Whether you can successfully start trading with $1000 largely depends on the instruments you wish to trade. It is possible to trade in some financial instruments such as forex with $1000 or less. But the real question is whether it is feasible to start a career in trading with such a small amount. As mentioned earlier, in some cases, it is possible, and in some cases, there is no point in trading with such a small amount. Let us try to understand these scenarios in detail.
Types of trading
Before we proceed to examine if it is possible to trade with $1000, let us take a quick look at trading itself. Anyone hoping to enter the trade market knows that trading is the buying and selling of financial instruments/securities to earn a profit. There are several ways to trade. Some of them are:
In day trading, traders seek to gain from the intraday volatility and typically close their trades within a day
In swing trade, traders look to seize the opportunities arising from swings in the market and generally hold their trades for a few days or weeks
Here, the traders seek to capture trends in the market and try to earn profits by holding trades for periods extending from weeks to months.
To be profitable, you must have an edge in the market and the low of large numbers must work in your favour. But then, what exactly is an edge? In simple terms, an edge is when you have a set of trading rules that generates a positive expectancy over time.
Expectancy can be denoted as:
(Winning percent * Average win) – (Losing percent * Average loss) – (Commission + slippage)
If you get a positive expectancy after 100 trades, you likely have an edge in the markets. However, having an edge is not enough. You must let the law of large numbers to work for you.
The Law of Large Number and Its Importance
It is a formula that explains the result of performing the same experiment many times. The law states that the average of the results obtained from many trials should be close to the expected value and will tend to be closer with a greater number of trials.
The theory of probability says that the results are random in the short run but will be closer to the expected results in the long run. It means that despite your edge in the market, you can expect to lose over the next few trades. However, after 100 trades, you can expect to be closer to your positive expectancy.
So, does this mean that with trading edge and law of probability working for you, you can expect to win more? Generally, the results will be random in the short run and it means you will face losing streaks. If you lose 50% of your capital, you will need to gain more than 100% to break even. Otherwise, you run the risk of ruin.
Strict risk management is the best way out of this. It means you should not risk more than 1 - 2% of your account on each trade. By following this risk management rule, you will prevent your risk of ruin. But a $1000 account size limits your option to trade different types of financial instruments.
Let’s see how:
Take the case of stocks, where the minimum size is 100 shares with a transaction cost of $50 per round trip/buy and sell. As you can see, the transaction itself costs more than your risk per trade (according to the rule of risking only 1% of your account per trade).
Here the transaction cost itself amounts to up to 5% of your return even before you started trading. If you make 40 trades a year, you’ll need a 200% return just to break even. It means $1000 is not enough to start trading in stocks.
Now let’s take the case of Futures, where the minimum size is 1 lot with a transaction cost of $10 per round trip. Here also, your transaction costs eat up 1% of your returns even before you started trading. If you trade 40 trades per year, you’ll need a 40% return to break even. Hence, trading futures with an amount of $1000 is not feasible.
Let’s take the case of forex, where the minimum size is 1000 units with the transaction cost is an average of 3 pips (which comes to around 30 cents). As you can see, this is only a fraction of your risk per trade. Your trade needs a stop loss of 50 pips. As each pip is worth ten cents, the risk here equivalent to $5. If we add the transaction cost of 30 cents to it, the total comes to $5.3. This is far less than the $10 risk you can take on your trade.
It means that trading forex with an amount of $1000 is feasible.
There is an easy way to know if the instrument you wish to trade is safe to trade. Follow the steps below:
- Calculate the amount you will lose if you get stopped out of your trade
- Calculate your transaction cost
- Add the two figures and if it is below 1% of your trading account you can trade the instrument. If not, it is better to stay away from it.
Read Also: Blueprint for Forex Day Trading with $1000 (or Less)
How Much Can I Turn $1000 Into?
One of the common questions you might have in your mind would be ‘how much can I turn $1000 into. Although people expect exponential returns, the truth is that you need money to make money – this is especially true in trading. For instance, if you have a profitable trade with an average return of 15% a year, $1000 will earn you $150. Likewise, a $10,000 account will earn you $1500, and a $100,000 account will give you $15,000. Your $1M account will earn you $150000. So, the higher you invest, the higher your profit. In short, the higher the risk, the higher the returns.
People often forget that trading is more than just random buying and selling. To make a career out of trading and to earn profits consistently, you should understand your market edge and low of large numbers. You are bound to face losing streaks, but proper risk management can prevent the risk of ruin. You must strictly follow the guideline of not risking more than 1% of your account on each trade.
Realistically speaking, forex is the most (and perhaps only) feasible market to start trade with $1000, that too, if you follow proper risk management. All other markets have a higher transaction cost and a bigger minimum size that renders starting a trade with $1000 unfeasible.
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