How much capital do I need for trading ? Formulas?? – Life Hack for Traders
I want to make $1,000 every month in trading. Is it doable?
So, how much capital do you need for trading, swing trading, intraday trading, options, and so on?
How much money should I set aside for trading?
This is the most common question that any newcomer will have.
Well… There is no definitive answer to this question.
It depends on various factors like expected returns, strategy win rate, experience and style of trading etc.
Let’s take a look at them one by one.
The first factor to consider is expected returns. This one is the most obvious. Before you do anything, you must consider the rate of return on your capital.
It is possible to generate $1000 from $10000 in capital on a consistent basis. However, making $20,000 profit from $20,000 capital on a consistent basis is impossible.
So understand the market’s reality and adjust your capital accordingly. Lower your expectations if you are unable to increase your capital.
Consider things like why you need the money, whether it will be a second income or if you will rely entirely on it, your monthly bills, and so on.
The more you rely on your trading income, the more emotionally disturbed you will be, and the more losses you will incur.
As a result, you will need a large sum of money as capital.
Strategy win rate
The the next factor is your strategy win rate. You will have to find the win rate percentage of your strategy along with the risk reward ratio. Now, you will get to know how much you can expect with that particular strategy.
If your strategy has a win rate of 60% with 1:2 ratio you will get a good return on your capital. Now you will not lose a small amount of your capital every month because of the poor win rate and risk reward ratio or because of the trading charges.
Next one is your level of experience. If you are a beginner you will need more capital because you will make more losses.
But if you are an experienced trader or you have a done a lot of paper trading and back testing you can reduce the risk. If you can reduce the risk then you can have a much lesser capital.
The strategy drawdown is the most important. If you lose 10 trades in a row with large stop losses, you will completely blow your account and have no capital to trade the next trade. As a result, you must consider the drawdown percentage of your strategy.
Style of trading
The type of trading is the next factor. If you want to do intraday equity trading, you may only need a small amount of capital because brokerage fees are usually low. Fees for delivery equity trades are slightly higher. However, the fees for futures and options are expensive. As a result, your capital requirement will be affected as well.
Simple ways to calculate the capital required.
SL = 1% of your capital
If you can risk $100 per trade (which is 1 % of 10000), and even if you make 10 losses in a row (10*100=$1000 loss) you will have enough capital (around 9000) to take the next trade. So now, a capital of $10000 is sufficient.
Capital = Max SL / Trade * 100
We can do it in reverse order to calculate the capital directly. Simply set a stop loss amount/trade in mind to begin. Then multiply it by 100. Repeat the process until the capital is found to be feasible. This will be your total capital required.