How Much Money Does One Need to Trade for a Living?

TraderMike posted this. The comments to the blog posts are very interesting, make sure to read them.

There’s a good discussion about trader capitalization needs over on Dr. Brett’s TraderFeed blog. (The discussion now spans these three posts: Capitalization and the Economics of Trading Success, The Capitalization of Traders: Why It Is Crucial to Success, and The Psychology of Leverage ) That topic is probably the one I get the most email about. It’s one of those classic questions that deserves an “it depends” answer. At the very least you need to know how much the person needs to live off of and their system’s expectancy. The type of trading and whether the trader holds positions overnight will probably also come into play.

As a general rule I used to tell people that they’d need an absolute minimum of $50,000 but $100,000 is probably more realistic. But years ago, after reading Dr. Brett’s thoughts on the matter (which he’s based on working with so many traders) I modified my response to add that “Dr. Brett recommends over $200K”. You’ll see comments by Michelle B (remember her?) on Dr. Brett’s posts. Her comments match my thoughts on the matter almost exactly for a very specific situation — a true daytrader, who doesn’t take overnight risk and is willing to max out on 4x leverage. (If you’re trading with a prop firm you may get 10x leverage, so the numbers could be adjusted accordingly.) If you’re holding overnight you just can’t be as aggressive with leverage and thus your capital requirements will need to increase.

Obviously people will have to analyze their own situations and come up with a number for themselves. Dr. Brett provided some links to some Monte Carlo simulation tools which are invaluable for doing that kind of analysis. As with so many things, one’s own mileage will vary. One’s risk of ruin should decrease with more capital and it will also be easier to make the amount of money necessary to make a living.