In episode 22 of the Two Blokes Trading podcast we tackled a number of questions from a young listener of the show, Mikey from the UK.
We make it very clear that we are not trading experts; we are still on the learning journey, so we never answer any questions on trading specifics or give out tips, signals etc. However, we do feel that we can help answer a number of questions that all new traders have. Why? Because we have asked them ourselves!
With the research we have done to put together the show and the website, and with the knowledge we have gained speaking to dozens of traders and trading industry insiders, we feel well placed to pass on some information that we have gathered, and perhaps venture an opinion or two.
One of the questions that Mikey had was:
“How much money do I need to start trading?”
It just so happens that we have asked a number of different traders that exact question. And, as with so many of these things, the answer has usually come back with ‘it depends’. Or specifically “It depends on how much money you have”.
True? Yes. Helpful? No. I do not mean to to be ungrateful to the traders that have answered this question slightly ambiguously, as I say they are probably entirely right and all have provided us with invaluable insight.
However this really is a question that needs a precise answer - Mikey wants to know whether he needs to ‘work in a bar for a couple of years’ first and save up, or if he can dive in now with limited resources.
Fortunately, we have had some specific answers. Doc Holiday, the equities trader and sometime activist investor, gave us a very exact minimum figure: £5000.
He feels that if you don’t have at least £5000 then trading costs and inevitable losses will mount up too quickly and you won’t be able to make enough to make it worthwhile.
When we asked Brandon Turner of Intex Learn he said $50,000 - $100,000! But Brandon is a believer in full time trading, or at least very close to it. In other words you will need enough money to sustain some initial losses and have enough left to live off the remainder.
I have a slightly different answer: £500.
Yep, £500. I’m not being trite or flippant, I truly believe you can get into trading with such a small amount of money, possibly less.
You may be sceptical, so let me try and convince you. What are the reasons that people often think you should have larger amounts before starting to trade?
Common Arguments Against Having Small Trading Accounts
Trading costs will eat up your capital. This is true, if you are shares trading. Doc Holiday is exactly right that to make it worthwhile trading shares on a non-leveraged basis, £5000 is probably necessary.
The cheapest regular share dealing charge at Hargreaves Lansdowne is £5.95 but you have to trade at least 20 times a month to get it. Right there you’ve eaten the best part of £120 in the first month in costs…so yeah that isn’t going to work.
BUT.
The beauty of the internet age is that there are loads of ways to trade at a fraction of that cost. If you decide to trade forex or commodities you can spread bet at 25p a pip at many brokers, and the average spread on many of the major forex pairs is no more than 2 pips at good brokers. So you are paying 50p a trade. That gives you 500 trades not counting profit and loss. Plenty to learn the basics of trading! Some spread betting brokers (such as ETX Capital) offer even lower pounds-per-pip smallest bets if you trade through their MT4 account.
If you trade CFDs through a broker like XTB then you can trade a fraction of this size!
This leads me onto the next common argument:
You won’t be able to sustain a drawdown.
I.e. if you lose a few trades you will run out of money very quickly.
Not so! If you are spread betting the forex majors (which Mikey can as a UK resident, but the point stands for CFD trading in other countries) then you can get 25p a pip on, for instance EUR/USD.
If you are looking to day trade then the daily average range (ADR) on this pair is about 70 pips over the last 20 days (at the time of writing). A common benchmark for stop losses is 20-30% of the ADR.
So you will be looking at a stop loss around the 14 - 21 pip mark. Some may consider this quite a small stop, so let’s overestimate and go above the top end at 25 pips. A 25 pip loss at £0.25 per pip is a £6.25 loss. At this rate you could sustain 80 losses in a row before your account is gone. In other words a 1.25% risk per trade. By no means a figure that is outside the realm of sensible risk management.
All of these metrics are what is commonly touted as being the maximum you want to risk on any given trade. Some people say 2%, others 1% but we are in the ballpark.
You need ‘skin in the game’ to trade properly.
One of the most repeated phrases that we have heard since starting Two Blokes Trading is that mastering your trading psychology is the key to learning to trade. In order to learn to ‘trade without fear or greed’ then you need to practice with real money.
Trading a demo account, we are told, is just not the same. Some go so far as to to say that trading a small account is not the same either - if you don’t care if you lose it then when you move to an amount of money you do care about, you will be paralysed by greed, fear or both.
