By: Sterling Terrell
So you want to be a trader? Or, you want to maybe start a proprietary trading firm?
First, the organization type that you choose (DBA, S-Corp, Corporation, Partnership, etc.), is just a question of those participating in the venture, and the liability that each person is willing to assume. Talk with a lawyer and CPA about these issues.
After that, your question might be the common: How much do you need to start proprietary trading?
The answer depends on if you trying to trade.
Or, if you trying to trade to replace X income.
To replace X in income the formula is easy.
If you need $100,000 per year to make it work, you just need to know what your average return will be.
If it is 12%, you need $833,333 to begin trading (833,333/.12). Some years you will have extra cash and some years you will eat into your principal – but it should work overall.
If you just want to trade, the answer is: It depends.
It depends on what you want to trade.
This is especially true if you are going to trade by Expected Value.
Before each trade is begun, you need to know your potential risk for on a particular trade: What are you willing to lose?
This is where volatility comes into it. For instance, you can’t say I am only willing to loose 10 points on a cocoa trade. Cocoa can easily move up and down 40 to 50 points in one day.
I look at the Average True Range over the last so many days.
If the Average True Range for cocoa over the last ____ days is 50 points, your stops are going to be around 50 points – and you are going to be risking $500 per cocoa trade.
And then, to keep the amount you are willing to lose per trade to 1% of your equity, you are going to need $50,000 to begin this trading.
See how we worked backward to get the equity needed?
There is no set amount needed to trade – it is just dependent on your circumstances.
Just go for it.