Minimum Capital Requirement

Over the past two years I have tackled, or tried to, the idea of how much is just enough startup capital to be able to trade successfully. I ended up deciding that $5000 is pretty much as small as one can start and only there if using a discount online broker. In Canada I found that Questrade was about the cheapest and I have been impressed with the trading capabilities...the customer service leaves a little to be desired so they are best for self motivated traders and investors. I would recommend them...they are the only broker that I put a banner on here for after all... with certain exceptions. I am opening a US broker account, just sending a cheque next week to get trading going so I will see how that goes, looks good to start but they are for commodity and index futures, not stocks.

Well, the issue is not so much how much is needed it's how much of a stomach do I have to weather the losses until the trading becomes consistent enough to book regular gains. Picking a real crappy plan or having no plan will decimate any account no matter the size. Strict money management, sticking to a simple proven plan and keeping trade size reasonable are all part of a good trading strategy required to trade a smaller account, more so than a larger account even though they should all be observed for any account.

In my case I like to play and that can be the downfall of any account. Even now that I have hit upon a working system, which I must admit involves using dedicated data and advisory services, I still have a desire to tinker. I was initially headed in the direction of paying only for services to enable me to manage my own trading. The line starts to blur once you get into some of the services that help to interpret the data as to how far into advisory the service gets.

So, I will work with what I am working with now while I consider the question of startup capital.

The trades that I am taking are Out Of the Money or close to the money options, straight calls and puts (mostly calls right now). These are proving to be the cheapest trade vehicle as the trades are almost all $1.20 or less per contract. I tinkered with deep In The Money options for a bit but found that they were pricey and still prone to quick stock price moves... some of these were profitable though.

With the current service I can trade every single option that is recommended with the exception of some of the spreads involving naked option writing as long as I keep my sizing small. This also lets me take advantage of every trade that comes up. The authors (for lack of a better term) consider that most people pick and choose which trades suites them. I am taking a shot gun approach and trading, or at least ordering, every single trade. This is due to my checking the past trades and seeing a pattern of overall profits... I'll chart that later.

I am currently taking every single trade I can in my TFSA account, which started this trial in the mid $3500 CAD range. I am now sitting around the $4800 mark counting the purchase prices of the positions. If I count the paper position now it is closer to $4100...but they don't count until they are closed. I have a couple outside of this account due to the age of the trades, I just was not using my TFSA to start.

Using the roughly $120 per trade risked (I count the full value of the option trade to be risked) I can run 41 concurrent trades. The service I am using, once I settle on just the one I expect to use, puts out between 20 and 40 trades per month. As the month progresses some of these trades are closed. The worst case for number of trades is if they suggest longer term holdings and those trades ride for months rather than days or weeks. The typical holding average is shy of 30 days...less if I only go by my trades to date. So average 30 trades taken and held on average 30 days I can expect that an 11 trade buffer is enough to accommodate the slush.

Hmmmm....having said that those 20-40 trades also include some trades that I will not take due to the nature of the spread used for the trade...so maybe drop 5 - 10 trades off that total.

OK, so $5K looks like a good starting point, although it does not have to be a minimum as single contracts could be used for every trade rather than a combined $120. The issue is that many of the smaller trades will be 100% gainers... the commission is going to be $22, a 35 cent trade NEEDS to hit 100% to make any money...better with 3 or 4 contracts to cover the commission easier.

Keep in mind that my primary trade idea here, considering the entire trade as risk, means that effectively I am risking my entire account if I use all my capital for active trades. Now my entire account is considered losable so that fits my plan.

The secondary idea is that the trades will rotate. The older trade will be closed and a newer trade will be opened so, like rotating stock on a shelf to keep it fresh, the trades will rotate to provide rolling profits. I already am seeing that as I am taking profits every day or two and adding new trades almost daily as well.

Even though the market could turn nasty and drop taking all of my trades with it, it is unlikely as not all stocks are going to follow the market in that manner...diversity gives me some breathing room as various sectors are trending on there own and each stock trends within the sector.

If I were to choose a minimum for stock trading I would choose to start higher BUT using the $120 risk still works if the stocks are in the $5 to $30 range. Choosing fewer trades and applying tight stop losses are in order though.

Jeff.