The Dilemma of Undercapitalization

[tireg]

Hi all.. just noticed a huge thing with beginning trading (with real money) is undercapitalization. I've been studying trading strategies and have been developing my trading style with special attention to Risk:ROI-based position sizing and risk management over the past six months, and while I still have a long ways to go, I've been very tempted to start trading with real money. My results with paper trading these strategies on Investopedia.com's competitions has been pretty good.. trading varying accounts including a $10k one, a $25k one, two $100k ones, and a $1mil one. 100k and 1mil accounts are up roughly 50% and 30% respectively in the 6 months I've been going, but 10k one is a bit down (due to effect of commissions and drawdown as well as a little bit of overtrading for this size account) and the 25k one is about even. My strategy seems to be working, but only in the larger accounts... Prob is, I only have about $2k USD and as such I've determined that since I have not yet been able to make money on the $10k paper account, I would not be able to do well on the $2k account of real money, esp. with the added factor of realmoney psychology. BTW I've been position trading US stocks/options.

CLIFF NOTES:
Anyway to cut a long post short my question is, what do you guys feel is a good starting capital to succeed trading US stocks? US also has pattern-day trading rules as well as regulation T, so a minimum of $25,000 is needed to overcome these regulations to be able to trade unrestricted (ie exiting and entering as much as I'd like).

Since undercapitalization is a big factor in why many traders initially fail, (Commission per trade using Scottrade.com is $7, but at $2k capital, ends up being .7% PER TRADE just for commission... then there's slippage..) has anyone experienced this problem when you felt you were ready to start trading real money? What steps did you take to become sufficiently capitalized? (LOL yes. the obvious answer would be work and save til you have enough but I'm still in college and graduate next year so I'd have to postpone my REAL money trading at least a few years :/)

 

[tireg]

HOLY GRAIL:?!
Just found out about Interactive Brokers... http://www.interactivebrokers.com
Seems like for my type of trading... only $10/mo, and .005 per share or $1 min...
NIIIIICE.

$2k minimum to open.

 

[Rhody Trader]

Something to consider is trading options rather than the shares. You can do it with lower capitalization and at IB the commissions are quite workable ($1 per contract). Whether it makes sense, though, might depend on your strategy.

 

[jiggly]

have you thought about trading a different instrument?

you can trade forex with o a n d a and have full flexibility of exposure, you can risk as much of you capital as you like. so if you only want to risk 1% of you capital on any given trade you have the flexibility to do this.

tachnically speaking if you strategy works and is profitable it will work with any amount of capital if you opt for this scenario.

maybe you should think about changing markets or up you starting equity!

 

[tireg]

thx for the ideas guys. I have absolutely 0 experience with forex, but it does seem a great majority of the board's members do SB and forex and futures etc... and quite successfully. I do plan on studying them in the future so at least i'd be comfortable with how they operate and how to trade them, but all of my experience has been in stocks and options...

Preferably I'd like to stick with my current vehicle for now, which means yes I will be having to raise some more capital. IB's low commissions will sure help lower the steep learning curve though.
As far as options go, I'm still refining my strategy for them... you do get a lot more leverage and alot more volatility (had a few SNDK options purchased at $1.00 that skyrocketted 1100% to 12.00 when the stock broke out)... not sure how to set stops or take profits on them yet b/c they fluctuate so much you could get stopped out and then the next day it could rise etc... but I plan on doing some more research and forward testing my strat with my paper accounts.

Learned something though, which is with smaller accounts, you almost have to have more exposure to the market to get sufficient gains to build up... otherwise you're making very little per trade.. 60, 70, etc... but it all adds up I suppose.

 

[fildi101]

FWIW I swing trade using IB, and I've found when opening a new account or trading a new system, 27k is about the minimum for my style..

I trade lots of small positions, with a maximum loss R of around 80-90 dollars, and an average losing trade of 50 dollars. I take positions worth 5% of NLV, and will generally hold around 20-30 of these at any given time.

As account equity moves up to 30k, I increase positions sizes as a percentage of NLV up to 15% (the maximum I can manage without hitting margin requirements, given my system and the number of positions it normally trades.).

if I'm losing, and and start sinking towards 25k, I'll reduce size to as low as 3% or NLV (i.e. under $800 worth of stock),

I've tried to implement the volatility based stop losses, but in practice it hasn't worked for me since it can make me take unusually large positions in low volitlity stocks which can mess up my margin planning.

to be fair though, my system allows for tightish stops since if stopped out I'm normally looking for a new entry the following day. often I will take 4 or 5 small losses before I catch a move.. sometimes I get lucky first time.. overall it's working though.. (so far!).

I guess it works for me because I place so many trades a day, with each being so small, that it doesn't matter if I only make $500 dollars profit on a given stock per year, if I'm doing that with 500 stocks.

 

[Rhody Trader]

I take positions worth 5% of NLV, and will generally hold around 20-30 of these at any given time.

Do I read that correctly to imply that at any given time you have 100%-150% of your account in stock positions?

 

[fildi101]

Do I read that correctly to imply that at any given time you have 100%-150% of your account in stock positions?

yes.. thats right.Actually it can get up to 350% (within my 4.1 IB margin), but it tends to be somewhere between 100 and 200%. Most of the time it's a fairly even mix of long a short positions, but sometimes it skews one way or another.

with this particualar system, trading the nas 100 stocks, I've found I can go up to 15% on NLV before I really run a risk of hitting my margin limit..

I'll vary the percentage dependent on market condition, and how far above the 25k daytrading limit my NLV is. (not that i intentionally day trade, but i often enter and get stopped out on the same day.)

This account is my income account.I try to live of the proceeds this one only, and generally each month I try to take out a couple of thousand, so it's often in the 26-28k area..

this is my current size chart, based on NLV

25,500+ 3%
25,600+ 4%
25,700+ 5%
25,800+ 6%
25,900+ 7%
25,900+ 8%
26,000+ 9%
26,250+ 10%
26,500+ 11%
27,000+ 12%
27,500+ 13%
28,000+ 14%
29,000+ 15%

at 3%, given the stops I use, my biggest losing trade are 20-30 dollars.. Unfortunately, as chance would have it, and my system has been generating buy long signals for the last week or so, I've been long through most of the correction... on average I lost about 100 dollars account value per day last week, and had about 15 positons entered and stopped out. yesterday I was up 78.. today im up 232 so far. (today's new position orders were all 10% NLV... one one filled so far, PETM long at 26.33, 143 shares (up 21 dollars on that one.. woo!)


it average out between 0.5 and 1% a day, which I can live on. I run other similar systems on the S&P500 in other accounts for capital growth..

 

[rog1111]

you only pay $10 pm if you generate less than $30 commissions a month, otherwise the non-professional data bundle is free

rog1111

HOLY GRAIL:?!
Just found out about Interactive Brokers... http://www.interactivebrokers.com
Seems like for my type of trading... only $10/mo, and .005 per share or $1 min...
NIIIIICE.

$2k minimum to open.

 

[Pat494]

tireg
As a beginner I would seriously suggest concentrating your efforts on say the S&P 500, while you are learning. If one company goes belly - up, it barely affects such a big index. Throwing huge amounts of money at the problem is more for politicians to fix a problem. It is a recipe for disaster in this game especially for beginners.
Again learn to walk before you run. For just a few hundred dollars you can open a spreadbet account and test out your strategy and have fun. There really is a huge pot of gold at the end of this rainbow it's just a matter of getting there intact ...............