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Lets talk about Capitalization

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  • First Post: Jan 5, 2008 12:02am Jan 5, 2008 12:02am
Hello everyone

After reading countless posts in various areas, i have yet to find one that addresses the area of trading that people really need. How money does one need to really be able to trade the forex markets?

I am making this post in the trading room, because I really don't want to answer 5 billion flame posts about how I am trampling on people dreams, ad nausium.

I am a professional trader with greater than 5 million under management, and I have a few criteria that clients must meet before I will accept them as a client.

1. No small change. I don't need grandma and her life savings. IMO, if someone doesn't have at least $25000usd to put into the market, they really arent serious.

2. There has to be an understanding that forex isn't an "investment" it is a risk vehicle.

3. Beyond that, its a matter of qualifying them for which of my systems i put them into.

Im not saying this to be harsh, but so much of what im reading is almost delusional. Yes anything is possible, but putting 250usd into the forex market is akin to driving screws with a dvd player...will it work? sure... will it work well? not a chance.

Just looking for some other qualified opinions, I remain

Respectfully yours

Lawrence a.k.a The Bear
For me, it's not so much the starting balance that matters, it's their trade size (standard vs mini vs micro lots). Brokers have a way of luring the clueless fish with their low balance requirements.

$300 dollars with FXCM, bad (not dissing fxcm, just proving my point )

$300 dollars with Oanda, good
Working towards CME membership
I didn't start with alot of capital.....but what I have found is, if a person can make what live money they have grow consistantly in the forex, you don't need capital, capital comes and finds you.....I am about to put 3 million into play but it is investor money for the most part...I'm the IB and I share the profit.......What I lacked in capital, I made up for in working harder than anyone else........sometimes I wish I wasn't so blue collar.....but thats who and what I am..I better get comfortable with it....LOL
Do not underestimate what I will do with my $ 2000 account... !! I am as serious as you are about it...!!!

I guess I am just in a mood tonight... sorry and yes to OANDA !!

Quote
1. No small change. I don't need grandma and her life savings. IMO, if someone doesn't have at least $25000usd to put into the market, they really arent serious.

2. There has to be an understanding that forex isn't an "investment" it is a risk vehicle.

3. Beyond that, its a matter of qualifying them for which of my systems i put them into.

Im not saying this to be harsh, but so much of what im reading is almost delusional. Yes anything is possible, but putting 250usd into the forex market is akin to driving screws with a dvd player...will it work? sure... will it work well? not a chance.
There's no one correct answer, but this has the potential for a good discussion. Pretending a friend had asked this, a few questions that immediately jumped to mind were:
....1) Will you be trading this capital yourself or having someone trade it?
....2) If trading yourself, at what stage of your trading education are you?
....3) Are you planning to make regular withdrawals from your account?
....4) Whether 2k or 50k, how much of your total liquid assets does this represent?
....5) Do you understand the difference between trading and investing?

Now, to answer to the majority of the people on this forum:

1) For Beginners:
If you trade $250 on a mini account you will lose it.
If you trade $250 on a nano account you will have plenty of opportunity to learn. I believe this is okay. Many of the people here are trying to learn and don't have a lot of capital to risk. However they can learn on a small account and fund it gradually over time. They may do this over 4 or 5 years--positive results plus adding capital when they can. That combination could build a decent account without risking the family farm. Nobody said this would happen over night.

I'd like to expand on this reply later. Capitalization is the 2000lb. gorilla in the room. Another gorilla in another room is reasonable expectations.

Bill
...size makes all the difference - if only psychologically.

regards
daytrading
Enter Signature
I totally Agree..... $25,000 minimum if one is going to trade
( would prefer 35k+ ) and expect to earn a living from this. If mini's or nano lots are going to be used, no "daily wage" can be made, along with building an account, and paying for business expenses..... if all a person wants to do is "trade" as a hobby or a side line....maybe smaller will do.

Size does matter.....no matter what some chose to believe. If one still doesn't believe, just check on the accounts of the big dogs ( players )....hell most would laugh at 25k-35k !!

