A common misconception among those new to futures trading is that one must have a high net worth to participate. In truth, you do not need to be Warren Buffett or George Soros to open a futures trading account ― the only prerequisites are a few bucks and an entrepreneurial spirit.
How Much Money Do I Need To Open A Futures Trading Account?
The old adage “if you have to ask, you can’t afford it” applies to fueling a yacht but is categorically false when exploring the best way to open a futures trading account. In fact, a typical retail account may be opened for as little as $2,000.
While a $2,000 balance may be great for some, each person has a different set of resources and objectives. In practice, the amount of money you will need depends upon a few trade-related factors:
- Goals: The question of “How much money do I want to make?” is best answered in terms of available resources. Given adequate time, smaller account balances can be turned into large ones. However, if your goal is to make an annual six-figure salary right out of the gate, then a larger initial account balance is a necessity.
- Disposable Income: In the world of active trading, the phrase “risk capital” is frequently used. It is money put into harm’s way in the hopes of securing a profit. One’s available disposable income is a good source of risk capital in that, if losses do occur, they may be absorbed without negatively influencing one’s lifestyle.
- Strategies: Each trading strategy is designed to identify opportunity, risk, and reward. Some strategies require more money to implement than others. For instance, short-term intraday scalping approaches aim to keep single-trade losses small. On the other hand, a swing trading methodology assumes greater systemic risk exposure and overnight margin requirements. At the end of the day, your adopted strategy will largely dictate the capital needed to execute.
In a perfect world, everyone would enter the market with $1 million in risk capital and a robust strategy. Of course, this is simply not the case. However, there is a unique account balance for everyone ― a sort of “sweet spot” ― where a trader can pursue goals and safely implement strategy.
Is A Small Account Doomed To Fail?
The primary goal of any trader, institutional or retail, is to grow the account balance. From hedge fund managers to intraday scalpers, the idea is the same ― make money!
The question of whether or not small accounts are destined to fail is simply answered: No. One of the biggest advantages to being an active trader is that strategy design and assumed risk rely on personal preference. As long as risk is clearly defined within an adopted strategy, then the small-cap trader has a chance to succeed. This may be accomplished by taking into account the following considerations:
- Quantify Risk: A good rule of thumb is to not risk more than 3% of the account balance on any one trade. This ensures that a string of consecutive losses does not wipe out the account, effectively eliminating the “bad luck” factor. In practice, a 3% per trade risk on an account balance of $2,000 equals $60. While a $60 per trade risk is not ideal for all markets or strategies, it may fit into a reduced leverage approach aimed at products with minimal tick values.
- Modest Leverage: For small accounts, position sizing is key. As an example, the E-mini series of equities indices offer $500 intraday margins. This means that even with a minimum account balance of $2,000, one is able to take a position of 3 lots and have $500 left to cover drawdowns. Of course, this is not advisable due to the increased chance of premature position liquidation. Nonetheless, putting on one or two lots instead is plausible.
- Product Selection: The beauty of futures trading is that there is a product suitable for everyone. For smaller accounts, the E-minis or E-micros offer reduced tick sizes and margin requirements. Both inputs are ideal for operating within the constraints of limited capital.
If you are looking to make $50,000 this month and are going to open a futures trading account with $2,000, then the odds of success are dismal. However, given the proper risk profile, use of leverage, and ideal market, the chances of building your account equity over time increase exponentially. While grinding it out every day on a small scale may not be glamorous, it can turn out to be a worthwhile and potentially lucrative endeavor.
The First Step Is Opening An Account
Many trading legends began their journey into the marketplace with a little bit of money and a whole lot of determination. From Warren Buffett to Richard Dennis, a majority of the market wizards started out as small-cap traders.
Opening a trading account is the first step on your journey into the marketplace. For more information on how to open a futures trading account, contact the team at Daniels Trading today.