How Much Money Do You Need to Be a Professional Trader?

Sep 17, 2020

Vijay Bhambwani, Editor, Fast Profits Daily

Many people would like to run their homes with trading income alone.

But very few are consistently successful.

How do we go about it an as simple a fashion as possible?

I'll try to attempt to answer this question in this video.

Now some of you may not be satisfied with my answer. I won't try to stop anyone from trading in any other way.

But my experience of over 30 years in the market has convinced me this is the right answer.

I am an old school, old world trader. I'll go about it from a mathematical, return on investment point of view. A real world achievable return of investment.

So how much money do you need to be a professional trader?

Find out in the video...

Hi, this is Vijay Bhambwani, and in this video, I'm going to answer a question that some of you have asked me as a people who are interested in trading the markets for a living. Now the question is, how much money do I really need as capital before I can actually run my house on trading income? Now this question has no easy answer but let's go about this in as simple a fashion as far as possible.

Now there are many people are there in the public domain in Siberia who claim that you don't need anything more than 30, 40, 50 thousand rupees to earn a lot of money in the markets. If you believe this is possible to run your house on profits garnered from a base capital of 30, 40, 50 or even 100,000, all the more power to you. I am old school. I am an old world trader. I'll go about it from a mathematical point of view, of return on investment, and a reasonable, real world achievable return on investment at that.

Now let's first start by calculating how much do you actually need to run your house because trading, if it is going to be as a business, needs to be calculated mathematically, unemotionally as a business. Inputs. Outputs. So let me tell you this. I've got two super senior citizen parents, a wife, a college going daughter, and myself and an earning but self-sufficient 25 year old son who doesn't require any money from me. So five of us need to have expenses catered to, and it takes me on an average 100,000 a month, medical bills being a substantial one of two super senior citizens. I need 100,000 bucks a month to run my house. This is something that would be the requirement of an average citizen living in a metropolitan city or the top four cities in India with a family of four, give or take a little.

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You have 20 trading days on an average ballpark, it could be two hear or there, in a month, to achieve this target of 100,000 bucks. Also, remember that it is impossible, simply impossible, that you have trading profits every single day. So you can't say that are 20 trading days in a month. I'm going to make 5,000 bucks like clockwork without fail, and 100,000 is done. Doesn't quite work that way.

So what if you were starting out with Rs 50,000 as some people claim? You will need 200% return every month, like clockwork, without fail, to be able to achieve your target of 100,000 bucks a month. I think that's pretty steep.

Look at what's happening in case you want to be an option writer. If you want to be an option writer, I can't think of any options contract that does not need a minimum of 80 if not 90,000 per lot and I am sure you would realise immediately that earning Rs 5,000 every day from one lot is simply impossible. So you need to play multiple lots. Now, when you go into multiple lots, you need more money. If you were to play in futures in the Nifty or the Bank Nifty, try doing that without paying a margin of Rs 125,000 per lot, and here again, you still won't be able to make Rs 5,000 playing only one lot, unless you're one of those geniuses who can by at the absolute bottom and sell it the absolute top or short at the absolute top and cover back at the absolute bottom. That, of course, is only a possible on social media. In the real world, I have my doubts.

So if you're looking at a realistic rate of return and if you're looking at achievable targets, my advice to you is, assuming that you would also be playing individual stocks, and remember, I am addressing traders, not investors, typically, short term traders who are getting in and getting out, weaving in and out of the traffic called day trading, you will basically be required to pay a lot of money.

Now there are counters which actually have span margins in excess of Rs 5 lakh per lot. Many a counter is in excess of 150,000. There are many counters where your span margin will cost a quarter of a million rupees per lot and the higher the mobility or the intraday volatility in prices, higher is the margin. This is called concentration margin or the extreme loss margin ELM, which is in addition to the span margin on the initial deposit.

Now this is telescopic in nature. As and when exposure builds up, the margin keeps rising. Why does exposure build up? It's because these stocks are moving. Where do you want to be? In stocks that move. You don't want to trade something that doesn't move after you bought or sold it. You want to be where the action is and where the action is, it's more expensive to get in, which means you need money. So how much do you actually need? Can you very safely say that you can earn 3 to 4% return per month? Of course broken into 20 trading sessions. So can you make 0.2% return on capital in a day? Multiply that by 20 days. That's 4% a month. Even then, you need Rs 25 lakh to be able to earn one lakh a month. This is not everybody's game.

I know I am disappointing a lot of people by saying this is not everybody's game because I have no ulterior motive. I have nothing to sell to you. I have no fancy financial product or service to offer to you, and therefore, I can speak the plain speak and the plain truth as it is. I run a limited company, which only does proprietary trading. I know how capital requirements have gone up over a period of time. Contract sizes, which were earlier Rs 2 lakh a lot, are now Rs 5 lakh a lot officially but there are many stocks because of rise in prices, where the contract size is actually Rs 10 lakh and more and the more the stringent requirement of margin, and remember the margin requirements were tweaked recently, the higher will be your capital outgo.

So it's a rich man's game. There is no doubt about it. As our elders used to tell us, 'paisa kamane ke liye paise chahiye'. Money is needed to pull more money to you. It is definitely a capital intensive game. If you actually were to compute how much money you needed 5 or 10 years ago and how much money now is required to be able to make the same amount of money, you know what I'm talking about as a fellow business owner or as a fellow real world trader.

