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Are you a small trader?
If you trade commodities, this is a formal term: You are a small trader if your positions are below the required reporting levels set by the CFTC and individual exchanges.
When it comes to the stock exchange, there is no widely accepted definition of what is a small trader. However, the market has clear (and hard) rules that will limit your activity if you are small:
Rules of the game
Almost all brokers will require a minimum amount to open an account
Most brokers will require you a minimum amount to start a trade
All brokers will require a minimum of US$ 2,000 to open a margin account
An active investor should above US$ 25,000 to avoid the Pattern Day Trader (PDT) rule
The first two rules are becoming more flexible nowadays, due to the intense competition between brokers. But the last two rules are actually government regulations, so it won’t necessarily disappear in the short term due to the market forces. In practical terms, the smaller you are, the more restricted is your activity.
If you fall below US$ 25,000, then you cannot have the luxury of having four stops off triggered within a five-day period (PDT rule)… ergo, you cannot diversify that much.
If you fall below the US$ 5,000, your maneuver capability is reduced and, more important, you are near to the death limit.
If you hit the US$ 2,000, then is a game over, as your maneuver capability is almost zero… unless you inject more money, and do exactly the opposite you probably planned to do when started investing in the stock exchange.
True: there are some other very active investments that you can play below the US$ 25,000 –like commodity futures– but they are more risky than stocks and options.
Small trader definition
We will assume a simple definition for small trader: A trader or investor whose capital is below the PDT limit (US$ 25,000).
Now, what is the small trader typical profile? Normally, he has a regular day job. He cannot be a full day trader, because its capital is not enough to produce capital gains to have a regular income, to not talk about the resources that a nowadays investor must have to play the game: computer, internet access, specialize software, training literature, etc.
Having a day job impose a severe restriction. You cannot be watching the market to make decisions. So, in this case, a responsible small investor playing the markets will be doing it as a delayed game, not online. As we will see, that handicap, properly managed, can become a huge advantage.
Normally, a small trader starts with a tiny capital, slightly superior to the minimum required by the broker agent. The initial knowledge of market rules is very narrow, and therefore the risks are very high. The beginner is very influenceable, and any mistake is painfully paid. The statistics indicates that 90% of the small traders are gone before two years of trading.
To have a chance in this game, we recommend to start with an account of US$ 5,000. Please avoid borrowing money for this endeavour. This should be money that you can afford to lose without a major disruption in your financial plans. Don’t use for this your savings for a home or your kid’s college tuition.
Of course, stop being a small trader, by playing the rules of the market. You should initially target to growth above the US 25,000 and keep at least that capital work to start producing the regular income to allow you living from the market. This will remove the most important restriction that can affect your market tactics.
But, beware, this is just an initial target. To be a full time trader and live from your capital gains you will need a capital above of US$ 100,000 to have a comfortable cushion. The good news is that going from US$ 25,000 to US$ 100,00 is much easier that going from US$ 5,000 to US$ 25,000, due to the exponential nature of the markets game.
And in US$ 100,000 you are still too little to worry about moving the markets. That problem is real when you handle a seven figure capital. But… that is a pleasant problem to have, don’t you think?
Here is an interesting paradox: By definition, a small trader is an person willing to… stop being that!
Welcome to The Small Trader. Check around and you will find useful information for this endenvour.