rfxsignals April 14, 2019 1 Comment
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Knowing how much money you need to trade allows you to get on with the business of trading itself without worrying about your trader pay cheque

How much money do you need to trade? How much can your trading system’s tap provide? It can be ‘cranked up’ to provide a greater flow, but there will always be a limit. Know your system’s limits to know the answer…

One of the first questions a beginning trader asks is “How much money do I need to survive as a trader?”

It’s often asked by someone with a very small account size who is nervous about taking the first step into trading.

If they are thinking of leaving their job to trade, the very fact that they are asking the question should raise alarm bells.

(For a short but extremely relevant discussion of this dilemma see the first of our forex myths, click the following link to go to Forex Myths)

Even though it’s asked by newbie traders, it’s a valid and important question. You should have the answer to this question before you ever contemplate relying solely on trading for an income.

There is a basic equation that gives the answer to the question. The simple maths goes like this:

Frequency * Magnitude equals = Expected Value

Where:

  • Frequency refers to the number of trades your system provides on average over a certain period. For example, if you wanted to know how much your system makes in an average year, the Frequency would be the number of times your system trades in an average year.
  • Magnitude refers to the size of the outcome – the win or the loss – of your average trade. This can be expressed in a number of ways: as pips, as percentage, as units or as a currency value, e.g. in dollar terms. For our purposes here, since we are trying to discern if your system will provide you with a living (you can’t eat pips, percentages or units :-)), we will use the dollar value.

Let’s assume the following inputs to the calculation:

  • your system trades on average one hundred and fifty times per year
  • your system makes 1% or one unit (see Forex Pip for a discussion on the use of pips, percentages and units) each time it trades
  • you have a trading account size of $100,000
  • you will risk 1% of your account each time you trade, i.e 1% of $100,000, or $1000

Professional traders only risk from 0.2% to 1.5% per trade. Beyond this risk level is reckless!CLICK TO TWEET

We now have all the elements to do the estimates:

Frequency * Magnitude equals = Expected Value

150            * $1000                    = $150,000 (yearly income from trading this system)

So that is the very simple method for working out how much money you are going to need in order to live off your trading.

If you find the yearly income is too low or too high, you can of course adjust how much you will risk per trade. Be careful of letting greed influence you here: most professional traders risk anywhere from 0.2% to 1.5% per trade. Anything above this is generally considered to be venturing into the danger zone!

Finally, the most important considerations in answering the question “how much money will I need to trade?” are:

  • Knowing how much money you have to devote to your trading account. Be careful of throwing your life savings into this effort, especially in the early years of your trading career. Start slowly and build as your successes and confidence increase.
  • Selecting the right approach to trading, i.e. your chosen strategies or systems
  • Knowing your trading systems inside out – which means knowing all the parameters such as Frequency – will be necessary in answering the question “How Much Money Do I Need to Trade?”

For more on basic forex education click the following link to go to Forex School or continue on to more advanced topics in Forex University

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