How Much Trading Capital Do You Need To Earn $100K A Year?

15 June 2018
Jesús Domínguez

In this article, we are going to make use of the professional trader’s calculator to find out how much capital you need to earn a 6-figure salary ($ 100,000). This may vary depending on your trading style, time horizon, leverage, the mathematical expectancy of your strategy but, above all, of an aspect that you may not have taken into account and that is crucial for the sustainability and viability of any business.


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Hang on a sec: why $ 100,000?

It all starts with a study recently published in the flourishing field of happiness research, based on a satisfaction survey to more than 1.7 million people who were asked to rate their lives from 0 to 10, where 0 is the ” worst possible life “, and 10 is the” best possible life “.

The higher the salary, the happier, right? Yes, BUT

Researchers analysed the relationship between the grade given and family income. They found that in all regions of the world, after taking into account the age, sex and marital status of a person, those with higher income were happier. No surprise so far.

However, they also found that there is a level of income above which happiness stops increasing proportionally. This varies from region to region, with Australia and New Zealand as the highest and Latin America and the Caribbean as the lowest. They even found some evidence that, in certain places, when incomes rise above this threshold, satisfaction in their lives decreases!

The following table shows the “satiation threshold” in different regions of the planet. All the income is converted to US dollars and adjusted according to the purchasing power variations of the countries in question.

trading capital earn 100K year


Mathematical expectancy: a fundamental metric in your career as a trader

Once you have already calculated your “happy salary” it is time to evaluate if your trading strategy is a winner or loser. How can you know?

Risk / reward ratio

The risk / reward ratio is a common term in the financial world that reflects how much you expect to obtain in a trade compared to the risk you are willing to assume.

The risk / reward ratio, taken in isolation, does not provide a complete solution, since a ratio of 1: 2 can be very good a priori, but if your winning percentage is a paltry 20%, your strategy is doomed to a failure of biblical proportions.

Winning percentage

Since the risk / reward ratio does not seem to be the panacea, could the winning percentage be the solution?

Imagine that you have an incredible winning rate of 90%. Spectacular, right? Equally spectacular can be the collapse of it if you lose $ 0.95 for each dollar you risk.

So, what is the solution?

The solution is called mathematical expectancy, and it’s calculated thanks to the combination of your risk / reward ratio and your winning percentage.

Mathematically it is expressed in the following way:

Mathematical Expectancy = (% winning trades * average gain) – (% losing trades * average loss)

Example:

Imagine that you have closed 100 trades with a winning rate of 60% i.e. 60 were winners. If those generate a $ 30,000 profit, then your average profit is $ 30,000 / $ 60 = $ 500. If your total losses accumulated were $ 16,000, your average loss is $ 16,000 / $ 40 = $ 400.

Mathematical expectation = (0.6 * 500) – (0.4 * 400) = $ 140 per trade

Once you´ve calculated it, do not forget to pat yourself on your back before moving on to the next point, only if your result has been positive. If not, you have to work harder to design a strategy with a positive mathematical expectancy.


What do you consider to be an acceptable return?

With the mathematical expectancy of your strategy on the positive side, it is time to be honest with yourself and estimate a sustained return over time for your strategy. Without letting your heart guide your head, what do you think would be an acceptable average annual return for the next ten years? 5%, 10%, 20%, 40%, 100%?

The problem of wanting to yield the best result in history

Every trader dreams of earning a lot of money. The difficulty is that you want to obtain it with a ridiculously small amount of capital and this is a problem that is hard to solve and, unfortunately, with a foreseeable outcome.

Undercapitalised account

Most traders want to earn a lot with very little, which is a deadly combination for the survival of the account.

An undercapitalised account has two main problems:

  1. Lack of capital = lack of flexibility => an account with little capital, and always operating with strict monetary management, often “condemns” a trader to work with short-term strategies, which are not precisely the most suitable for beginners.
  2. The less capital, the more … => a trader with little money will always be pressured to use large quantities of a tool that entails considerable risks in inexpert hands.

