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What is the minimum amount you need to invest in a particular trading system?

Before trading any system, you should establish how much money you need to commit to it in order to generate potential profits. At the same time, you should define what investment strategy you will follow. For instance, will you be reinvesting both your principle and all achieved profits? Or, will you always invest a fixed, predetermined amount? Or, will you always invest a specific percentage of your portfolio? (click here to read more about investing strategies).

First, as a general rule, we recommend that you commit no more than 20 - 30% of your portfolio to a single options trade. Second, for options trading we do not recommend the full reinvestment of both your principle and your achieved profits; rather, we suggest putting only a fixed, predetermined amount into each options trade. As an alternative, commit a certain percentage of your portfolio to each trade. Options trading is risky - reinvesting your principle and any achieved profits can ultimately lead to dramatic losses, even to the loss of your entire options portfolio.

One of the most important factors when evaluating a trading system is that you need to define the minimum investment required to trade the system profitably. In order to determine this, you must calculate the following parameters:

  1. Average monthly profit delivered by this particular trading system;
  2. Average monthly expenses associated with this trading system.

The average monthly profit delivered by the trading system can be calculated by analyzing a period of several months (preferably spanning at least 6 months) and calculating the average gain per trade, as well as the average number of trades per month.

In order to estimate the average monthly expenses connected with a particular trading system, you again need to look at the average number of trades per month (in order to calculate brokerage commissions). As well, you will need to add up all other expenses, including items such as membership fees, and the costs of receiving real-time streaming charts and quotes.

For the sake of argument, let's assume the following:

  • A particular options trading system generates an average of 3 trades per month;
  • The average profit per trade is about 5%;
  • A trader spends about $60 per month on additional expenses (membership fees, costs for real-time streaming charts and quotes)

Based on these assumptions, we can derive that the hypothetical options trading system described above would generate above a profit of 15% per month. Average monthly expenses would include brokerage commissions for 6 transactions (3 options trades = 6 transactions), which works out to about $90 per month (or $15 per transaction). Including all further expenses, your costs could rise to an average of approximately $150 per month.

In summary, our hypothetical options trading system delivers an average profit of 15% per month; however, we also incur average monthly costs of $150. Given these numbers, we can calculate that a minimum investment of $1,000 per options trade would only allow us to cover our total expenses (15% of $1,000 = $150). We now know that only an investment exceeding $1,000 per trade would bring sufficient potential to push this particular options trading system into profitability.

The above example illustrates how you can evaluate a trading system and derive the minimum investment required per trade that allows for potential profitability; furthermore, this evaluation will give you an approximate idea of the kinds of returns you can expect from a given system. Before committing any money to a particular trading system, we encourage you to perform similar calculations. Always remember that past results do not guarantee future performance.

Remember, you alone are fully responsible for the decisions you make about the amount you should commit to a particular trading system or approach. You should also fully understand the risks involved in trading.

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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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