You don’t have a ton of money to spare.
Perhaps you’ve just started working.
Or maybe you’re still studying.
But you’re wondering…
Can I start trading with $1000?
The answer is, yes and no. It depends on the instruments you’re trying to trade.
In this post, I’ll share with you the financial instruments which are feasible to trade with a $1000 account and those which are not.
But first, let’s understand what trading is all about…
What is trading?
Trading refers to the buying and selling of financial securities, in an attempt to earn a profit over time.
The various types of trading are:
Day trading – traders who seek to capture intraday volatility, typically closing their trades within a day.
Swing trading – traders who seek to capture swings in the market, typically holding their trades for few days to weeks.
Position trading – traders who seek to capture trends in the market, typically holding trades for weeks to months.
In order to be profitable, you need to an edge in the markets and allows the law of large number to work in your favor.
You’re probably wondering, what is an edge?
The elusive edge traders are talking about
An edge is when you have a set of trading rules that yields a positive expectancy over time.
Expectancy can be defined as:
(Winning % * Average win) – (Losing % * Average loss) – (Commission + slippage)
If you have a positive expectancy after 100 trades, then you possibly have an edge in the markets.
Having an edge alone is not enough.
You also need to allow the law of large number to work in your favor.
What is that exactly?
The law of large number and why it matters
The law of large numbers is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value and will tend to become closer as more trials are performed. – Probability Theory
In other words, your trading results are random in the short run but will be closer to your expected value in the long run.
Even if you have an edge in the markets, you can expect to lose over the next 10 trades.
But after 100 trades or more you can expect to be close to your positive expectancy.
Toss your coin 10 times and check how many percent of the time it comes up head or tail.
Now toss your coin 100 times and check how many percent of the time it comes up head or tail.
Do this simple exercise and you’d understand what the law of large number is all about.
Now here comes the important part…
Proper risk management so you don’t blow up your account
Now that you’ve realized your trading results are random in the short run, how does this impact your trading?
This means you will encounter losing streaks. And the last thing you want is to empty your trading account during a losing streak.
Looking at the risk of ruin table, if you lose 50% of your trading capital, you need to make back 100% just to break even.
So how do you prevent the risk of ruin?
Risk no more than 1% of your account on each trade.
Here’s an example:
If you have $1000 account, this means you cannot lose more than $10 on each trade.
Because 1% of $1000 = $10
Now with only $10 to risk per trade, what can you trade?
Which financial instruments can you trade?
Following the 1% rule will prevent your risk of ruin.
But given a $1000 account size, it reduces your option to trade different financial instruments.
Minimum size: 100 shares
Transaction cost: $50 per round trip (round trip means buy and sell)
The transaction cost itself is more than your risk per trade. Recall you can only risk $10 per trade.
Your transaction costs eat up 5% of your return before you’ve even started trading. And if you’re making 40 trades per year, you need a return of 200% just to break even.
Clearly trading stocks is not feasible.
Minimum size: 1 lot
Transaction cost: $10 per round trip
Your transaction costs eat up 1% of your return before you’ve even started trading. And if you’re making 40 trades per year, you need a return of 40% just to break even.
Clearly, trading futures is not feasible either.
Minimum size: 1000 units
Transaction cost: Average 3 pips (which is about 30 cents)
Now you’re onto something.
Your transaction cost is now a fraction of your risk per trade.
Your trade requires a stop loss of 50 pips. Since each pip is worth 10 cents, this equates to a risk of $5.
Adding transaction cost…
…your total risk is $5 + 30 cents = $5.3 (This amount is lower than the $10 risk per trade we set earlier)
Trading Forex is feasible with a $1000 account.
If you want to know which instruments you can trade safely, just do this:
1. Calculate how much you will lose if you get stopped out of your trade
2. Calculate your transaction cost
Add 1 & 2 together, if it’s below 1% of your trading account, the instrument is feasible to trade.
Now you may wonder:
How much can I turn $1000 into?
This is the truth…
The reality of trading is this…
You need money to make money.
Averaging 15% return a year:
$1000 account will make you $150.
$10,000 account will make you $1500.
$100,000 account will make you $15,000.
$1m account will make you $150,000.
But I’ve heard stories of traders turning $1000 into $100,000…
It’s possible. But they conveniently forget to tell you the number of trading accounts they blow up along the way.
Trading is more than just random buying/selling.
If you want to be a consistently profitable trader, you must understand what is your edge, and how the law of large number works.
You will encounter losing streaks, and only proper risk management will prevent the risk of ruin.
A guideline is to risk no more than 1% of your account on each trade.
But if you have $1000, only the Forex market is feasible to trade, and still follow proper risk management.
The other markets will incur a higher transaction cost and the minimum size is too large relative to your $1000 account.
So, what else can you trade with a $1000 account?
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