So let's smell the coffee and let's stick to reality and assess how much money we really need. In my recent video, I talked about a low cost way to learn trading, which was playing on 2 to 5 shares in the cash market and cutting your teeth, getting your toes wet, and learning about trading. It's okay to play in the spot market because the lot sizes are not predetermined and margin sizes are not huge but at some point in time, when you really want to or run you house on trading income alone, that's when you have to plan for some serious outlay, some serious capital, and do not make the mistake of borrowing that money to trade in the markets. That is a straight no no. Your mind actually knows that it's under pressure, and it must perform with borrowed capital. So never, ever do that. Ever.

Let me tell you a small story in behavioural science because I believe in behavioural technical analysis. Roy Baumeister is one of the most respected a behavioural scientist there is, and he conducted a test on his students. He divided a batch of 60 students with established similar IQ's into two parts, 30 students each, and he told them they would be subjected to a test in mathematics. One set of students was put in a lab, and they were given their question papers and told to answer their questions. The others were told that there was a lack of space and therefore, they would have to sit in a bakery class where some cookies and cakes were being baked. The students were really agreed, but they were warned that the goodies that we're being baked were for the baking class, and they were under no circumstances allowed to taste the cakes and cookies.

Guess what happened? The students who were sitting in a laboratory and answering questions without distractions, even though being of similar IQ, as the others, scored more than the students who were sitting in the bakery class and fighting their salivating mouths, their mouths dribbling with saliva at the aroma of freshly baked cakes and cookies, knowing that they had to fight their hunger pangs, could not concentrate, and therefore got lower marks. This is precisely what happens to traders whose margin accounts are not adequately funded. Their minds are always under pressure here. Their mind, their subconscious mind, knows that there is not enough money left in the funding account to be able to take risks. Therefore, you will always be under pressure.

What do you choose to believe? Is it possible to run your house with the capital of Rs 50,000? Or you need to be adequately capitalised? I leave it to you. I belong to that school of thought, which says, my company's margin trading account has to be adequately funded to an extent of a couple of million before I can venture out.

On this sombre note, I'll say goodbye to you in this video till we meet again in my next. If you're watching this video on YouTube and if you like what you saw, don't forget to click like on this video and subscribe to YouTube channel. In the comments section, do let me know what you think of this video and what you would want me to record in my next.

Help me reach out to fellow traders who are interested in knowledge-based trading and investment systems by recommending my video. Also, don't forget to join Equitymaster's Telegram channel, with the handle Equitymaster official, wherein I put up three updates every day, Monday to Friday, which help you make more informed decisions.

Take very good care of yourself, your health, your friends, your family, trades, and investments. Have a very profitable day. Vijay Bhambwani signing off for now. Thank you for watching.

Stay safe and have a great trading day!

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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7 Responses to "How Much Money Do You Need to Be a Professional Trader?"

PREMKUMAR R

Sep 21, 2020

Remember your telling us in one of the tutorials of weekly cash alert about needing 5 lakhs or even lesser amount to start trading. Agree completely with you that trading should not be attempted with borrowed capital. I am not a professional trader but I feel that any one who is entering a trade should always be ready to risk losing money. I did lose some recently in the first week of this month on what has been called a black monday and black friday. But as you pointed out recently, there is no urgent need to enter a trade. Nobody is forcing you to trade. It is interesting to note that these losses happened when Nifty and Bank Nifty futures went on a roller coaster ride and this happened on a week when I was free to spent all my time on the markets. Since then I didn't trade not because of these losses but because I didn't get any time spend on the markets. Of course, these are not the first losses in the market.

Like (1)

Vijay Bhambwani

Sep 21, 2020

Dr Rajeev Kapur - dont put your existing portfolio at risk by putting it as collateral margin. I would caution you against it. Its your call.

Mr Ameet Parekh & Mr Mohit Malkani - thank you

Vikas B - Take your own sweet time and dont rush into any trades. The markets will always be around

Mr Bajpai - the 4% return was a hypothetical example only. I was making a point of how difficult it is to make Rs 1 lakh per month as compared to the mistaken notions prevalent online. If you are consistent with 20-25% per annum, you will be richer than you can imagine in a decade. All the best

Like (1)

Dr Rajeev Kapur

Sep 19, 2020

Thanks Vijay Bhambwani, for very lucid and easy to understand lesson on professional stock trading. its good to dispel unrealistic expectations and letting us know how much money is required to trade and what can be the realistic returns. Could you have added tips to use the existing stock portfolio as margin for trading. It appears that Rs 10-20 Lakhs is the minimum amount to start trading.

Like (1)

ameet parekh

Sep 19, 2020

great informative video.Thank you

Like (1)

Mohit Malkani

Sep 17, 2020

Very insightful.

Like (1)

Vikas B

Sep 17, 2020

Dear Vijay ji,

For a total newbie in the trading world like me, this was one of the most relevant shares from you, for setting expectations. Not that I did not like your earlier ones.

I had earmarked like 1L education capital to learn how to go about it, with the mental preparation to loose it completely in the process. But sadly not have been able to start for something or the other. Very recently I also got commodity segment enabled on my new Zerodha account. But not yet started. Some inconfidence even like how to enter a Gas Futures buy/sell order there. There are too many options whose effect I don't even know. May be I need to read more or a small video/tutorial from you on how to enter first few orders can help noobs like me.

Thanks for the informative shares.

Best Regards,

Like (1)

SHARAD BAJPAI

Sep 17, 2020

4% return per month is very good return.
For an investor; what is minimum return any investor should expect in trading per month or per year?

Thanks for very well explained trading fundamentals in lucid style easy to comprehend.

Regards.
S. Bajpai

Like (1)
  
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