How much money do you need to start spread betting? [UPDATED]

 

[POST-ESMA RULES UPDATE]

On 1^st August 2018, the goalposts for spread betters moved.

This super-cheap way-in to the world of finance, got more expensive. It happened overnight, as new legislation came in.

The new rules were designed to make traders safer.

But many feared that it would really just exclude all but the rich. Another exercise in sharing the profits from wealth among the wealthy.

As is normally the case, the reality falls somewhere in the middle – with some benefits and some downsides.

Yes, you’ll need more cash in your account. But no, it’s not really more that you ‘should’ have been holding anyway. And, provided you’re smart about the kind of trading you’re doing – there’s no reason you can’t be very profitable with just a modest fund.

Are you feeling priced out?

If you’re getting on in age … with little funds … and an income that’s barely covering your outgoings …

You could be forgiven for thinking that trading is just not for you. Perhaps you should just give up on the idea?

And just accept your financial situation as it is?

The truth is that it’s exactly this kind of thinking that stops most people from trading.

It’s also this kind of thinking that stops people setting up their own businesses … or starting a new career path … or making any positive changes in their lives …

It’s disheartening to know that we’ll have to start right at the beginning, with tiny baby steps.

So, why bother at all?

Sure, you may have read about someone who’s made £500 in a single day from their trading strategy … but they’re trading with a £25,000 pot. Scale that down to a small fund, and you might have only made £10. What’s the point?

Well, that’s exactly what I’d like to show you here.

There’s good news. You’ll be surprised at how little it takes.

And what’ll surprise you more is that it doesn’t actually matter how much you have to start – really, it doesn’t. If you stick with these guidelines, you can achieve your financial goals just as well as some ‘hot shot’ with a big pot of gold to invest.

The practicalities of a small fund

The ‘Holy Grail’ most traders are looking for when they are picking a trading strategy is … profitability.

But, I’m afraid that’s not enough (especially if you have a small fund).

The smaller your fund, the more carefully you need to be when choosing a trading strategy. There will be some systems out there that, despite offering mouth-watering returns, just won’t work for you.

These are the criteria you need to watch for …

1. Low margin requirements

One of the main benefits of spread betting is that it allows us to profit from tiny moves in markets without actually having to buy huge swathes of a company’s stocks, or of a particular currency.

Rather than buying £10,000 of Australian dollars, we can still make comparable profits when we bet that the value of the Aussie dollar will move a fraction against Sterling. And we can do this for just a few £s outlay.

This is called leverage. But the rules of the deposit your broker requires for a leveraged trade changed in 2018, meaning you need more money tied up for one of these bets.

(If you’d like to get up-to-speed on how this works, you can check out our margined trading course HERE.)

To avoid having too much money tied up in these positions, there are some key things to consider:

• Look for strategies that only require you to have one trade open at a time. This will significantly reduce the risk of you running into problems with margin requirements. PLUS it makes is much simpler to manage.
• Margins are calculated as a percentage of the instrument you’re trading, so look to trade relatively small markets. Don’t mistake this for ‘obscure’ markets – which will be expensive to trade, with wide spreads, and (sometimes) erratic behaviour. What I mean here is avoiding big markets like Wall St or Hong Kong 50.
• Margin requirements are also a multiple of your stake size, so – if you’re scalping a few pips profit, but using a large stake, you could also find yourself requiring sizeable margin.

2. Minimum stake size

Different brokers set minimum stake sizes, and this can vary from one instrument to another.

Let’s say that you’re trading an instrument that has a minimum stake size of £1 per point. If your distance to the stop level is 50 points. That means a minimum risk per trade of £50. If you want to trade with a 3% risk, that means you’d need a fund size of over £1,600.

If you don’t have this much – then this strategy isn’t going to work for you. (Or, you’ll need to find another broker who’ll let you trade with a smaller stake.)

3. Diversity

I’ve already mentioned this point above when looking at margin requirements.

Diversity across our trades is a good thing – it balances our risk. However, it’s a form of insurance, and insurance always comes at a cost.

Some strategies require you to have several positions open at one time in order to balance your risk. This means that you’ll need to manage multiple trades, which will tie up more funds. Too many trades running (even at minimum stakes) with a small fund can lead to a margin call.

As long as you’re keeping risk low, you shouldn’t need to open multiple positions. Instead, look for strategies that don’t tie up too much money at a time.

