Trading for a Living – How Much Money do You Need?

The article “Trading for a Living – How Much Money do You Need?” first appeared on AlgoTrading101 blog.

How much money do you need for algorithmic trading? You need 20 times your yearly expenses to be a full-time trader. However, the minimum amount needed could be as low as $300, if you just want to test your ideas and learn.

As you can see, you need quite a lot in order to be a full-time trader. This could be more than a million bucks if you have high expenses.

Moreover, this assumes you are a profitable trader and can make 15% annually consistently (not an easy feat at all!).

Why do we need millions to be a full-time trader?

High effort, low dollar returns

Let’s say you start with $50K and you have great long-term performance. You make 15% per year for 10 years.

Having this performance will put you up there among the top 10% of hedge funds.

After these great 10 years, you will end up with slightly more than $200K.

That’s great but that’s an amount that can be achieved easier if you have a salary or run a small business.

Considering that the amount of effort to profitably trade a $500K and $50K is almost similar. You are leaving a lot of money on the table (you don’t say!)

Full-time traders need to eat too!

It is worse if trading is your only source of income.

In the above example, you’ll make $7.5K (15% of $50K) in profits on your first year. Even if you live in a developing country with low cost of living, you will still need all of that profits to get by.

You won’t be able to compound your money. If you spend $7.5K a year, you will have exactly… your original $50K after 10 years of fantastic performance.

A rule of thumb is that your trading capital needs to be 20 times your yearly expenses.

Let’s spin up some numbers. In a developed country, you might spend $50K a year if you are single and thrifty.

20 times of $50K is $1 million.

If you make 15% in your first year, you get $150K. After expenses, your portfolio is still up by $100K for the year.

Continue this path and your portfolio can compound nicely to $3 million in 10 years.

Of course, this number is just a guide. If you want an amount that is more than 20 times your expenses, go for it.

However, I don’t recommend an amount less than 20 times. Too little capital might induce you to take on too much risk just to pay the bills – which reduces your profitability in the long run.

Yes, I’m talking to you YOLO traders. You know who you are…

How much do I need if I trader other people’s money?

Okay, I’m not living under a rock. I know most of us didn’t start with $1 million of inheritance or lottery winnings.

Thus, we need to raise funds from others. This changes our math.

We need 100 times our yearly expenses if we are trading other people’s money.

If you are trading other people’s money, you do not get all of the profits.

You usually get about 20% of the profits, which is 5 times less if the trading capital is yours.

This means that we need 5 times more capital if we trade other people’s money.

You will need $5 million of other people’s money instead of $1 million if your yearly expenses are $50K.

To learn how to raise money for your trading, check out this article: How to Raise Capital for my Trading and How Much Will I Make?

Why is the minimum amount to get started so much lower

The minimum capital required is defined as the smallest amount required to run your strategy.

In other words, it is the amount that lets you trade your intended bet size.

Normally, the amount you want to bet is calculated using some kind of formula, AKA a position sizing formula. I could write 10 long blog posts on that so let’s not go into unnecessary details for now.

Here is a simple example. Imagine that your strategy requires you to buy 1% of your trading capital in Apple stock.

If your trading capital is $2000, you need to buy $20 of Apple stock. But one share of Apple stock is trading at $200 at the time of this writing.

Hence, $2000 is not enough. You need $20,000 to get started.

The reason I state that you need $300 to get started is because, in Forex trading, you are able to trade 0.01 standard lot (a small amount).

Thus, for most strategies, $300 would suffice. (p.s. I’m not advocating Forex trading).

For stock or bond trading, the minimum amount is much higher. Depending on your strategy, you could be looking at least $10K.

Related Questions

What is the point of trading if you trade $300 and earn pennies? The point is to learn, improve the strategy and build a track record! It is dangerous to risk a large amount of money on an unproven strategy. You need to validate your trading ideas first. Doing this builds a track record. It is essential to have a long and consistently profitable track record when you raise funds from others.

Can I start trading with no money? Yes. You can test your strategies using virtual money. Do treat virtual trading seriously like you would with real money. You will learn the fastest this way.

How much do I need for algorithmic trading software? Zero dollars. There are free software and coding languages like MetaTrader, Python, Quantconnect and Quantopian that let you test your trading ideas for free.

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