What "Small Capital" Means in Trading
Trading with a small account. Is this possible? Well, first of all, we have to define what small means. Of course, we might have found some advertising on the net where you put $250 and you make a fortune or put $100 there, you will be the next rich or blah, blah, blah. This is obviously, I don’t say impossible, it is possible. Things happen. Imagine people who purchased bitcoin in 2011 and they kept it till today, they have a fortune now with a small amount at the beginning. This is sort of a lottery. You might better invest your money in lottery tickets rather than try to find a way with small money in trading.
Advantages and Disadvantages of Platforms Like Metatrader
So, trading with $250 is something that cannot really be considered now, for practical reasons. Now, imagine you trade from 1000 to 5000. Okay. Here you start having some possibilities, but you need to be careful about all the costs that are around trading. So, you have probably to choose a platform which is for free and the market where you can scale down as much as possible your positions. This is possible, for example, with Forex and CFDs, if CFDs are allowed in your country, of course. Using the Metatrader, probably, platforms that are offered from the broker and using the data that are delivered from a broker.
Now. Forex, CFDs, and also the crypto market, cash, crypto cash is scalable, so you can trade small there. The point is that these are all non-regulated markets, so you have an additional risk. You might accept it, you might be happy with it, you might not. And you don’t have a professional platform.
I don’t mean that Metatrader is not professional, but believe me, it’s not easy to use. They tell you -oh no, you are an idiot. It’s easy, it’s simple. – It’s not. I mean, I’m not the most stupid out there, maybe in the top five, but not the most one, the number one. And I can tell you that Metatrader is not simple if you are not a programmer. I use MultiCharts, which is much easier for me, but Metatrader is free, MultiCharts is not. So, this is something you have to consider, especially if you have $1,000, for example, to trade with. And if you have to pay $1,000-2,000 for a platform, obviously you prefer a free one.
And if you want data, real-time data, you need to pay for it. Forex data come for free from the brokers and this is obviously something you might prefer. But the quality of those data and the historical amount covered by the data are normally poor. So, you have a problem, but it’s a choice, it’s a compromise you have to accept because you don’t want to pay for the data.
You need a computer because you cannot trade from a tablet or a phone. It’s possible to place trades, but not to trade systematically as a professional and so. So you have to pay for the computer, you have to pay for the Internet connection, and you have to make sure that you have power. If you don’t have money enough to pay all for all this, for good Internet connection, for good power supply, or to be sure that you have no shortage, so you might be willing to put it on a cloud server, but you have to pay for it. So, you don’t have to pay this $100 a month. You do it from home with all the additional risks. All these things have to be considered and you are limited to these markets.
Above €5,000, Other Doors Open…
When we go to $5,000, it starts changing a little bit. In the past years, I would not have said anything similar, of course, but things change. And today, in addition to all these markets that I just mentioned, we have also regulated markets offering micro futures. And micro futures are small enough to trade with lower capitals. For example, Micro SP is one 10th of Mini SP, and one 10th is very small compared to the big one. Unfortunately, commissions for a micro are not one 10th of the commissions of a big brother. They are not the same, they are smaller, but not one 10th. So, the incidence of costs is higher on the micro futures, but micro futures offer an interesting possibility to trade where you were not allowed to trade until yesterday.
Believe me, today we have a good offer. Micro futures on indexes, Micro SP, micro-Nasdaq, micro-Dow, micro-Gold on metals, micro Crude Oil, energy, and also some currencies are offered in micro version. So you have the possibility to put in place a good, interesting portfolio of strategies covering different markets. So, this is the good news. This was not possible up to yesterday, let’s say, but today it is. And all these I mentioned have decent volumes to trade with no major problems or sorrow.