4. Avoid big drawdowns

A drawdown is the size of a fall in your trading fund from its peak, following a ‘bad patch’. A drawdown isn’t great for any trader – but for a trader with a small fund, it can be fatal to your finances.

The problem is that big drawdowns often go hand-in-hand with some of the most profitable money-making systems – simply because, bigger risks tend to give us bigger potential profits. Don’t allow your head to be turned by these systems – those of us with a small fund need to look for more modest returns, but ones that are steady and more reliable.

Don’t worry – this doesn’t mean that we won’t come out ahead of the flashier ‘big money’ strategies. This is a long game – and we’ll be taking the straighter road.

And, when we do suffer drawdowns, with the new margin requirements, you could find that you’re struggling to place trades with your reduced fund size. In this instance, you may need to top-up funds.

When I talk about topping-up funds – I’m not suggesting that you turn your trading account into a financial black hole! What I do is allocate funds to a trading strategy – but I won’t load all that money into my account unless I have to. While new margin requirements have meant that I need to put more into the account that I used to – I really don’t like using my broker account to store any more money than I have to (I hate the idea of it sitting there in someone else’s bank!) Keep some back-up funds elsewhere that you know can be allocated to top-up if required.

The temptations of a small fund

When faced with the prospect of earning a tiny return from our tiny funds, the biggest temptation is to up our risk levels.

Instead of looking at our fund and working out how much we can earn, we instead focus on how much money we want to make … and work backwards from that.

This means staking too high…trading too often… And, usually, it means wiping out that small fund.

Many times I’ve heard traders say that they’ll risk more of their pot per trade, just until they’ve built up their fund to a reasonable level – then they’ll cut their risk. Chances are they’ll never get that far, because a few losses will have come along and decimated their account.

Risking £50 on a trade may not seem like a lot – but if your trading fund is just £500, then it’s TOO much. Just a handful of losses can wipe out your fund at that level. Keep risk sensible, around 2% of your fund.

The advantages of a small fund

How many times have you heard advice to “start small” … “don’t risk too much” …

One of the beauties of having a small trading fund is that you’re forced to “start small” – it’s what we all should do, but I talk to no end of traders who jumped into the markets with all their savings, only to wipe out thousands of pounds in the first few months.

If you have a modest trading fund – you HAVE to start small. And, as your fund grows in size, so too will your experience, and (hopefully) your success rate.

Plus, traders with a modest fund really understand the importance of NOT LOSING that money. Let’s say that Trader A has a fund of £25,000 to invest, but starts trading with just £500 of that fund. Meanwhile, Trader B has just £500 to invest in the same trading strategy.

You can be sure that Trader B will have a very different attitude to risk, and will guard that £500 ferociously. Your trading fund is the most precious commodity in your trading armory – the most important thing you can do as a trader is to protect it from losses. If that means sitting out of the market when others are jumping in – so be it.

Traders with tighter budgets understand this principle far better than those with deep pockets.

A small trading fund doesn’t need to be a disadvantage – it will teach you the best habits while you’re learning, so by the time you’re playing with the big bucks, you’ll be more disciplined, more accurate and in the best possible position to keep building that wealth.

And, the most powerful tool of all

The most powerful tool in trading is available to small and big funds alike – the simple process of re-investing our winnings.

There’s nothing clever or complicated about it – it just takes a little patience. If you always calculate your stakes as a percentage of your fund size, you’ll be naturally increasing it as your pot grows. That way, the paltry £10 you made in your first week of trading soon grows to £20 a week … and £50 … and more …

Yes, those numbers may seem small at first – but with a good win rate, they’ll quickly pick up.

If you’ve got kids, you’ll probably remember them taking their first steps … or learning to read.

Some find it easier than others … but they all start from the same place – falling over, repeatedly … or staring at those mystical shapes on the page and wondering what on earth you mean when you tell them it says, “the” …

But they keep at it with that dogged determination that kids are so good at, and before you know it, you’re worrying about what they’re reading … and where they’re running off to …

Kids just aren’t phased by the fact that they have to start at the beginning.

But as adults, we often see this as an insurmountable hurdle.

Yet, many of the most successful people on the planet have started out from very humble beginnings. How much money you have to start with is only a small part of what makes a trader successful. A trader could start out with a fund of £50,000 and wipe the lot out in the space of a year. Another trader could start out with £1,000, and by doubling that each year, have turned it into over £1 million in ten years.

The most important ingredients for long-term trading success are good money management, perseverance – and the simple decision you’ve made to use the small fund you have to work towards something bigger and better.

 

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