Don't scream :BUCKET SHOP: ! at every dealer that lets ya trade small....if your account is bush league, that is also the type of stadium you will play in.... and your "vig" will be higher for the right to play....

Good thread for discussion......

Fxj
Proper Prior Planning Prevents Piss Poor Performance
I agree here with all you said... but my $ 2000 account will be $ 20K in a couple of more years... even though that... still would be minimal for ANY kind of wage... but at that point the chances and time frame get better and shorter more quickly...

And I did not mean 2K to 20K by trading... but also by what I can put into it until then...

2K is learning money...

Quoting FxJarhead
I totally Agree..... $25,000 minimum if one is going to trade
( would prefer 35k+ ) and expect to earn a living from this. If mini's or nano lots are going to be used, no "daily wage" can be made, along with building an account, and paying for business expenses..... if all a person wants to do is "trade" as a hobby or a side line....maybe smaller will do.

Size does matter.....no matter what some chose to believe. If one still doesn't believe, just check on the accounts of the big dogs ( players )....hell most would laugh at 25k-35k !!

Don't scream :BUCKET SHOP: ! at every dealer that lets ya trade small....if your account is bush league, that is also the type of stadium you will play in.... and your "vig" will be higher for the right to play....

Good thread for discussion......

Fxj
Quoting FxJarhead
I totally Agree..... $25,000 minimum if one is going to trade
( would prefer 35k+ ) and expect to earn a living from this. If mini's or nano lots are going to be used, no "daily wage" can be made, along with building an account, and paying for business expenses..... if all a person wants to do is "trade" as a hobby or a side line....maybe smaller will do.

Size does matter.....no matter what some chose to believe. If one still doesn't believe, just check on the accounts of the big dogs ( players )....hell most would laugh at 25k-35k !!

Don't scream :BUCKET SHOP: ! at every dealer that lets ya trade small....if your account is bush league, that is also the type of stadium you will play in.... and your "vig" will be higher for the right to play....

Good thread for discussion......

Fxj
Hello FXJ--I knew you'd pounce on this one. Our first discussion was very similar.


The original question is a little broad. "How much money does one need to trade the forex markets?".
To trade the forex markets for:

....1) A sole source of income?
....2) To build an account over time?
....3) As part of a trading portfolio?
....4) As a learning experience?

Beartrade says he expects clients to be able to pony up 25k, which is probably a good figure as applied to his circumstance. 15 years ago I tried to open a managed investment account with Fidelity as part of my total plan (I'd already been investing with them for a decade). They refused my 20k, requiring 25k back then, and unless you had 100k they would only offer limited services. So I believe Beartrade's figure is in line, if not conservative. I'm guessing he won't accept even 25k if it's the client's total liquid assets. I'm also guessing he doesn't want to:
....a) be continuously fielding calls over a 1k account
....b) do a ton of clerical work over a 1k account
....c) have to go through the process of convincing someone what the reasonable expectation would be on a tiny managed account with conservative leverage.

For a sole source of income:
Personally I wouldn't want to trade 25k or even 50k for a living, unless I had other liquid assets or a working spouse with a very good job.. If you're experiencing a few bad months and tapping your account for everyday living expenses your account will dwindle quickly and cause all kinds of psychological havoc. If I chose to do this as my sole income, Id prefer to have at least 100k set aside exclusively for Forex. And that wouldn't have me entirely in my comfort zone. I like to live well--no Ramen noodles for me.

On the other hand for learning or building an account I think any amount is okay, as long as the account lets you size your positions using proper MM. If you are consistantly gaining, keep adding cash. Even if you have to work a few extra hours at your day job each week, or drive a less expensive car for a while, or whatever it takes to fund your account. I've been self-employed for almost 30 years and start-up money always had to come from somewhere; It never fell from the sky.

As part of an overall portfolio, maybe 10k in a mini-account, after you've had success with a tiny account and proven your method.