Micro Futures for Less Capitalized Traders
Now, one thing is important. I tell you about the micro futures, because you can scale down your position as you want to do the same you do on the big futures. I mean, your strategy must remain the same. The stop loss that you will be applying will be smaller than the stop loss of the big market, just because the market you are trading needs less cash, is of lower value, it’s one 10th as big. So if you were stopping thousand dollars, now you have $100, just to give you an example.
The solution where you could imagine changing the stop loss of the big markets… So, why should I stop thousand? I can just 100 and have the same conditions and I have more opportunities if it goes in the right direction. This is, as numbers is okay, but it changes completely the strategy and in some cases it doesn’t even make sense. So that’s not the solution. You have to keep your trading models and apply them where you can cope with the money which is involved. And this is micro futures.
The Threshold for Professional Trading
Interesting. Then you have to start all the other calculations when you grow up with your capital. Considering that for this solution you have to pay for the data because it’s not as in forex where the broker delivers free data. But also in this case you might find some solutions. If you trade, for example, with interactive brokers as I do, you might just need the historical data and then you can use real time data from your broker. It’s not the same thing as with a good quality provider of data, but it’s a solution. It’s a cheap solution if you don’t want to put additional costs on your activity.
Platform, platform is expensive as I said. But you can choose for example TradeStation where they have their own platform and you get even data from TradeStation and this data can be cheap if you produce enough commissions every month. So, that is another solution. It’s not what I prefer personally because I prefer another solution, but it’s something that works and can obviously avoid extra costs for many reasons.
VPS, okay, in this case, obviously you have to make a choice. I want to trade from home, it’s possible, you can buy a power supply bench and so on. And you can put some solutions in place that are cheaper than going on a cloud server. And then you can get there when you have more money, of course. So you can consider all a number of solutions.
When you get to 20,000, then you can start considering even some other markets. Meats, for example, also going up from 20 to 50,000. But you can start considering doing it the most proper way. So, adding costs, but knowing that you would probably cover those costs with the extra profits due to the higher capital. Why do I always mention 20,000 not 5000?
I mentioned 20,000 because is a level which I identified, considering the potential profits that we can make, I mentioned more than once that a very good trader, a very good systematic trader, can imagine making a 30% a year. Of course you can have a 100% year and a losing year. So, in average, okay, but 30% if you run the math very simple on 20,000 is $6,000 in a year. I mean, you don’t get rich, but it could make sense. So this is a level where I start thinking that it makes fun, okay, to go for it.
But I can tell you that it’s possible to trade with less money. It’s not recommended, but in my Academy, on the Trader of the Month contest, I see statements with people who were trading with $5,000 and they got great results in the months that we were submitting. So it’s possible, it’s technically possible to trade with 5000. It’s harder, maybe it’s more dangerous, but it’s possible.
Risks of Leverage
One thing you have to think anyway. These are all solutions that I propose to trade with smaller capitals. Trade from home, use a broker that offers data depending on the commissions you generate, offers you a platform or things like that. Never consider leverage as the answer to your problems. Never consider it. Because leverage can help for many reasons but cannot be the solution to small money. Because with leverage you really risk going dangerous. It’s like if I have a Ferrari and you want to drive a Ferrari in the sitting room. It’s crazy, isn’t it? But let’s imagine it’s possible, because I allow you to do so. I allow you to drive the Ferrari in the sitting room. Is that safe? I believe not. So it was not impossible because I allowed you: my sitting room, my Ferrari, drive it. But you understand that this is crazy. Same is for leverage. If a broker allows you to trade big with small money, it just allows you to drive a Ferrari in the sitting room. Same effect. Consider this.
So, leverage cannot be the solution. Leverage can be a help for other reasons, but not the solution to the small account. Small account has to be traded small. To trade small, you have to consider the right instruments. And micro futures today are a good opportunity for the smaller accounts.
Expectations have to be kept smaller as well, of course. But this is something that is always so and is clearly so. So, guys, I hope this helps. I hope you set your mind on the right path and I hope the best success for you in your trading activity.
Ciao, from Andrea Unger!
