Choosing The Right Market

Now that we have discussed the basic hardware needed to begin trading and the types of markets available for the beginning day trader, it is time to choose a market to begin trading. This post will be provide a simple approach to choosing the right market for the individual retail trader. The most important factor in determining your options is of course the amount of seed capital you have access too. It is important to note that all capital used for trading should be treated as risk capital, that is money that has been set aside knowing that it could be entirely lost. Never trade with money that you cannot afford to lose. In order to begin day trading the Stock Market, you need $25,000 in order to do it efficiently. This is because of the Pattern Day Trader Rule. The PDT rule limits the number of times a trader can open and close a position within any given trading week. A trader cannot open and close a position within a 24 hour period more than 3 times per 5 day trading week. If this rule is not followed, the trader’s account will enter a 6 month lockout where he or she cannot trader. The only way to escape this rule is to have an account value of $25,000. Obviously, if you do not plan to trade this often then this is not an issue but you should at least be aware of it. These values are exactly the same if you wish to trade stock options; however, options traders usually have greater success with even larger account values of $50,000+. Trading futures requires less capital than stocks but is still a significant amount for the beginning trader. Most brokers will have an account minimum to open a futures trading account between $5,000 and $10,000. This is mostly necessary because opening 1 futures contract can cost between $700 and $7,000 depending on the commodity you trade. Therefore, have a higher account value is necessary to ensure traders aren’t taking on excessive risks. The final financial market is the Forex market where, in general, the rules are much looser. There is a large spread in the required account minimums between forex brokers. Brokers like Oanda have no account minimum effectively allowing a trader to open an account with $10. Brokers like Interactive Brokers require a $10,000 account minimum. The beginning trade should use a demo account to practice before risking real capital in the markets. However, with the low account minimums, the trader who wishes to get a true feeling for the live markets can open a very small account with real money just to practice. There is a large required capital spread between markets; but, deciding which market is right for you depends on your available capital and your appetite for risk. 

CFTC Required Rule 4.41:
Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

Hypothetical Performance Disclaimer: 
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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