Leverage: its benefits and dangers

Leverage allows you to take larger positions than you could with your capital, so you will not need to start with a big account to trade sizable volumes, which will magnify your profits … and your losses.

Leverage, in inexperienced hands, is a weapon of mass destruction for trading accounts. Usually, beginners usually operate accounts with little capital and “need” to leverage excessively to produce returns that allow them to live off trading.

Take the best traders in history as a reference

Although it may seem “easy” in a backtest to double an account every year, as a general rule, if you manage to yield an annual 20% in the next ten years with moderate drawdowns, you will be able to enter in the Champions League of trading / investing. Therefore, you’re private jet with share hangar with celebrities such as George Soros, Warren Buffet, Carl Icahn, Peter Lynch, Michael Steinhardt or Ray Dalio.


How much capital do you need to earn $ 100K?

And now comes the part you were keenly awaiting. You have a strategy with a positive mathematical expectancy and an annual return target very similar to the pros. How much capital do you need if you are an …?

Intraday trader

Data based on 8 DARWINs with a D-Score greater than 79 and a capacity grade (Cp) less than 3.

* This depends on the base currency. For this example, imagine that the base currency is the EUR.

Do you think it is feasible to yield a 182.3% on average every year? How many traders do you know who have been able to do it for ten years? How many do you know that they have achieved it one year only to wipe out their trading account in the following?.

After an ice-cold bath of realism, an intraday trader like you would need $ 54,832 and an average return of 182.3% if he wanted to earn $ 100,000 a year.

If your target annual salary were $ 50,000 instead of $ 100,000, you would have to divide this by 2 = 54832/2 = $ 27416

If you wanted to yield a return similar to the pros, with an annual objective ten times lower, that is, 18.23% per year, you should increase your capital X10 = $ 548,320.

Do your calculations based on your location / lifestyle / degree of optimism but it seems obvious that you might need much more capital than you probably have in your trading account.

Swing trader

Data based on 6 DARWINs with a D-Score greater than 72 and a capacity score (Cp) greater than 7.

* This depends on the base currency. For this example, imagine that the base currency is the EUR.

Check the intraday trader section and apply the same logic in case you are a swing trader.

Discouraged? It comes as no surprise. After having read elsewhere that you were going to make a killing without lifting a finger with a $ 1,000 account to tell you that you need approximately half a million USD, as long as your returns are similar to those of the professionals, it is not the news you were expecting to read. But please don’t throw in the towel yet, since I am going to give you the key so that you can become a pro trader with much lower capital, while keeping the $ 100,000 per year goal!


The key: combine your talent with investor capital

The purpose of this article is not to invite you to give up your budding trading career, but to understand that it is almost impossible to become a pro trader if you don’t have the ” wand” that great traders possess.

Investor leverage

Regardless of the capital you have in your account, as long as you have a minimum to be able to follow rigorous monetary management, the key to obtaining those $ 100,000 relies on how much investment capital your pure trading talent gets to attract.

As an example, and as long as you follow the industry standard of 20% performance fee, for every million $ of investment capital, one percentage point equals $ 2,000. That is, to get those happy $ 100,000, you would need a 50% return per year. It is still very ambitious, but you don’t need half a million in your account to get it. If instead of $ 1,000,000 under management you had:

You have gone from almost giving up your dream of becoming a successful trader to see the light at the end of the tunnel.

Do the math

What annual return is your trading strategy currently averaging? If you have this data, you just need to calculate the investment capital necessary to obtain those $ 100,000*. Additionally, you can take a look at a DARWIN with a D-Score / return / drawdown similar to yours and estimate the capital that could attract your DARWIN.

*Remember that the average salary of 100K is for citizens living in the USA. If you live in other region, or are more than happy with less you may need a fraction of it!


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