A simple answer is the more, the better. Under capitalization is one of the major problems that traders have. First of all, trading is one of the most difficult professions on the earth due to its very high earning potentials. If you have a few grand trying to make a living at it, then what I can tell you is that it is impossible. You need at least 100k to even stand a chance to make a modest living if (a big if) you have the skills.
For example, your objective is to make 50k per year consistently, which is 50% of your 100k. A 50% annual return year over year WITHOUT compounding is very hard to achieve even for the most experienced traders. With compounding, not even Warren Buffet could . I believe Warren Buffet’s track record is perhaps around 15%-20% minus management fees with compounding. Madoff’s “track record” was around 10% compounding. You know why I mentioned “Madoff” here. Stay away from anyone who claims something like that.
As I always mentioned in the past, a few lucky shots or even a couple of years of lucky shots mean nothing to me. A trader must prove herself through at least one major crash like the dot come bust or the financial crisis that we just had, and a major bull market. If you have gone through these cycles and still made some decent money, you are all set for the rest of your life since trading will never change. It is this way today and was like that 100 years ago because it is all about human psychology.
A consistent 50% annual return without compounding is hard. But I believe a 30% without compounding is doable. But 30% of 100K is only 30k. 30K is around the poverty line in the developed world such as the US, Canada or Japan. But 30K packs a lot of purchasing power in a developing country like China. The purchasing power of 30k US dollars in China is equivalent to 150k in the US and you do not have to pay taxes on capital gains. The beauty of trading is that you can do it wherever there is an Internet connection. I believe the income tax is around 17% in Hong Kong and 15% in Singapore. We will explore this option in another post.
So obviously 30k is not good in the US. If you need to make 60k per year, you would need 200k trading capital. I am every bit against using leverage/margin. So let’s not even go there. If you have 1 million, you could make 300k theoretically provided you trade liquid stocks. That is one of reasons why I never trade those thin penny stocks. The more liquid, the harder they are to trade such as GS, APPL, RIMM or GOOG because there are too many professionals in them. But you have to go compete with them head on.
Now you see why it is “the more, the better”. But this does not mean people who are temporarily under capitalized should not even try. You should. But you should not focus on how much you can make in the first couple of years. Instead, you need to focus on your trading plan/system because all it matters in the end is your percentage. If you could trade a 10k account well, you should do well with a 100k account.
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What are your thoughts on trading options? So far I’ve noticed they trade like dow/nas stocks but have earnings potential of penny stocks
Posted on September 26th, 2009 at 1:45 pm
Totally agree with most of what you mentioned. I assume when you mentioned “leverage” you mean trading on margin. I think nowadays, trading options allow a trader to leverage his/her limited capital.
Posted on September 26th, 2009 at 1:48 pm
You are right. I am only referring to trading stocks here. As for options/futures/Forex, leverage is what define them.
Posted on September 26th, 2009 at 1:54 pm
Jeff might be able to give some insights into this. I do not trade options. My only thought is that beginners should be very careful with trading options due to the use of leverage.
Posted on September 26th, 2009 at 1:56 pm
What I’ve noticed is that picking stocks that are on a momentum swing and then a call that is one above “in the money” you get the same predictability of a Dow stock but 10x the upside. Last week I did this with yhoo. $300 turned to $600 in an hour. Mylong term goal is to generate $500 a day on avg in order to stay home.
Posted on September 26th, 2009 at 2:21 pm
Jg,
Swing trade can make you decent money, BUT, you must know your trade. Study your pick of the day hard, don’t just gamble, and you’ll do good!
Posted on October 1st, 2009 at 1:06 pm
Gunther,
Thanks for the encouragement. What I’m trying to work on is closing the gap so that its more of a day trade than a swing trade. These options seem like the way to go to gain leverage but finding the right strike price seems to be the trick. You don’t know until the market opens and then they jump up so fast your late for the party. Any ideas?
Posted on October 2nd, 2009 at 7:56 am
Let’s put this way: If you have a huge job interview next day, what are you going to do the day before? get yourself ready! study what you know best, but no everything for the simple reason you can’t learn everithing! So, when you get there, you’ll talk about what you know. What you don’t know, just keep your mouth closed:) when you leave, research what you don’t know and learn more… Now imagine everyday a new interview… Can you picture it? That’s the stock market… DO NOT GO IN until you have a game plan! if you don’t, or you’re not sure, just watch, don’t play! Go to blogs, discuss with people, learn… when you’re confident, you’ll know what to buy, when to buy… anyway, I always look for news on marketwatch.com from 6 to 7am mostly related to my portfolio, futures and commodities. that gives me some confidence for my day plan I draw the day before… And always, always ask people. keep your network working for you, and share info, people like that! gbergama@hotmail.com… take care!!!
Posted on October 2nd, 2009 at 8:16 am
I’ve had to take a break because I have no time to study up. The one problem is that I’ve come close to breaking even or profit, but that vanishes once trading fees are included. I just can’t buy lots big enough where the smaller profit percentages can work out for me.
I have about 20k to play with right now, I think I might go back to paper trading for awhile for practice once I have time for it, but I really find the psychology of paper is so different that it’s not really a fair test.
Posted on October 13th, 2009 at 4:02 pm
You need to hold onto your winners longer for bigger moves. I know it is easier said than done. But I still have to say it “Patience is a virtual”.
Posted on October 15th, 2009 at 12:09 am
After adding up the profit in your portfolio this year. It average less than $2500 a month. So, are you using less than $100,000 in day trading. I am thinking with the trading skill you have and the time you spend. You should be making 6 figures income. May be leverage is a way to go for you. You seem to have a very good cut loss skill judging from a large amount of loss trades in your portfolio and still making money.
BTW, I am a mixed trader/investor. I made more than 100% last year by only longing depressed stocks. But I know it will not make good money as stock going back to normal mode in the next few years. Your trading method looks like the way I need to learn. As I have $350,000 now. 30% is doable for me as a full time job.
Posted on October 15th, 2009 at 1:48 am
First, congrats on your huge return last year. Second, you are already ahead of a lot others since you have lots of capital. People wonder why the richer gets richer? :)
I am running a 50k account. I do have some money sitting in a CD that generates a meager annual return of 1.3%. I am just concentrating on my consistence and improving my mental strength for the time being. Once I am ready, I will increase my position size. I have nothing but time. So I will wait.
Posted on October 15th, 2009 at 7:28 pm
At what time of delivery comes?
.-= Good_trade´s last blog ..The market review for November, 11st =-.
Posted on November 13th, 2009 at 11:48 am
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