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How Much Money Is Needed For Trading Emini S&P

By Lawrence Chan   on 2012 Oct 19 Fri 13:31:11

iStock_000000448195XSmallI have received this question so many times I guess I should post the answers here.

Answers? Yes. Not one answer but answers.

Learning To Trade Discretionarily

If you have no proper daytrading experience before, given the current overnight margin on 1 Emini S&P contract is about $4000 USD (it various among the brokerages), you probably need to burn through multiple $20,000 USD accounts before you will be able to trade profitably. By proper daytrading experience, I mean you have been trading other future contracts and have been reasonably profitable for some time already.

Remember the amount stated is on a per contract basis. That means if you are aggressive and like to trade 2 contracts at a time to start your trading career, then be prepared to burn through multiple $40,000 USD accounts instead.

Already Profitable Daytrading Some Other Markets

If you have some proper daytrading experience and is expanding into trading the Emini S&P, then you probably need to burn through one to two $20,000 USD accounts only.

Already Making Good Living Daytrading Some Other Markets

Then do not switch to trade Emini S&P. Especially if you are used to trade instruments with good follow-thru price actions (e.g. crude oil). Emini S&P will wreck your mind and mess up your trading on the other market as well. Be prepared to trade conservatively and expect to burn through at least one $20,000 account before you get used to the way Emini S&P behaves.

Have Swing Trading Experience In Other Markets

I’m sorry that does not count at all. Daytrading Emini S&P is a completely different ball game. You may not believe what I say here since I am just some nobody from the Internet, right? Well, in that case you may want to read my article on trading skill development which cited at least 3 scientific studies on retail day trader performance.

Account Size Minimum

Some brokerages have an account size minimum that once breached, you can no longer trade. If this threshold is higher than the margin requirement, you need to add the difference to the amount of money needed.

For example, a brokerage may have a $5,000 minimum balance policy. Even though their Emini S&P margin is just $4K, you still need $1K extra to hold just 1 contract. In this situation it is better to have $21K seed capital instead of $20K to start.

Daytrading Margin

Some brokerages offer daytrading margin rate to their clients. The margin can go as low as $300.

I strongly advice new traders to have enough money to cover the full margin as oppose to having just enough margin.

For example, having only $17000 vs. the recommended $20000 when daytrading margin is $1000 only with your brokerage should work fine in normal market conditions. However, when the market goes wild, brokerages who offer daytrading margin rate may choose to stop offering that suddenly and catch you off-guard and put you in a very bad situation. This has happened before during the financial crisis and it can happen again.

Think about the situation where your balance is down to $3.5K and you are long 1 contract with their $500 margin rate. Then the brokerage suddenly choose to raise their margin back to the normal rate of $4K. You are then immediately under margin and the brokerage can liquidate your position.

Starting With Smaller Amount

The question I hear most often right after I replied to the title question is, "Can I start with a smaller sum of money?" or "Would $5000 do?".

You get what I mean – you wanted to know if it is possible to learn trading emini S&P discretionarily with a budget of $5000.

The soul destroying answer is no.

I have seen countless number of posts in trading forums claiming that someone did it and it is so easy.

Well, can someone trade Emini S&P with just $5000 to cover both margin and buffer for losses and make a lot of money from it? Of course it is possible.

The real issue here is that those who can are either traders with a lot of experience already and/or pretty good at trading Emini S&P, or, they are at least borderline mechanical trader with a well defined trading model that is known to perform. Only rarely an inexperienced trader can survive the learning curve with a very small size trading account unless they get a lucky home run or a very lucky streak.

In normal situation, the chance of surviving the learning curve for an absolute beginner goes straight down to almost nothing with such small amount of seed trading capital.

My advice is to switch to some other markets that offer a better chance of survival comparing to Emini S&P.

Or, wait until you have save up enough money before you try your hands on it.

Expect To Burn Through Multiple Accounts

Notice that I said burning through multiple $20K accounts. The reason why losing $20K at a time is better than stuffing, say, $60K right from the beginning, is that each round of blowing out an account should have taught you something and in turn increases your chance of survival when you are trading the next $20K account.

If you put up $60K right from the beginning to learn trading, you may lose it all while learning just the first lesson that should have cost you only $20K.

Every time after you blow up a $20K account, you need to reflect on the reasons of your failure. Do not blame it on others. Do not associate the failure with pessimistic judgement either. Be objective.

Lessons like trading discipline learnt from blowing through an account is 10 times more likely to stick with you than reading a book on proper money management.

Trading Mechanically

Given that you have a stable trading model on hand and you know the historical backtesting results, the amount of money needed is,

Margin + 2 x Max Drawdown + Worst Loss

The interesting thing is that if your trading model is a good one, you would need a lot less amount of money to trade successfully comparing to those who try to trade discretionarily.

We Have Not Talked About The Details Yet

If you are new to trading and want an answer to the title question, please do yourself a favour and read my ebook Know Your Odds Before You Trade. It is free. It covers more than the answers I have listed here because trading is not just about the capital you need to open a trading account. For example, have you thought of the amount of money you need to survive for prolonged period of time while you are learning the skill?

Do yourself a favour by learning about all the issues you have to face first. I am not trying to discourage people from trying their hands on trading here. In fact I encourage people to learn the skill because of the way the world is heading is going to be very unforgiving to those who want do an honest job to just make a living.

So instead of going gung-ho cheerleading you into trading, I want you making informed decisions. Just face the challenge as it is with a prepared mind.

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