How To Determine What Account Size You Should Start With

Day trading can be rewarding but difficult, and most traders fail because they cannot control their emotions or are unable to develop an attractive mindset.

When most people first jump into day trading, they assume that it is only necessary to formulate an excellent trading strategy and analysis.

After that, they just need to come to the trading market every day, trade with their strategies, and the market is going to start earning money into their account.

Unfortunately, as any professional trader knows, it’s not that easy. There are many traders with excellent trading strategies and systems, yet they regularly suffer losses instead of reaping profits.

This article is for those who are interested in the stock market and day trading, as well as those who want to know how to determine what content size let’s start with.

But before we go any further, let’s first talk a little bit about day trading.

What is day trading?

Day trading is a form of market speculation in which those involved constantly buy and sell stocks or other financial securities, then sell them within the same day to make short-term profits.

By the end of the trading day, the trader will have abandoned all his positions and made either a profit or a loss.

A day trading investment approach is completely different from a long-term investment in which an investor holds stocks or other securities in the hope that they will increase in value over time.

By opening and closing their positions within the same day, day traders eliminate the risk of explosive sudden moves.

Day Trading Capital

Not every day a trader will have the same capital when it starts. The amount of money you have (the size of your trading capital) will determine the position with which you can enter the market.
The position size is the amount of money you trade with.

The bigger the position, the more you will earn if the trade wins. But this also means you can suffer more losses.

This is why it is so important to determine at what business size you need to start, because you can protect your capital from loss of trades and stay within the right limits of money management.

Determining what business size you need to start with

If you are new to daily trading, you have no business starting with real money until you have first demonstrated that you can realize profits in a trading simulator.

The next step should be to understand the concept of making more money than you lose (profit-loss ratio).

Most traders end up trading with a negative profit-loss ratio without realizing it, which means their average losses are often two or even three times greater than their average profit. This is an expensive metric to win and profit from.

Therefore, we tell our students that it is best to keep access and risk no more than 1-2% of your account every day when you start trading.

While you risk 1% per day, your goal should be around 2% to earn your account every day.

This is also consistent with our minimum profit-loss ratio, which is to do at least twice as much as you risk with a 2: 1 profit-loss ratio.

For example: If you have a $ 5,000 account, and you risk 1% of your account per day, that would be $ 50. This means you risk $ 50 to earn $ 100.

This could mean that you place a trade of 500 shares at $ 3.00 per share (total cost is $ 1500)

If the price drops more than 10 cents, you will hit the maximum risk you want to take. (0.10 X 500 shares = $ 50)

For this trade to be in line with our standard trading plan, you will then have to accept a reasonable expectation based on the layout, i.e. technicality and momentum that the price will rationally reach $ 5.20, giving you a risky profit target of making $ 100 (0.20 X 500 shares = $ 100) while only risking $ 50 (0.10 X 500 shares = $ 50)

Based on about 250 business days a year, if you aim to profit $ 50K a year before taxes, you would need an average of about $ 200 a day. From there, you can then determine that you would like to start at least a $ 10k trading account. This would be an ideal scenario, just a baseline to start your calculations.

It is possible to take more risks with a business and start with a smaller account. But with that you run the risk of emptying your account during downloads.

Don’t forget the PDT rule

Another important thing to remember is the Pattern Day Trader (PDT) rule, which requires traders to have an account balance of $ 25,000 or more per day to trade more than 3 times in a 5-day period.

Executing 3-5 trades per day per week earns you “template trader status” and you are subject to the minimum account balance of $ 25K. Day traders are advised to start with over $ 25K to have a buffer above the minimum requirement.
If you let your account fall below $ 25,000, your broker will not allow you to perform any day trading until you fund your account to more than $ 25K.

However, if you don’t need the $ 25,000 needed to fund a trading account, there are some international brokerage firms that do not comply with the PDT rule. You can sign up with them and trade daily in a margin account with a minimum $ 500 balance.

These brokers can be a great choice to trade while you are building your account, but are not usually preferred platforms to always stay due to higher fees. If you are starting out, you can also create a small account by trading with a money account at a US broker.

Bottom Line

Being a day trader requires possessing quick decision-making skills and knowledge. By improving and maintaining your risk management plans and trading strategies, you can easily achieve consistency during day trading stocks or other financial markets.

Emotions are one of the main problems of beginning day traders, including those who have already decided what size of business they should start with.

It can be heartbreaking to accept losses and adhere to your daily trading strategies and rules. But it’s important to remember that those who do their business based on logic rather than emotions like greed or fear are more likely to become successful traders.