Adequate Capital to Trade

We need to ensure that we have enough capital to trade. Trading with insufficient funds makes it hard to succeed because it is impossible to set good risk parameters when we don’t have money. It becomes a norm to put on positions that are too large when we are undercapitalized. Some small traders feel that if they have enough to make a trade, then it means that they are properly capitalized. However, the fact is we have enough capital to put on a trade doesn’t mean that we are capitalized enough to do it. Undercapitalized people end up risking much more than they should, and it takes only a few mistakes to get them in trouble.

Table 1 shows four different combinations of account balance and risk parameter to be used in Table 2, in order to simulate the impact of account balance and risk parameter to profit/loss on a standard account.

Combination

Risk Parameter (%)

Account Balance (USD)

A

2

15,000

B

5

15,000

C

2

50,000

D

2

100,000

Table 1: Four different combinations used in Table 2.

As clearly shown in Table 2, if you have USD15,000 in your account balance, using 2% risk may not give you a sound return. To increase the return, you have to increase risk parameter to 5% which I personally felt that 5% is too high. If your capital is similar to C and D, you only risk 2% of your account balance then you can comfortably gain USD6,757 and USD13,806. In short, if you have adequate capital, your risk parameter per trade can be much lower.

Pair

Dir.

Date

Buy

Sell

Pip Value

S/L (ATR)

Position Size

P/L

A

B

C

D

A

B

C

D

AUD/NZD

LONG

8/30/2010

1.26984

 

12.69

186.2

0.1

0.3

0.4

0.8

352

1057

1409

2818

10/4/2010

 

1.29700

12.97

USD/JPY

LONG

9/16/2010

85.292

 

11.72

125.2

0.2

0.5

0.6

1.3

-279

-697

-837

-1813

9/24/2010

 

84.118

11.88

GBP/JPY

LONG

9/24/2010

133.422

 

7.49

295.7

0.1

0.3

0.4

0.9

-227

-680

-906

-2039

10/7/2010

 

130.464

7.66

EUR/CAD

LONG

9/27/2010

1.38682

 

7.21

329.6

0.1

0.3

0.4

0.8

69

207

276

553

10/4/2010

 

1.39647

7.16

EUR/GBP

LONG

9/28/2010

0.85549

 

8.55

142.1

0.2

0.6

0.8

1.6

161

484

646

1291

10/4/2010

 

0.86483

8.64

EUR/JPY

LONG

9/28/2010

113.855

 

8.78

174.4

0.1

0.4

0.6

1.3

63

253

379

821

10/7/2010

 

114.579

8.72

GBP/USD

LONG

9/16/2010

1.56149

 

10

252.5

0.1

0.2

0.3

0.7

322

644

966

2253

10/8/2010

 

1.59368

EUR/USD

LONG

9/16/2010

1.29906

 

10

227.3

0.1

0.3

0.4

0.8

933

2800

3734

7468

10/8/2010

 

1.39241

EUR/JPY

LONG

9/16/2010

110.846

 

9.02

226.6

0.1

0.3

0.4

0.9

273

818

1091

2454

10/8/2010

 

113.955

8.77

Total

 

 

 

 

 

 

 

 

 

 

1668

4886

6757

13806

Table 2: Impact of capital to risk parameter.

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