Undercapitalized account theory

T

tamvik

After going thru a lot of posts in a last few months I got the impression that if a new trader starts out with a small account size 4k-5k will have difficult time or even impossible of making it in daytrading.

Taking in consideration before PDT (25k) rule, some were suggesting minimum 25K to start trading some 50k in order to have a fair chance at trading.
Some were suggesting to wait until you save enough, or get a second job, stressing the point of being adequately capitalized before even starting to trade.

On the other hand everyone cautions to start trading with 100 share lots until you learn the ropes. So if 100 shares of QQQ costs about $3000 to trade(at the moment) why would I need 25k, 50k to start trading?
Am I missing something?

tamvik
 
with PDT, and you mentioned it, there is no choice (but go with futures or get the minimum capital).

if you don't have enough money, you can't absorb drawdowns. when you learn you should start with 100 lots only because of drawdowns.

The concept is slow bleeding. If it is slow enough, you can survive until you know what you are doing. If you lose an arm and a leg, you may not survive long enough in the jungle.

afterward, when you can trade, you need enough capital so the job is worthwhile. And indeed, it takes 50K or more. Unless you use a lot of margins for stocks (futures are always with margins anyway), but margin can be very dangerous if you have a bad streak (risk of ruin).

tntneo
 
Trading 100 shares will not earn you a living.

The reason people suggest that a newbie start with 100 shares is to get them into the game without risking too much. Almost everyone will lose a portion of their account when they start trading. By only trading 100 shares until you are consistently making money then you are preserving your capital. However, even if you are making money on 100 shares it will not be enough to grow your account in any significant way.

In order for you to make a living you need to increase your share size, therefor requiring more capital. You also need sufficient capital for the inevitable drawdown periods. Whether the capital required is $10,000...$25,000...$50,000 or higher is debatable and will be based on your style or system, your needs and your goals.
 
With less than 25K you cannot trade equities in today's environment, holding overnight is too risky you'll have to take small positions so you'll make peanuts if anything, not worth the trouble unless it's a hobby. IMO stocks were great as trading vehicle in the late nineties because of the bubble, they were trading like commodities they had huge moves, text book chart patterns etc. This game is over.

I believe it's possible to start with 10 K and build an account trading futures but you need to start very slowly and study your markets a long time before trading actively. Then at some point you have to take some risks (going overnight)otherwise you can't catch the big moves (20 ES points +)and really get ahead. So if you ask most people they'll say the odds are heavily stacked against you and you can't do it. I think it's doable, after all your buying power is 10 times your account equity, you just have to find out how to avoid stupid trades, catch the big moves and keep losses small.
 
5k is enough to get started trading equity options and your risk is limited to the value of your trade, unlike futures where you put up a small deposit but you are liable for the full value of the contract. However, in my opinion, options are more suited to swing trading than day trading due to commissions and the relatively wide spreads.
 
You can trade options with 5 k but if you want to risk an acceptable portion of your capital you are not going to make much I think in this environment again the stocks don't move. And it's pretty much gambling IMO, holding for days hoping that your leverage position will move in your favor while the premium is going up in smoke . The spreads and executions are terrible too.
 
I was assuming that the 5k was pure risk capital of course. Ideally you wouldn't put more than 2% of your capital at risk in any one trade. As for it being gambling, well that is a whole 'nother philosophical argument and I have voiced my opinion about it on other threads, so I won't go there. Basically the answer to the original question, is no, 5k is not enough for trying to be a professional daytrader.
 
is definitely not enough. If you dont have at least 30k then you should get job to raise that. Try to get a 1st shift job and anohter in the second shift. Work your ass of and save the money. If you do this for a year and half you should have this amount. I know you might say thats long time but hey the markets will always be there. in fact working these 2 jobs may help install in you Dicipline. which i think is the most important thing in trading
 
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