Six things I wish I knew when I started trading: Part Five – Sufficient Funding

This is a somewhat controversial subject.  I have thought long and hard about whether I even put it out there, but here goes…

Under-funding and finding money is a little like the “what comes first” quote, “the cart or the horse”.  That being said, it is still an area that is worth discussing.

In my opinion, being underfunded leads to 2 evils:

1. You get distracted by the shiny penny of different strategies or ideas that may accelerate your returns, that only to turn out to be false dawns…penny stocks are notorious money pits.  As are hyped options strategies and services.

2. Secondly, your profits get eaten by the trading fees and commissions.

If you have a winning system, a fully tested strategy, and I mean ONLY IF, then try and find ways to raise capital between friends and family or even private investors.  Or look to find cheap money via a low interest loan.  Having enough funds is essential both in keeping your interest and discipline to follow your strategy through to wealth and financial freedom.

I am not suggesting that you go out and convince your granny to part with her life savings so you can make money in the market or take on unmanageable debt.  What I am suggesting is that you get comfortable with a trading strategy or system FIRST, my hope is that you choose mine.  But again it’s not about me; it’s about your success.

We all need a reality check sometimes.  My goal, with the use of leverage, each year is to make a 50% return on my money, I have exceeded this in past years, but that is my goal.  Now if I managed to reach this goal every year for the next 5 years and I only had $1,000 to begin with, that would compound to about $7,000. Hardly a sum to retire on!  However, it’s still would be over 7 times your money in 5 years, so the more money you have to trade with the sexier the return!

Now onto brokers, an advantage that Questrade has is in how it deals with leverage.  Equity leverage is locked out at 2x your money by the SEC in the US, Interactive Brokers like a few others are not a Canadian company so they follow the SEC rules on leverage.  However, Questrade is a sole Canadian corporation with no entity in the states, therefore they are able to offer 3x leverage on margin, and very few if any other brokers now offer this.  Someone told me Think or Swim offers this in Canada also, but I am not sure if they still do for new accounts.

Margin is scary to some people and it’s not for everyone.  But let me ask you, if you knew that there was a strong possibility that you would make 20-30% cash return year after year that you would not want to take advantage of leverage.  That same 20% would be +60% with margin.

I like to get as much margin as possible in my trades and I factor in the margin risk into my trading system to protect my capital.  I also don’t understand the concept of tax free saving accounts et al.  Simply because you cannot trade on margin in these accounts.  Therefore, the taxable implications of earning 3x you return with leverage out-ways the need for tax protection in a registered account.  You will have to pay tax on that (“tax free”) money when you take it out…and one day you will.

Understand that I am not a tax professional, nor am I giving advice to anyone.  This is just my opinion from a common sense perspective.  It is what I practice and is not for everyone.

So back to the under-funding question.  Leverage is a way that you can climb out of the under-funding gap, it need not be scary if your strategy is a good one and has proven itself in testing and live trading.

May today be a profitable day…for all of us!

John