As far as mini and nano account and daily wages:

Why can't you trade a 50k mini-account? You Money Management rules might tell you that your ideal position size is 37 mini-lots. Some standard accounts wouldn't allow you to buy fractional lots (3.7 standard lots). On a standard account you would have to buy or sell 4 lots, thereby breaking your own rules, or you could buy or sell 3 lots and not be using your account size to it's fullest potential.

Happy New Year, Jon


Bill
Even at the living standards of a student and a very cheap flat you will have monthly outflows of 800-1000 EUR here in Germany(350-600 for flat - assuming a smaller town and not the middle of downtown Munich - and electricity and heating, plus internet, health insurance, food..).

Considering there's 12 month's in a year, that's 50% profit AFTER TAXES in a year on 25.000 EUR just to make 0 profit after expenses, i.e. not go anywhere.

Keeping in mind capital gains tax is around 25-30%(depending on things like church tax or not, deductions, several other limits etc) you would require even more to make it past the deductions into profitability.

So in short: to live the life of a student you'd need to be able to do well over 60% returns per year on 25k initial. Less than that and you start to lose your capitalization base and approach the zero/indebtation point.

Just to put things into perspective.

Also: you'd need the 25k in the trading account AND already enough in a seperate one to live the first year off of, obviously.

(Would make me ask "Are there many people who do over 60% NET profit per year consistently on average?", too)
Trust price. Know yourself.
IF someone was going to make a living solely from trading profits, I would say you need 100k.....and make 10% return per month...10k per month you can have at least some lifestyle.......but there are other income sources....get an IB agreement with your broker.....8.00 per standard lot is about average. if you make 10% on your own money, investors will come out of the wood work wanting you to trade thier money...get a series 3 and trade thiers, again with you as IB and sharing profit.......the key to leaving the J.O.B. behind is being consistantly profitable live......if you do that, making a living trading won't mean just making money with your own capital......
Quoting SeekingLight

church tax
Wtf is that?
Quoting Beartrade
I am making this post in the trading room, because I really don't want to answer 5 billion flame posts about how I am trampling on people dreams, ad nausium.
I don't think some here in the trading room understand this point unfortunately.
Quoting SunTrader
I don't think some here in the trading room understand this point unfortunately.
Tis a shame
Suntrader and JFX81:

How about weighing in on this. This is a potentially valuable thread and your input is valued and taken seriously. This is the only place this discussion stands a chance.


Thanks
Bill
Thanks to all of you for getting this off to an excellent start. I expect some flak bursts over this, because I'm attempting to talk about reality vs dreams in this thread.

A better way to state my original question is:
How much money does an individual need(psychologically) to be effective in the forex markets?

Bilflet hit the nail on the head in one of his posts. I truly don't want to field calls over a 1k, 5k, etc account. There is no gentle way to put this, so im going to pull the gloves off and say it outright. In my experience, the typical middle class person with some money to invest has ZERO understanding of what it takes to make big money or big returns. That requires big risk. So they check the online statements several times a day, and call at the slightest draw down. And they invariably end up withdrawing their funds because they are WAY WAY to defensive about their "Hard earned money".

Trading in risk vehicles such as forex or futures is NOT for that type of mindset. They are really better off in a different area, such as fixed return governmental instruments, or the equities market. Whereas, also in my experience, a person with enough liquidity, when I do have a draw draw down, will actually add more funds to the trading account.

What I'm really getting at here is class distinction that turns into a limitation. Money isn't a possession like the middle class is brought up to believe. Its merely a tool. And if used correctly, it will work for you instead of you having to guard it.

As far as using forex as a learning platform, Im sorry, i cant agree with most of you here. There is a massive difference between trading 250usd or even 2500usd, and trading 20k or more. The psychological differences alone would probably warrant another thread. YOU DO WHAT YOU TRAIN!!!

Respectfully yours

Lawrence a.k.a The Bear
Quoting billflet
Suntrader and JFX81:

How about weighing in on this. This is a potentially valuable thread and your input is valued and taken seriously. This is the only place this discussion stands a chance.


