What is the minimum amount
you need to invest in a trade in order to be profitable?
First, as a general rule, we recommend that you
invest no more than 20-30% of your portfolio in a single trade.
Before trading, you should also establish how
much you may commit to an individual trade. Keep in mind that
there are numerous trading styles you can adopt: Intraday
trades, short-term trades, mid-, and long-term trades. A basic
approach is to calculate how many shares or contracts you are
able to buy, and then to evaluate how much of a profit you need
to generate per trade in order to at least cover your trading
In order to define the minimum
required investment amount for a given
trading strategy, a
Know how much to commit to any given trade;
Take brokerage commissions and expenses into
Calculate other expenses associated with
trading (membership fees, fees for real-time quotes and
Here is an example: If you are able
to buy 50 shares of QQQQ at $40 per share (i.e., commit
$2000 to a single trade), then your profit requirement would
be at least 1% ($20). This is the amount you would need to
make at a minimum in order to cover your brokerage fees (2
transactions); additionally, at least another 1% would be
required to cover other expenses, such as membership fees.
In addition, as a trader you would obviously anticipate
making a surplus profit (beyond simply covering your
expenses) – this is after all the main purpose of trading.
Based on these approximate calculations, you
would want the QQQQ to move at least 2 - 3% so that you
could bank at least a profit of 1% after all trading-related
expenses. However, if we also take into consideration that
not every trade can be a winner (as no 100% successful
trading system exists) - and if we additionally expect that
our profitable trades should cover the expenses of our
losing trades - we can derive a required 3 - 5% gain from a
single QQQQ trade (based on a purchase of 50 shares).
Furthermore, assuming the noted 3 - 5%
gain from a single QQQQ trade, it follows that someone who
is in a position to invest no more than $2,000 into a single
trade cannot realistically expect to trade this instrument
on an intraday or short-term basis – it is highly unusual
for the QQQQ to make a move of as much as 3 - 5% in a single
session. This means that intraday and short-term trades
would typically fail to cover your associated trading
expenses. Based on an investment of no more than $2000 and
an anticipated gain of 3 - 5%, a QQQQ trader should thus
favor a mid-term trading approach, typically making about
one trade per month. Longer-term trading strategies (making
only a few trains per year) are obviously suitable in this
case as well.
Now, let's use another
example where a trader is able to commit $8,000 to a single
trade (which would buy about 200 shares of the QQQQ at $40
per share). In this instance, the number we derive at for a
minimal required move in the QQQQ that would allow you to
cover all your trade commissions and other expenses is 0.2%.
Since the QQQQ frequently move a half percent in a single
session, traders able to invest sufficient funds to purchase
200 QQQQ shares would therefore be able to trade this
instrument on a short-term basis.
While these are approximate calculations, they should give
you a better understanding of how you can develop a personal
trading strategy, and how you can define the minimum amounts
required to trade an already existing
Remember, you alone are fully responsible for
the decisions you make about the amount you should commit to
trading system or approach. You should also
fully understand the risks involved in trading.