I had an email from Graham, “I’ve had someone ask what sort of starting bank would be useful for trade the banks. What would you recommend?”
Not an easy one to answer as I don’t know what your objectives are or what your background is.
Firstly, the bank should NEVER be more than you can afford to lose.
Next, if using IG-Index, use their trading school facility to trade for the lowest possible penny per point whilst they get used to the system, interpreting the candle patterns, etc. Even on Brokers, take the lowest possible micro trades available. Also, beginners should probably look at opening and managing 1 trade at a time.
That said, I just feel it is good practice to never risk more than 3 to 5% on a trade. Of course, this all depends on your attitude to risk. The maximum spread I have taken so far is 310 points. Again, Guy discusses tighter spreads that will get closed more often, so there is another “depends on how you trade” option. 310 points at £10 per point is £3,100 risked. For this to be 5% of bank you would need 20 times this value, or a bank of £62,000. It therefore follows that £1 per point needs a bank of £6,200.
Another way of looking at this is that the average spread, and by spread I mean the difference between the open and the stop-loss, is 95 points. The calculations here are 95 points at £10 per point is £950 risked. £950 times 20, is more or less £20,000. So a bank of £2,000 could be used to run £1 per point.
So far I managed £2,500 in 2 weeks. Making the (very) large assumption that this profit rate can be maintained, let’s assume you want to make £500 per week. As IG-Index betting is tax free, this is £2,000 per month, a decent wage! Therefore you would need £2 per point (£2,500 divided by 2 (weeks), then divided by 10 (pounds per point) and multiplied by 2 (pounds per point) is about £500). The bank to fund this needs to be £12,500 for a conservative strategy (the 310 point spread) or £4,000 for an aggressive strategy (the 95 point spread).
You can also operate with banks less than this by taking fewer trades.
One last point to note is the power of compounding. If you can leave the profits in IG, and use these to increase the stakes on subsequent trades, then you can grow the bank quite quickly to a point where you can make a liveable salary.
In summary then, realistically about £2,000 is the minimum bank I feel, looking to trade £1 per point and grow the bank by compounding.
One last assumption to note, this assumes you can place 50p per point bets on IG. Sometimes though there minimum could be £5 per point on a particular stock. If the risk is too large then the trade has to be ignored. As I am NOT betting these live, I do not have a feel for the £ per point position of IG or how their spreads will affect trades.
Hope this has helped some of you.