Trading large amounts (issue from "Do I Go for It?")

[Daniel]

I am thinking about an issue raised by Hopeful's thread, and am posting it seperately rather than hijack that.

In theory Hopeful could raise 500k equity. How could such a large sum be traded? Obviously, most traders start with much less than this, and run the dangers of undercapitalisation, which is discussed frequently.

Part of the undercapitalisation issue (or most of it) is the need to achieve rates of return which seem impossible to most non-traders, if trading for a living is to be viable.

But a larger account would require much smaller returns - for example 10% of £500k would be a good living for most. A couple of commenters in Hopeful's thread said if you can't make profit from £10k, you won't from £100k. This suggests that you can either trade or you can't irrespective of how much you've got - although presumably if you can trade £10k, you'll make a hell of a lot more trading larger sums. Is there, then, an optimum sum in trading?

If Hopeful has the required trading skills and, purely hypothetically, decided to remortgage to the hilt, which would be best (ie potentially more lucrative)

1. Invest most in other ventures - you could probably still achieve 10% on buy to let in parts of the NW, leaving a chunk for trading;

or

2. Trade it all. Presumably, this would allow him to diversify over different markets, systems and timeframes. Would a 'basket' of trading accounts be more likely to achieve 10%+, in the round?

 

[Racer]

Do you mean borrow £500K and trade that?
If he was to trade it all, uh, well a bit risky.

But you can trade on margin using CFDs with a lot less.
E.g., say £50K and use that.
Often you can trade using just 5%, some shares are up to 40% though

 

[TheBramble]

UKDan - diversification over the long run has been shown to be counter-productive in trading.

As for the practicalities of mortgaging to the hilt (and I know you're positing a hypothetical situation) - I don't think that's going in the right direction to minimise 'Hopefull's stress levels were he to decide to embark on this venture.

As I understand things, trading your own account up to a few millions is quite different to fund management or handling funds in the 10s of millions and above.

(On a personal basis - I'm not quite ready to worry about those aspects just yet.)

As for rates of return - why would you adjust expectations on the basis of the amount of trading capital available? By that logic, you'd get to a point where putting a few million in a high street bank savings account would meet your requirements nicely.

 

[zow]

Hello all
Long time, no write....

This question raises one of several paradoxes/catch 22's inherent in trading.....(a related one being "knowing you don't HAVE to make money is the best frame of mind in which to make money")

Yes, if you have a big pot of money you only need to make a small annual return to make a living.
Having a bigger pot is also useful as:

a) to negotiate more favourable commission rates.
b) ability to scale in/out of positions.
c) systems/computers/feeds as a fixed cost will be a much smaller percentage of turnover/profits.

to name just 3 off the top of my head.

But how do you get that initial 'big pot'?
Ideally by starting with a small pot and building it gradually into a big one, and in the process learning about the markets/trading and yourself. And if you do lose it all it hopefully won't be too much. Paraphrasing from somewhere "when you start out, you want to be the worst trader you'll ever be.....then you'll have lots of money for when you REALLY know what you're doing."
So the 'optimum sum' with which to really learn to trade is the smallest amount possible which you'll barely notice if you lose. (Never gamble with money you can't afford to lose.....trading will be gambling until you know what you're doing)


"Hopefull" (and others) could take a bit of a short cut by 'mortgaging to the hilt' but the downside is of course having to pay off that mortage AND supporting the wife/kids with any trading profits (however much other economising he does). And most importantly he will have missed out on gaining all that experience.
So in this case the calculation for an 'optimum' sum with which to start trading would be driven by external factors apart from JUST learning and experiencing the markets. i.e. having to support himself/the family and repaying that mortage.
So you have another catch 22.

Also, as you point out, there are other ways of creating income with a big pot of money - investing in rental property as you say.
But if you are really considering something like that as an alternative to trading I would say go and do that other thing. I believe you really have to be committed to trading in order to succeed and you really have to WANT to do it. It is like no other activity/business. So if your aim in trading was to "make enough to invest in some rental property" then forget the trading and invest in cheaper rental property to begin with.


A final related point that has been debated endlessly on this site: It IS MUCH harder to turn £100k into £200k than it is to turn £1k into £2k.

Finished with the ramble....hope some of it makes sense.
Good luck!