How Much Money Does A Day Trader Need To Successfully Day Trade Futures
I am often asked, just how much money does a day trader need to successfully day trade futures? Most people are usually surprised or confused when I tell them my take on this often asked question by new traders that are coming into the trading arena. Anyone that asks me about which markets are best for day trading will always hear me say “futures markets, of course!” While I actually think that trading stocks is often a little easier than most futures markets, there are so many other advantages to day trading futures that it quickly over shadows the slightly easier to trade stocks. After all, once you learn price action trading, or how to read a price chart, you can quickly learn to trade any market and any time frame just as easily.
The most important reason I prefer trading futures over stocks is the leverage and the need for much less trading capital, and this leads us right back to the original question of how much trading capital is actually needed. It takes a minimum account of $25,000.00 USD to maintain day trading status when day trading stocks, so at a minimum, anyone wanting to day trade stocks must maintain at least $25,000.00 in their trading account. A stock trader must also take into account that a 1000 shares of a $600.00 per share stock, would require a very large trading account, even if you were using margin money to lessen the blow. Even if you stuck to some of the best blue chip stocks, they are often priced close to $100 per share, so it still takes a large trading account to make any real sums of cash. There are also some additional rules when shorting stocks that often are not favorable to day traders, so yet another strike against stocks. In order to have enough funds to safely trade 1,000 shares of many stocks, a day trader will need a minimum of $75,000.00 to $100,000.00 USD. A large amount for any average person trying to break into the day trading world.
Now consider futures, particularly any of the US Equity Index Futures. These indexes all offer mini futures markets, which allow you to trade with leverage, while also greatly reducing the amount of funds needed to successfully day trade them. I often hear that futures are too dangerous, but in my opinion, they are no more dangerous than trading any market if you do not know what you are doing or if you don’t trade with sound trading principles. Yes, it’s true that you can buy and hold most stocks forever if necessary, while you can’t really do this for futures. However, for day traders, buying and holding is not not really an option, so stocks can be just as difficult to day trade as futures when you get down to the nuts and bolts of what day traders actually do each trading day.
When trading futures though, you don’t need that minimum account balance of $25,000.00 to maintain your day trader status, and you don’t have any special rules for shorting. You can sell or go short just as quickly and easily as you can buy or go long when trading futures. For these reasons alone, we think there are great advantages for trading futures over stocks. Also, just to clarify: Most of the horror stories that you hear about people losing more money than they have invested are no longer a major concern if you are day trading highly liquid futures in today’s electronic markets during regular trading hours. When it comes to trading capital requirements for futures, how much capital depends on your chart size and whether or not you are holding your trade over night. As day traders though, we never hold our trades over night, and by following this rule of exiting before the close each day, our futures margin requirements are greatly reduced, so futures day traders can trade with much smaller accounts than most traders might realize.
I know, I hear the stories too. I have read these same comments and stories myself, and you see them at many forums or in articles written by people that are truly supposed to know, and they all say you need $30,000.00 or $50,000.00 or maybe even $100,000.00 accounts to successfully trade futures markets. Well, you won’t hear that from me! I think it would be insane to keep that kind of capital in a day trading account in today’s volatile economy unless you were trading such large leverage that you actually needed that kind of cash available, which most of us retail traders are not doing. My rule is to keep three to four times your needed margin alone in your futures day trading account. As an example, if you trade 2 contracts per trade, and your margin is $500.00 per contract, then you need $1,000.00 margin whenever you enter a trade. Multiply that number by three or four and you will need only three or four thousand dollars of margin in a futures day trading account.
Understand, that these numbers work only if you are consistently making money and if you are consistently trading using our trading style and trading rules. If you are consistently losing, or if you are taking large or improper stops, or not using stops at all, then these numbers are not going to work for you. My goal is to keep my margin at around 3 times my margin requirements. Once a month or so, I will sweep out any excess funds and that will be my pay day or pay check for the month. As long as I’m consistently making money and following the rules, this strategy of three times my margin requirements has never let me down. My rule of thumb is that if you are not consistently making money as a day trader, that you must trade only on the simulator, so you don’t really need any margin requirements other than what you set on the simulator if you haven’t yet proven yourself to be able to read a price chart properly. I normally suggest that a trader set their simulator account at $5,000.00, and then be able to double or triple that amount before they can even consider going live.
If and when you can make money consistently every day and can double or triple your simulator account, then you are ready to trade singles only, because there will still be some emotional influence that will take some time to work through when first going to a live account trading real money. Start with trading singles, simply scalping out every trade. Shoot for a small daily goal and once you hit it, stop trading live for the day and go back to the simulator or just sit and watch prices after that. If you lose a few trades in a row, do the same. Stop trading or go back to the simulator until you get your confidence back again. Trading is a two step learning process. The first step is learning to read a price chart or learning our price action trading rules, and step two is getting past the emotional or mental blocks that come from fear and greed, which are truly what drive the markets. The slower you build your leverage or number of contracts, the better. The faster you build the leverage, the more mental errors and losing trades you will have, so keep this important piece in mind.
I have heard people say that trading on the simulator is a waste of time, but with today’s simulators that work on real time data feeds, it’s exactly the same as trading a real live account. And, if you can’t make money on a simulator, why risk real capital in a live account? Take it from me, learn on the simulator and prove you can do it there first! Obviously I agree that success on the simulator does not automatically transfer to a live trading account, but it at least proves you can make money withe the same tools and data feed as you will be using in a real account when the time comes. Learning to day trade is hard and most people that try fail, but it’s because they study a course or read a book or two and then just right into the live fire and quickly go broke before they ever really even understand what they are doing. Don’t make that mistake, get on the simulator first.
In closing, I hope you now have a better feel for the answer to the question of how much money does a day trader need to successfully day trade futures or even stocks for that matter. Forget the fear and horror stories, because day trading futures has never been easier or less dangerous than in today’s electronic markets. Do not take this to mean that there is no danger of losing money or that the journey to becoming profitable is even easy, because it is not! It takes hard work, and lot’s of time studying and putting into practice. If you have the aptitude and the desire, it can be learned, particularly if you have the right strategy, which we think we do here at PATs. Just remember, that the requirement of needing three to four times your margin requirements is only pertinent to day traders that are using our trading techniques which consist of lot’s of quick trades with small stops and very small losses when we are wrong. If you would like to learn how we use price action to day trade futures, you can find our price action trading manual at http://priceactiontradingsystem.com/pats-price-action-trading-manual.
You can find additional reading materials on this subject at the following links: