If you spend enough time on the Darwinex website, you are bound to see something about “the peanut problem” or “trade peanuts, make peanuts”. This mantra places emphasis on how small capital prevents traders from getting the rewards they deserve from their trading. So, is this really true or is it just all marketing speak? Does little capital limit forex trading success?
Unfortunately, yes. Small capital can make your trading career a failure even when you have the best trading strategies. You will disagree with this statement when you look at the beautiful excel sheets showing how you can compound $500 into $50,000 in the next two years. Let us know in the comments if you still disagree at the end of this blog post!
What Qualifies as Trading Success for You?
As with everything else in life, trading goals will differ from one individual to another. For example, a year that ends with a $20,000 profit will most likely be regarded a success by a private retail trader in the developing world but is it enough for a professional trader with offices and staff on the payroll in the same country? How about a retail trader in a developed country? You can see the picture now. So, before you proceed further, make an estimate of how much you need to make in a year for it to count as a successful trading year.
For many sensible traders, making 100% of their trading capital at the end of a year is an insane return. They will bite your hands off, if you offer that at the start of each year. Unfortunately, even this level of returns will amount to little if you have a trading account with $500. Even with a $10,000 account, you need to be living in a developing country for it to make sense.
100% returns over a year starts to make sense wherever you may live if your trading capital is at least $50,000. How many traders have such an account?
You might be thinking, “Yes I have $5,000, but I can compound it and make over 1000% by the end of a year”. Well, good luck with that!
This blog post shows that most professional traders, including popular hedge funds, are happy to make 20% of their capital a year, so you need some dose of realism as you punch in the numbers in your excel.
So, when you have mapped out how much money qualifies as trading success for you, find out if you can get that sum by making 100% of your trading capital a year. If you can’t, you are trading with small money.
How will your Trading Capital Impact Your Trading?
There are many reasons why forex traders fail. However, unrealistic expectations (greed) and over leveraging are usually top of the pile. When you have wild expectations from your trading capital, you will trade larger/unrealistic position sizes to reach those expectations.
The snowball effect will lead to closing trades too quickly, setting tight stop losses or even deploying dangerous techniques like Martingale to recover losses. In our experience, exhibiting all or some of these habits never ends well.
On the other hand, an adequately capitalised trader who takes responsible risks in line with his trading strategy will trade with a mental state that will help him avoid rash decisions and stick to his trading strategy.
This will, in turn, lead him to meet his yearly profit targets or even surpass them. When he doesn’t meet the objectives, you can be almost certain that he will end the trading year in profits of some sort.
A trader with a $100,000 balance making 50% ROI in an average year has $50,000 in profit. Even at 20%, that’s $20,000.
So, small capital hampers your trading by forcing you into trading habits that ironically have a higher chance of crashing your account than growing it.
What Should You Do As a Trader with Small Trading Capital?
By this stage of this post, you already know if your trading capital qualifies as small in line with your profit targets. If this is the case, you have a few options open to you.
Sell your trading signals
If you have the time to run a subscription service, you can grow your trading capital by selling signals as they are generated by your trading system. Your customers pay a monthly fee to be able to receive and copy your signals.
If you’ve got some experience in internet marketing, selling your signals will be easy. Otherwise, there might be some learning curve ahead. You will need to know how to get the word out to as many people as possible through methods like Pay Per Click and Social Media Advertising.
When you have generated followers, you will need to know how to manage your subscriptions. All of this, in addition to ensuring that your trading is going on smoothly.
The copy trading model as seen on the Meta Trader community (and other similar models), is also based on this except that you have to list your strategy on the Metatrader community and wait for subscribers.
Leverage on third-party capital
You can make more from your trading by leveraging on third-party funds. There are two main ways of doing this: PAMM (percentage allocation management module) and of course, the Darwinex Darwin Model.
They both have their pros and cons (which we will delve into in the future), but they all allow your trading to be copied by other people in different ways, ensuring that you are managing far more substantial capital than what you can come up with on your own right now.
Of course, you only get to keep a fraction of the profits, but it is better to keep 20% of the profits made on $500,000 than to keep 100% of the profits made on $1,000 regardless of your return for the year.
Apply to a hedge fund
If you have exceptional results, you can apply for a place in a hedge fund where you will be provided with a salary and commissions while trading huge sums.
However, it is not for everyone as most hedge funds will require years of decent track record that will be finely scrutinised. You may also be expected to show specific paper qualifications.
Find a Job
…Or stay in one if you already have. When your trading account isn’t your only source of income, you can trade with far less pressure. You won’t be under the mental torture that comes with knowing you have to make money every month to keep the lights on around your home. This is why becoming a full-time trader is not a decision you make lightly.
As an undercapitalised trader, you will always be under a dark cloud until you find ways to remove expectations from your small trading capital. The methods described above can allow you to retain your small capital without the dangers associated with it, while still making enough money to sustain a living as a forex trader.