12.09.

2023, 10:52 TeachTrade - Technical Analysis and Market Commentary By Traders For Traders

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Your Location: Home > Trader Education > Capitalization and Expectation
April 18, 101
There’s no such thing, truly, as an under-capitalized trader.
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Theoretically, you could have as little as $1,000 to trade and
and receive all the be sufficiently capitalized assuming you bought and sold only
benefits of penny stocks.
TeachTrade
TRADER The problem with capitalization is when the money you have is
EDUCATION over-shadowed by your expectations. Put another way, if you
• The Ten trade too large or too aggressively for the amount of money you
Commandments have, you will run into trouble.
• Devising a Plan
• Risk and Reward How much money you risk on any given trade depends upon
• Law of Averaging many variables, including your own risk tolerance, your strategy
• Stop(s) and Go based on serious market analysis, and your track record. For
• Margins and some, you may want to risk only 1% of capital on any given
Leveraging trade. For others, the percentage may be closer to 5%. But at no
Capitalization and time is it wise to risk a significant portion of your capital on any
Expectation trade. In trader’s parlance, "Thou shalt not shoot thy whole wad."
• Trading with a
The amount of capital you have determines not only how you
System
trade, but what you trade. If you have $5,000, you will
• What Happens to
automatically be limited to smaller amounts stocks or shares of
John Q.
smaller companies. If you have $50,000 to trade, your options
Public's Order
broaden. When you speculate in stocks, you can buy shares
• OPTIONS - The
outright or on margin. But if you start margining your capital,
Fundamentals
you risk exposure automatically increases.
• Strategies
• Delta and the Futures are by definition leveraged instruments. That means you
Greeks only have to put up a small portion of capital to trade a contract.
• Psychological For example, the S&P contract has a face value of $250,000
Profile times whatever the value of the index. But the margin
• Trading Facts requirement for a full S&P contract (known as the S&P major) is
• Book Preview roughly $15,000. But profits and losses are predicated on the full
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12.09.2023, 10:52 TeachTrade - Technical Analysis and Market Commentary By Traders For Traders

OTHER value. That compounding due to leverage can eat up capital even
FEATURES on seemingly insignificant moves. Say, for example, you bought
• Put/Call NEW! one S&P major contract at 1306, and the market moved against
• Market Calls you to 1300, at which your protective sell stop was hit and your
• Stock Picks were out of the trade. Your loss would be $1,500 on that trade, a
• Bios seemingly small amount compared with the $250,000 face value
• The Weekender of the contract. But it represents 10% of the $15,000 margin that
NEW! you had to put up to trade that contract.
• My Account
Therefore, capitalization and expectations cannot be separated
from each other. Whatever your capitalization, you must tailor
your trading to it. You can’t start out with $10,000 and trade as if
you had $50,000, with the hopes of making profits quickly so
that you reach that $50,000 target. If you do, you will be
automatically taking on too much risk by exposing too much of
your capital in each trade. That kind of risk increases the
statistically probability of loss, which will reduce your capital.

Too many traders "blow up" because they did not trade in
proportion to their capital. A slow and steady approach, starting
off small and increasing the size of trades as capital and
experience increase, is the best way to work toward longevity in
these markets.

Another key point on capitalization: When you start trading, you

have to expect to lose more than you win. The North American
Securities Administrators Association reported that an estimated
70% of stock day traders will lose money. Other research shows
that beginning stock and futures day-traders last about three
months. The best way to improve your chances is to give
yourself the best tools possible.

That means trading with a professional’s dedication and not like

an amateur who trades on a lunch break or when the boss isn’t
looking. That means reviewing all your trades, especially the
losers, which hold valuable lessons as to why you made those
trades and what went wrong. (See "Analyze Your Trades"). You
must also diligently track and analyze the market, each and every
day, honing technical skills.

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12.09.2023, 10:52 TeachTrade - Technical Analysis and Market Commentary By Traders For Traders

Capitalization and expectations go hand-in-hand whether you’re

putting on your first trade or you’ve been trading for decades. As
capitalization increases, so may your expectations. But don’t
make the rookie mistake of putting them in reverse order. Raising
your expectations will not put one more penny in your trading
account. Rather, unrealistic expectations are a sure way to
undermine your discipline and sidetrack your strategy, which can
have disastrous results.

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