Determining Capital Amounts for Trading by Ajay Jani
Last month, Ajay Jani covered several topics crucial to developing a comprehensive trading plan, including the importance of portfolio level simulations and the ability to use risk-reduction strategies to increase profitability. This time, Jani discusses a method to logically determine the amount of capital necessary to begin trading and provides guidelines for developing the mental discipline for trading.
Determining the amount of capital required to begin a trading system is usually an afterthought,
relegated to the "unpleasant but necessary" pile. Aspiring traders have been known to blithely say, "Well,
I have a good system and I have $10,000 saved up, so I should capitalize my account with $10,000" —
indicating that a very hard lesson will be learned very quickly. The logic in this statement is flawed in
that the market in which the novice intends to trade doesn't care how much money the would-be trader
has in his or her account.
Whether you start with $5,000 or $10,000, the system that you have designed will encounter the same
string of profits and losses, ignoring the fact that larger accounts will be able to take advantage of more
signals. So instead of choosing the amount of capital necessary to fund your account by simply looking at
your checking balance, take the time to do a comprehensive study and increase your chances of
weathering the inevitable market storms that will batter your trading account. Remember, the markets
aren't going anywhere; if you have to save for a few months to accumulate the required capital, you won't
be penalized — and, in fact, most likely you will be rewarded.