And I completely agree. A good cross reference would be poker - the really small money tables are characterised by very loose play because people are just there for fun, not to make real money. As you start to see £10, £50, £100 in the pot then play gets tighter - people are playing to not lose.
If you have £1,000,000 in the bank and you put £500 in a trading account then clearly you may as well be trading a demo account.
And to that extent ‘it depends on how much you have’ is true. You have to trade with an amount that you can afford to lose, but also an amount that is meaningful to you, that will hurt if you lose it. Not lose-your-home hurt but still something that you will notice.
I have no idea how much money Mikey has, but most 18 year olds on a gap year working in bars won’t have thousands in the bank. £500 is probably quite a lot of money. Losing it would hurt.
In my gap year I genuinely slept on building sites in Bangkok for a few nights because I totally ran out of cash. £500 would have been massive for me. (Probably to the point where trading it would have been, er, unwise!)
So, if you don’t have a lot of savings, but you could stump up £500 without risking missing your rent, or not eating, then that’s a good place to start. If you have savings, go higher, but if losing £500 hurts then you do have skin in the game and it is a perfectly acceptable place to start.
You need to have money to spend on research and analysis and trading tools.
Rubbish. At this stage you are trying to find your system and decide how you want to trade. You can get a very simple system and use whatever basic analysis your broker provides for free and you can get trading.
You can buy a book on Elliot Waves for under £20 or whatever. Babypips.com is totally free and goes to a relatively advanced level. There are loads of profitable traders we have spoken to who have never spent a penny on trader education and don’t use any premium tools.
Once you have a decent sized trading account and decide you want to take things to the next level then maybe you want to start paying for trading education. If you have £10,000 right now then spending £1000 on learning to trade might be a good idea for you.
You won’t be a ‘sophisticated investor’ if you only have £500.
I’ve never understood this. I think it is a regulatory thing but when you open a brokerage account they want to know how much you have in savings. It seems that if you have a lot that is cool and if you have a little you may not be a ‘sophisticated investor’...
This has trickled down to a lot of traders and people in the industry believing that if a youngster or indeed anyone without a small account wants to trade that they should be ‘wary’ of it. I get that if you have a million quid and lose ten grand you’ll be fine. But if you have two grand spare and lose £500 you will also be fine. Just don’t have two grand and lose ten grand!
Either way, being 60 and having loads in the bank from a career as a doctor doesn’t make you any more sophisticated than an 18 year old at the beginning of his working life, in my opinion. So, crack on.
The benefit to trading now with a small account: You only learn to trade by trading
We have read loads of books, done loads of online courses and spoken to loads of successful traders, but my learning curve is the steepest when I am in front of my trading screen, putting my money on the table and making profits and losses. You have to put in the ‘face time’ with your screen.
Actually trading and spending time with the markets is the best way to learn, we’ve been told that 100 times already in our short trading careers and it is proving 100% true for us. You have to make your own mistakes and work out what system you like. It also takes time to get a ‘feel’ for the markets.
Mikey asked us if he should get trading right away with a small amount or save up for a few years then trade a decent size account. In my opinion, for the reasons detailed above, there is no reason that he shouldn’t get trading right away even with a very small account.
The size of his bank balance is only a limiting factor if he truly has no money to lose whatsoever. If a £500 loss would hurt but he’d still have food and shelter then he should go for it! If he could find £1000 or more then do that, but as long as the loss would hurt but wouldn’t ruin his life then that is fine.
On the other hand, if Mikey spends the next two years saving up £5000 and in that time reads a hundred books, does all the free courses on the internet then he is still very very unlikely to be able to trade profitably on day one.
Only one of the traders that we have spoken to on the show has suggested to us that he made money right from the start. He spent about 5 years learning before going to a prop trading firm and trading for a job. Retail trading is a different ball game and everyone that is now profitable in this arena has told us that they first had to learn the ropes, that it was a process to becoming profitable.
Some made money right away and then lost it. They then started again and made more money.
Even if Mikey starts and blows up ten £500 accounts in the next two years he should still be able to save for another account (if he still wants to!). And crucially, he’ll have two years of experience!
If Mikey waits 2 years and saves £5000 he might then just blow the whole lot! Better to lose £500 than £5000 and better to spend two years trading than two years book learning before discovering the real thing is totally different!