Required Trading Capital

How Much Trading Capital do you Need?

You might think that this is an easy question to answer because of how straight forward the question is, but in fact there is a lot to consider when it comes to deciding how much capital you need to start spread betting. First of all, there´s a difference between a professional spread bettor, a semi-professional spread bettor and a beginner trader.

We´ve seen on previous lessons that the minimum required deposit on the majority of the spread betting firms is around £100, but this is not the same as the minimum required capital for you to make a profit in the long run.

The minimum required capital for a profitable spread betting operation is defined as equity that given the appropriate risk management rules, will be enough to support bad streaks and losses. It´s normal for every spread bettor to get into bad streaks where he will lose 3 or 4 trades in a row; but with a sufficient capital and tight risk exposure rules these bad runs can´t be outperformed with strict discipline and a winning system

Here´s a profit and loss graph of a winning trader:

trading capital

As you can see, from trade 1 to trade 90 the system works perfectly yielding almost a $2000 profit. From trade 90 – 96, the trader sadly had to close all of his spread bets on a loss for a negative $520. This may sound catastrophic, but let´s remember that this trader had a balance of $6970 before trade number 90. This drawdown represents only 7.5% of his entire equity.

In the same graph, you can see that the trader has 3 more drawdowns on his entire 300 trade, some bigger than the others, but because he has an big enough balance he can withstand them and make a profit on the long term, which is what we look for when spread betting.

This is just the general overview of how a professional trading capital works and moves with each trade. But the vast majority of us are not professional spread bettors and only trade part-time with a much smaller balance on our accounts. So let´s have a look at the required capital for a nice second income.

The first thing we need to emphasis is NEVER SPREAD BET WITH MONEY YOU CAN´T AFFORD TO LOSE. This is the most important rule when talking about capital requirements for your trading operation. It´s simple actually; it´s not the same to be holding a losing spread bet but still know that the idea is valid when you opened it with your rent money. This will make you react to the situation and not think rationally about the position, making you close it prematurely. On the contrary, if you are spread betting with extra income or some of you savings then this fear will never cloud your judgment. More on this in the psychology lesson.

A very conservative win ratio in spread betting is around 10% but good traders can go as high as 150% return. This is when you are conservative and not risking more than 1 or 2 percent of your balance per trade. ¨Remember that while hitting home runs is sexy, it’s rarely a recipe for success in the investment world. Aim high but play small. Overtime, good risk management and patience wins. Power is no substitute for precision and patience. The same is true in the world of investing¨ Cullen Roche, the pragmatic capitalism.

Whether you are a professional trader with a £100,000 account or a part time spread bettor with a £1,000 account, if you follow tight risk management rules your risk of going bust is very small.

That being said, if you really want to make an income out of spread betting we do recommend at least a £5,000 capital with the objective of growing it to a much larger sum.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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