The 5 questions that successful traders ask themselves
Starting Capital: Do You Have $5000?
You are just starting out. You are new to the game. Perhaps you have had some career success and saved a little money. Perhaps not. Maybe you are in college, maybe you are retired, maybe you’re just ready to trade. Whatever the reason, once you start the process of entering the markets you will need money to play the game.
So how much do you need to play?
One of the questions most often asked me by beginners is, “Can I trade your system or invest with a trend follower with $5000?” I’m not sure where this number comes from, but it always seems to be $5000. What do I mean? I suspect many beginners, whether they have a little money or a lot, pick $5000 as a starting amount of money because they think that number is “safe”. They seem to believe that even if they have a lot more than $5000 (or less), $5000 is the number that will tell them whether a trading strategy works or not.
What is a fun example of the $5000 syndrome? I noticed the other day that Ed Seykota was asked the same question using the same amount at his site Seykota.com (and I paraphrase):
“I have $5000…should I keep trading or stop until I gather equity to diversify?”
In true Seykota style Ed responded:
“Say you want to buy a car and only have a few dollars. I wonder if you: Go out and purchase something in your budget, like a spare tire (or) wait until you can afford to buy a whole car.”
Ed then added:
“Plan A:
Drive a tire around for a while.
Plan B:
Save up and buy a whole car.
Plan C:
Develop a trading system and attract capital.”
You get his point? There is no stated minimum capital to trading as a Trend Follower. There is no magic number. Accept that you need to consider many factors relating to your starting capital not the least of which is your own personal discipline and ability to stick with a trading system or stick with a trading advisor. Anyone who gives you an exact figure for starting capital is either conning you, or more probably, dismissing your query with the mindless answer it deserves. A top trader was asked this same question (I’m guessing once again the amount was $5000). He responded:
“I ask the trader who thinks he needs a certain amount before he can trade exactly what amount he would need to STOP trading.”
No one can guarantee your profits, whether you start trading with $5000,
$500,000 or $5 million. There is no dollar amount to little or too big that
allows you to sit back and assume that your starting capital alone is some
pivotal key to success. Rather than focusing on starting capital, decide how you
are going to trade. What is your trading strategy going to be? Have you answered
these five questions?
- How do you determine what market to buy or sell at any time?
- How much of a market do you buy or sell at any time?
- How do you determine when you buy or sell a market?
- How do you determine when you get out of a losing position?
- How do you determine when you get out of a winning position?
Additionally, which, of the wide variety of instruments across exchanges in nearly every major city in the world, are you going to trade? Stocks? Currencies? Commodities? Do you see how the process is much bigger than simply asking how much money do you need?
Do you think John W. Henry, Trend Follower and owner of the Boston Red Sox, had some magic starting capital number in mind when he opened his first program with under $25,000? Of course not, he had figured out his trading strategy and began with what he had. And isn’t that the real crux of the matter? Will lack of “enough” starting always be your excuse? Will you always sit around lamenting your poor fortune?
On the other hand, unlimited starting capital can be a strike against you depending on your approach to trading.
For example, Jaromir Jagr, the famous hockey player ‘s trading style was once described this way:
“Jaromir Jagr does not do moderation. This is a man who doesn’t just play the stock market but romps through it: last year, published reports estimated he took a kit (loss) of anywhere from $8 to $20 million in the dot.com market.”
Trading is risky no matter what amount you start out with. It’s a zero-sum game in which winners, armed with sound trading strategies, take from losers armed with poor or no strategies Get a solid plan of how you will handle all eventualities before you begin, and the “amount” will have less significance than you imagine. Jagr is exactly the type of trader William Echardt, the very successful trend following trader, would avoid judging by his views below:
“I know of a few millionaires who started trading with inherited wealth. In each case, they lost it all because they didn’t feel the pain when they were losing. In those formative first years of trading, they felt they could afford to lose. You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose. I’d rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions…This is one of the few industries where you can still engineer a rags-to-riches story.”
Eckhardt or Seykota seem to be saying the same thing: avoid making an excuse for yourself. Nike has been saying this for years: “Just do it.”
MC
Michael W. Covel is the founder and President of Trend Followingâ”