If you’re reading this post it’s most likely you’re a trader or you intend to start trading and investing in the Financial Market. Either way, it’s all good, as you will get to learn a lot if you read to the end of this article.
You see, there are various method to allocate capital for trading but the most important thing is that you should always use your spare money.
That is money you don’t need for any urgent use. And the major reason for this is to be able to separate your emotion away from your trading.
Why must you separate your emotion from trading?
This is simple, the market does not know anybody. It doesn’t know you, me or the big players. All that’s visible for everyone is the price chart, which is a graphical representation of what is happening in the market.
So if you’re loosing money, the market does not know, and you can keep loosing more money, and there’s no one you can go and meet.
What I’m trying to say rhetorically is that, just because you’re lossing does not mean the market will pity you and make you win the next trade.
The market can be very irrational at times. It can do things you won’t expect. So to avoid unnecessary loss, it’s good to use your spare money. Money that you won’t need for food or medicals tomorrow.
Yes, I’m very serious here:
- don’t use money you need to use for school fees.
- Don’t use house rent.
- Don’t use all your capital
- Don’t use all your salary
- Don’t borrow money to trade especially from bank, loan app, credit card etc. The 10% interest and charges you will pay on your loan is certain but the money you will make from your trading is not certain. So be very careful taking debt to trade.
All this type of capital usually make you emotional, and the market does not know or care. The market just want to facilitate trades. It does not know particular that me(Mr Kehinde Lawal) is trading. It just wants to make sure that everyone execute trades. So wining and losing now depends on the quality of your buying and selling decisions.
So start with spare money. I repeat start small and with spare money.
How do you calculate the spare money to be used as your Trading Capital(TC)?
Basically, the formula I use and I advice people to use is that your spare money is 30% or less of your total Investment Capital(IC).
So if you have #100,000,
Your spare money which you will use as your Trading Capital will be
30% of #100,000 = #30,000
Note that it can be lesser than 30% i.e. 20%, 15% etc. But the most important thing is that it’s not money you will need to quickly withdraw the next day or month.
Trading profitably requires compounding and it does take time.
Another reason you should use spare money is that, there’s something we call Progressive Learning and Progressive Position Size.
This simply means it’s advisable to start with handling small capital well before moving to managing huge capital.
Okay, that’s it for this article. I hope you’ve learn how to properly calculate your Trading Capital, so you don’t become emotional while trading.
If you have any questions or suggestions, kindly drop them in the comments below👇. I will love to answer all of them😊.
Until next time, keep learning dear 9jaCashFlow.com reader.