures. Trade one contract and use this account as a test drive to see if trading is really something you’d like to pursue.

Assuming you blow through this account (although slower than most because you used the daily loss limits as described above) and are interested in learning more about trading. I recommend taking your new knowledge back to the simulated account and rehashing out your strategy.

After You Blowup Your First Account

When you feel you are ready to take your new knowledge back to the live trading world, you can fund your account with a slightly larger dollar amount.

If you’re starting out with a 15k trading account and have your max daily loss limit set to 5% it would take a roughly 20 consecutive days of solid losing trades, zero winners to blow up your account. Now that would be pretty hard to do, but it is certainly possible, which is why your second account is still a small amount of risk capital.

After a few months trading your second account you will have uncovered a whole new understanding for how the markets work and a deeper understanding of who you are as a person. My post on the 38 steps to becoming a successful trader outlines the stages of this process.

Your Time to Shine

The third account is the big dog, the Mac daddy. Once you’ve mastered your setups and been able to show consistent profitability with your second account you are then ready to build or add money to your account to trade larger. This money should still be risk capital, but now that you’ve mastered your setups you will have confidence in your own trading.

This process can take a number of years, to master trading can only come from experience, time spent in front of the markets. Work to control your losses and you will find the winners emerge as to strive to become a successful trader.

About Tim Racette

Tim is a full-time trader in the futures and stock markets and founder of EminiMind.com. He is also a Chicago-land native, competitive mountain biker, adventurer, and ASU Sun Devil.

2 Responses to “Funding Your Trading Account: How Much $ Do You Need?”

  1. Are there any valuable lessons you wish you knew before you started live trading?

  2. You’re so right about saving small losses and letting profits grow.
    Sometimes I move the stop and money I earned all week goes one day .. very frustrating..I have been trading and earning consistently for the past year and a half I managed to increase my account by 100%

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