Thanks
Bill
Bill

The answer to the question completely depends upon individual's risk tolerances and expectations. If you are attempting to procure high returns then you may not need as much capital as someone looking for moderate returns type of thing.
ah Bear, I see.......naturally the more money a person has the greater the tolerance...this would be generally true........I was going to open up a managed account for friends and such a while back...minmum investment was going to be 10k.....I didn't care if 10 guys got together to make a 10k entity or whatever....but I wanted to only talk to 1 person or do the bookwork required for no less than a 10k investment...preferably more.....the accounts I'm working on now, are all MUCH more than that..........
Quoting Beartrade

A better way to state my original question is:
How much money does an individual need(psychologically) to be effective in the forex markets?

Bilflet hit the nail on the head in one of his posts. I truly don't want to field calls over a 1k, 5k, etc account. There is no gentle way to put this, so im going to pull the gloves off and say it outright. In my experience, the typical middle class person with some money to invest has ZERO understanding of what it takes to make big money or big returns. That requires big risk. So they check the online statements several times a day, and call at the slightest draw down. And they invariably end up withdrawing their funds because they are WAY WAY to defensive about their "Hard earned money".

Trading in risk vehicles such as forex or futures is NOT for that type of mindset. They are really better off in a different area, such as fixed return governmental instruments, or the equities market. Whereas, also in my experience, a person with enough liquidity, when I do have a draw draw down, will actually add more funds to the trading account.

What I'm really getting at here is class distinction that turns into a limitation. Money isn't a possession like the middle class is brought up to believe. Its merely a tool. And if used correctly, it will work for you instead of you having to guard it.
Beartrade,

Rephrasing the question did clarify. Your question is more about risk tolerance/appetite, how capitalization shapes it, and how those things combined will determine how you function in this type of market. And class distinction is a valid point. Now I get it, or at least I'm closer.

In the early eighties I read a book or an article, can't remember which, about this very thing. A stockbroker wrote about people scrimping and saving until they reached a significant figure. At that time, he stated, the significant figure was almost always ten thousand dollars. He went on to say that when most people grew their savings to that figure, they developed an urgency to "do something with it". That was the magic number that they felt could be quickly parlayed into financial freedom if entrusted to him. The author's point was, the very importance that the clients assigned to that figure was also the very thing that dissauded him from dealing with them.
He went on to say that this type of client would hound him endlessly about their returns, call him with tips from their barber, and demand more of his time than they deserved. All this caused undue stress for both parties.

And a quick story about class distinction causing limitation. A neighbor of mine was paralyzed from the waist down in an accident. Years later, he recieved a 700k settlement--more than he would have earned in a lifetime. I convinced him to put half into mutual funds and a broker convinced him to buy Boeing with the other half. He'd never even had a savings account. He watched the Boeing stock daily, hounding his broker and eventually whipsawing it away. He then started siphoning off his mutual funds to buy and sell more Boeing. In the end it was almost all lost. He started with exceptional capitalization, but his working class values wouldn't allow him to have a single down day on his Boeing stock (What? I lost $3200 today? Sell!) Any type of managed account was out of the question--only he could look after his own nestegg and he became his own undoing.

I've been referring to equities, but the point becomes all the more valid in Forex.

I'm certainly not banging on the undercapped here. I've already alluded to my own class distinction and how it influences me in my previous posts.

Excellent topic Beartrade.

Bill
obviously the optimal situation is that you would trade with your own capital. who the hell wants to deal with investors?? : most of us are in this game because we love to trade and DONT like dealing with people LOL.

but the catch is that you need a huge pile of money to make your returns a significant amount of money, so most of us unfortunately need investors to "get rich" (at least at first). so if zero investors is optimal, the next best thing is having one single investor, right? well, not exactly. if you rely on one investor he could pull the rug out from under your operation. as a general guideline, i say shoot to have as few investors as possible while keeping each investor to less than 25% of the total capital. under this model you would need AT LEAST 4 investors, and 6 or 7 would be more realistic since one investor would probably be significantly bigger than the others.
Relax and be happy.
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