How Much Money Can I Make With Trading? What Account Size Do I Need To Start?

What account size do I need?

How much money can I make with trading?

First of all, let's clarify a common misunderstanding: You never risk your full account size. You always have a "catastrophic stop", and it is important to define the "ruin" before you start trading. Let's say you start with a $10,000 account, and you decide to stop trading if you lost $2,000. In this example you are "ruined" if your account decreases to $8,000. Though you invest $10,000, you only risk $2,000.

Back to the first question: "What account size do I need?"

The first factor is the margin required by the exchanges. The margin is the "security deposit" that you need to have in your account if you want to trade. This margin varies depending on the contract you want to trade, e.g. $3,938 for the e-mini S&P and $1,688 for the 30 year Treasury Bonds. Many brokers offer a 50% deposit? on this margin requirement if you daytrade, i.e. you open and close the position on the same day.

If your trading system requires trading 1 contract of the e-mini S&P, and you hold the position overnight, then you need at least $4,000 in your trading account.

The next factor is the expected drawdown. If you would only deposit $4,000 in your trading account, the first trade moves against you by more than $62, and the value of your account falls below the margin requirement of $3,938, then you receive a "margin call". Many electronic platforms automatically liquidate your open positions, and don't let you trade any longer. Therefore, you need to know the maximum drawdown of your trading system in the past. Let's say your trading system had a maximum drawdown of $2,200 in the past, then you need at least $6,200 in your trading account: $4,000 margin requirement plus $2,200 "buffer" for a possible drawdown. A safe approach is to double the maximum drawdown, because usually the worst drawdown is still to come.

Let's say that based on these calculations you decide to fund your account with $8,000, and you define your "ruin" as $6,000, i.e. you are willing to risk $2,000 for your trading adventure. How likely is it that you lose the $2,000 you are willing to risk?

Assuming you have a well tested and robust trading system that is likely to achieve similar results in the future as in the past, then you can use the log-normal distribution to calculate the risk of ruin. In the following example we will use the values of our e-mini S&P Trading System "Coin Collector".

The profit factor of this system is 1.42, i.e. for every dollar you lose you earn $1.42. The winning percentage is 70.5%, and the average winner is $129. Using these figures and the results of the past trades, you can calculate the "risk of ruin" for our system:

The probability of losing the whole $2,000 that you are willing to risk in the next 30 trades only is 1.4%. That's very low. If you decide to risk $3,000, then the probability of losing all the money in the next 30 trades decreases to 0.07%.

Let's talk about the next question: "How much money can I make"? You first need to calculate the average profit per trade by dividing the overall profit by the amount of trades you made. In our example the "Coin Collector" produces an average profit of $37. Next you need to multiply this number by the trading frequency. The "Coin Collector" produces in average three trading signals per day, i.e. you can expect $111 per day per contract.

An average week produces 15 trades and $555 profits. Deducting commissions and slippage you can expect $842 in two weeks (=30 trades).

If you catch a lucky streak you could even make more. So how likely is it to MAKE $2,000 within the next 30 trades? The probability of making $2,000 is 20.4%.

Trading is about risk and reward: you want to get a decent reward for your risk. In our example the probability of losing $2,000 is 1.4%, and the probability of making $2,000 is 20.4%. That's an excellent ratio!

Conclusion:

Your account size is determined by the margin requirement set by the exchanges and the "buffer" you should have for an expected drawdown.

The question "How much money can I make?" can be answered using the performance report of the past results of a trading system. Keep in mind that these figures are only valid if you developed a robust (and not a curve-fitted) trading system.

Using some statistical functions, you can then determine the "risk of ruin" and the probability of making a certain amount of money. That's what trading is all about: risk and reward.

The author, Markus Heitkoetter, is a recognized author on the subject of trading systems. His website, http://www.rockwelltrading.com, provides a wealth of informative articles and free information on how to achieve your financial goals through trading.

---

The Next Bull Market

We are already in it, but you can't see it.... Read More

Your Trading Objective: Why is that so Important?

You've decided to try your luck at trading stocks or... Read More

Why Investors Use Financial Planners

Do you have a financial planner? Does one of your... Read More

Making Outsized Returns in the Stock Market - Using the Dow Theory

The Dow TheoryCharles H. Dow... Read More

True Investment Road Maps

If you don't know where you are going any road... Read More

Stock Market Diversification

In one of my previous articles (Investing in the stock... Read More

Perfect Storm

Having lived aboard a sailboat for 2 years I was... Read More

Where Is The Beef?

Where is the beef? Or maybe it should be where... Read More

Patterns

The Law of Chaos is the theory of random unpredictable... Read More

Dont Spend Another Dollar on Business Opportunities Until You Read This

With an insecure job market, overworked employees, insufficient retirement savings... Read More

Cash Is A Position

I go to the Money Show every year to visit... Read More

Mousetrap

The spring-loaded rat catcher is the ultimate low-tech device invented... Read More

What the SEC Really Thinks About Mutual Funds!

Let's go into the details of why non-indexed mutual funds... Read More

Stock Market Course .... Day Trader Online Seminar ... Can You Generate Profits Trading from Home?

When it comes to stock market trading it PAYS to... Read More

Its A Duck

If it walks like a duck, quacks like a duck... Read More

Trading Education: The Best of Both Worlds!

I made my very first investment in the stock market... Read More

I Love To Lose Money

Well, not really. What I mean is I don't mind... Read More

Advantages and Disadvantages of Mutual Funds

Outlined below are some of the advantages and disadvantages of... Read More

Stock and Fund Dividends

When is a dividend not a dividend?The latest thing "conservative"... Read More

Catnip of the Stock Market

I have watched my cat play with a bag of... Read More

10 Tips For Creating Wealth From the Stock Market

1. Do not spread your money too thin.My friend has... Read More

China Syndrome

There has been great condemnation recently because China has been... Read More

When?

When will the stock market stop going down and start... Read More

Trading vs Investing

I often hear from people, "I don't trade. I invest.... Read More

How Eating Bitumen Made Me a Better Trader

Trading is a fascinating activity.There are so many layers to... Read More

Complacency Indicator

If you haven't heard of the technical indicator with the... Read More

Investment Discipline

One of the great "secrets" of successful people is discipline... Read More

Living Trust Investing: Income Considerations when the Grantor Dies

A common problem I often see when working with living... Read More

Prosperity

It has fallen upon the consumer to make our economy... Read More

Why Technical Indicators

The fight continues to rage among traders who use technical... Read More

Dispelling Illusions of the Stock Market

How can you dispel an illusion unless you look directly... Read More

Managing Investing and Stock Market Risks

Reduce your investing and stock market risks by:Setting your sights... Read More

12 Basic Stock Investing Rules Every Successful Investor Should Follow

There are many important things you need to know to... Read More