There’s one main reason the vast majority of traders fail – they are undercapitalized.

Why should capitalization matter so much?

SCARED MONEY

Because, as I recently discussed, our attitudes toward money are anything but neutral. Undercapitalization means you are likely trading with “Scared Money,” which will trigger a host of underlying psychological issues.

Specifically, monetary fluctuations activate latent core issues having to do with security, power, status, self-worth, trust, etc. When these issues come to the foreground, trading one’s plan becomes virtually impossible.

ARE YOU UNDERCAPITALIZED?

Richard Weissman is a professional trader and author who I respect. He trades futures, as I do, and his capitalization guidelines are perhaps more relevant for traders who trade zero-sum markets. (These are markets with no market makers.) But regardless of the market you trade, we can all learn something by listening to the perspective of a no-nonsense trading professional like Weissman.

Weissman recommends a minimum of $500,000 of risk capital as an initial stake for an aspiring professional futures trader. He recommends that the trader take 10% of this amount to fund an account. He expects that the individual will require at least two years to learn to trade and in that time will blow up this account at least twice.

According to Weissman, by the end of two years of study and practice, the aspiring trader should have developed a trading method with positive expectancy and trust in his/her method, based on rigorous back testing and forward testing across multiple markets.

Once ready and well-prepared, the novice trader should enjoy a positive return on capital. Weissman warns, however, that if the trader subsequently experiences more than a 20% drawdown in the trading account, he or she should close the account, because something is wrong, and then re-assess.

Is trading just for highly disciplined millionaires?

No, but as one popular trader often quips, the first million is the hardest. And the smaller the pile of risk capital, and the more “creative” the trader, the more likely that fear and greed will insinuate themselves in a problematic and self-limiting manner.