How Much Money Do You Need to Start Trading?

This is the question I hear most often from new traders, especially those who want to quit their jobs and trade full-time for a living. Obviously, the more money you have the less risk you have to take to produce the same return but the exact amount of capital to start trading full-time depends on your resources, situation, goals and risk tolerance.

Taking the Pressure Off

The surest way to lose money in trading is to be under pressure to produce a certain amount by a certain date. That's why you never gamble with your mortgage or rent money. The market does not know (and does not care) that you need X amount by a certain date. Market returns are not linear. You may tread water or be in the red for the first 10 months of the year and make your annual goal in the last two months in just a couple of good stock runs. The only way to get to month 11 is to have a cash reserve for living expenses. It is the most efficient way to take the pressure off trading so that you can think clearly and make rational decisions.

How Much Do I Need to Have in Reserve?

It depends on your monthly expenses and situation. Obviously, being single and unattached is easier than being married with 3 kids and a mortgage. But in any case you start by figuring out your monthly expenses. Let's say they are $4,000. The next step is to decide how many months of living expenses you should have stashed away. I think 6 months is the minimum; 12 months is sufficient but it's best to ask yourself: how long will it take me to make enough to cover another month of living expenses? If you think 6 months, then a 6-month reserve is sufficient. You can also ask yourself: if I lose my trading capital, how long will it take me to get a job? If it's 3 months, than your total reserve should be 9 months: 6 to trade and another 3 to look for a job if you lose your trading capital.

Putting It All Together

Your monthly expenses are $4,000, you have $40,000 stashed away for trading, you feel that you should be able to make 10% in 6 months, and that if you lose all the trading money, you can get a job in 3 months. Your total reserve should be $4,000 X 9 months = $36,000 so you need at least $76,000 to start trading full time.

Family Support

Being single and unattached may help but on the other hand spousal support may be equally important: trading is a lonely endeavor; it's you against the world. It is one thing to have confidence in yourself, quite another if someone else close to you has confidence in you and supports you in your trading. Family obligations may also make you act more responsibly and avoid unnecessary risks.

The Plunge

Some would-be traders want to make sure that all the ducks are lined up before plunging: sufficient trading capital, good trading system, detailed trading plan... Things are rarely perfect in life and a "perfect" opportunity may still result in a loss, while taking some risks in an uncertain situation may actually help you succeed in your transition.

More from this contributor:
How Much Money Can You Make Trading Stocks?
Stock Trading as a Business
How to Beat the Market Trading Zoomers