Can You Trade with Little Capital?
TABLE OF CONTENTS
We're often asked whether large sums of money are necessary for successful trading, or if it’s possible to trade with little capital.
The basic answer is that anyone can trade, so long as they have the cash to cover their broker’s minimum deposit. However, we caution against the use of trading to magically multiply your savings.
The belief that trading allows you to multiply loaves and fishes quickly is deeply flawed. Trading can certainly open up new horizons for you financially, but like any profitable economic activity, it requires time, training, and commitment.
Having made this perhaps slightly picky, but very important preamble, we still want to show you how to go about it if you want to venture into the world of trading with little starting capital.
What Is Meant by "Little Capital"?
As you may know, at the Unger Academy we deal with systematic trading, and in the context of systematic trading, we talk about little capital (or small account) when we have $5,000 – $15,000 at our disposal.
It’s always preferable to start with even larger sums, around at least $15,000 – $20,000. But if you don't have that right now, let's see what strategies you should apply to maximize your chances of success.
How to Trade with Small Sums of Money
1. Start with the concept of "downside risk”
"Downside risk" refers to the possibility of accruing a loss on a given trade. In general, you should try to maintain a moderate risk profile, meaning that you should not invest more than 2% of your total capital on a single trade.
This will allow you to limit the damage in case the trade closes at a loss. Indeed, your maximum risk will be to lose 2% of your total capital.
Tip: Allocating 2% of your capital on a single trade is different from allocating 100% of your total capital on that same trade with a 2% stop loss.
2. Identify which markets to trade on
Choosing which markets to trade in depends not only on personal preference but also on other factors. Among the most important is your capitalization. If your capital dedicated to trading exceeds $20,000, you’ll be able to trade on virtually all underlying assets.
If, on the other hand, you plan to trade with little capital, for example, $10,000, you'll have to orient yourself to markets that offer a good level of downward scalability, or markets that allow you to open smaller trades.
Markets that allow for downward scaling include:
Forex
CFD
Some futures with good downward scalability (for example, Live Cattle)
Mini (Mini DAX, Mini Crude Oil) and Micro futures contracts (for example, Micro Gold)
Cryptocurrencies
In general, when choosing a market, remember to also check its liquidity. Some markets are not very liquid, making it difficult to trade on them with trading systems. For more detailed explanations of each of these markets watch this video starting at minute 3:00:
3. Use leverage wisely
Leverage is a very powerful trading instrument that involves borrowing other people's capital. For example, by using 2X leverage, you can invest $10,000 while having only $5,000, paying a small percentage to the broker for a loan.
As you can imagine, this instrument requires great forethought. While it's true that leverage grants the ability to potentially double, triple, or tenfold your profits, the same is also true for possible losses.
When you trade with little capital, using very high leverage can be a great temptation, but always keep in mind the worst-case scenario.
To learn more about leverage in trading, read this article: How To Use Leverage in Trading - Don't Make These Mistakes
4. Remember the importance of diversification
Having little money to invest in trading means less ability to diversify, which in turn results in greater portfolio risk.
For example, if by choice or lack of capital you decide to exclusively trade Forex, you’ll be completely uncovered, helpless in the face of earthquakes in this market. A single traumatic event is likely to cause you to lose everything you've invested.
In contrast, if you hold positions not only in Forex but also in other unrelated markets (stocks, futures, options, etc.), you’re better protected from the upheavals of a single market.
You can imagine the concept of diversification as the legs of a table: the more legs there are, the more stable the situation. If, on the other hand, we start removing the legs until only one is left, it will only take one jolt to topple the whole thing over.
Is It Worth It to Trade with Little Capital?
As we've seen, trading with smaller amounts isn't impossible. Of course, getting noteworthy results is quite difficult. If you have $10,000 at your disposal and want to accrue another $10,000 in profits, you should aspire to make +100% — a remarkable result that would far exceed average trading performance. If, on the other hand, you have $100,000 at your disposal and want to achieve the same goal, you only need to make +10%, a far more realistic number.
Keep in mind, too, that in order to see attractive returns with low capital, it's necessary to risk more.
We'd advise against overly risky maneuvers, such as reckless use of leverage. Never forget that it only takes a single trade gone wrong to destroy everything you accumulated up to that moment.
In summary, trading with little capital can be worthwhile, especially if the ultimate goal is learning.
Perhaps you aren't yet sure whether you want to devote yourself to this activity in a more structured way or simply want to test the waters. Dedicating a smaller portion of capital can be helpful to see if trading is your thing.
Keep in mind, however, that the role of emotions changes dramatically when the stakes are raised. The risk of losing $300 is one thing, but if there are several thousand dollars in the pot, emotions come overbearingly into play, and it's good to learn how to handle them properly (here you can read an article we wrote specifically on the subject).
