I have no money! 8 Ways to get trading capital
By Ivo Luhse
Trading has to be the best business in the world — You have no employees, no bosses, no offices to rent and no product to sell. As an independent trader, the set-up costs and running costs are low; all you need is a computer, a desk, and an inexpensive trading software. When trading is done thoughtfully and efficiently as a proper business – controlling the risks and managing the expectations — profit margins are high. Profit margins for trading businesses are among the highest in the world — no wonder why the investment bankers are so flush with cash.
In many ways, trading really is the perfect business. One thing, however, is as critical for that business as for any other company – and that is capital.
Without a sizeable amount of trading capital, it doesn’t matter how well you trade and how disciplined you are – the returns you make will not be life-changing.
What new traders usually do to overcome their small account sizes is to use high leverage on their accounts and take a crazy amount of risk – often as much as 5-10% per trade. That kind of trading inevitably ends up with blown accounts and shattered dreams.
Lack of capital is one of the main reasons that prevents traders pursuing their trading careers. Countless times have I heard people say:
"If only I had money, I would trade for a living."
"My account is too small to trade effectively"
These arguments are no longer valid! For good traders, funding is never an issue and getting funded is now easier than ever.
All the major central bank's money-printing exercises over the last decade have resulted in so much money being available, money that people are investing not only in the stock markets and real estate, but also in talented traders.
To get funded, all you have to do is prove that you can trade with discipline and in a consistent way – even if it's on a small account!
Investors, in particular, like traders that use objective trading systems with well-structured and automated approaches (bots). This is because trading with bots and objective trading strategies means that you are not subject to the emotional rollercoaster that is often derailing even the most talented discretionary traders who are using subjective trading strategies.
If you can show solid and consistent trading where you manage your risk and achieve above-average returns, you will not need to worry about attracting capital.
A good rule of thumb is to aim for 24% annual return (~2% per month). This is considered a very good performance, and if you can match it with 2/1 annual return to Drawdown ratio, you're in the money!
Note — Annual return to Drawdown ratio of 2/1 means that if you make 20% annual return, your max drawdown does not exceed 10%.
Even if you achieve this level of return on a small $1,000 account, this can actually be viewed favourably by investors as it shows that you can control your emotions and you are not greedy.
So: First, learn to trade! Build a solid track record and you will never need to worry about funding.
Here are 8 ways to get funding and a regular monthly income as a trader — I would recommend getting at least a 12 months track record first, but some investor programmes will accept you with as little as two months track record and trading records from demo accounts.
1 — Signal service
Here you send out your trading signals to your clients, and they enter the trades manually, a service for which you charge a monthly fee. Typical signal service costs $50-$100 per month, so just 20 users can generate a regular monthly income of $2,000. You can send signals by email or, via messaging apps such as Telegram.
Note — With DARA you can set up this process automatically. DARA will forward the trades you have taken to a Telegram group of your choice. There is no extra work for you; you just keep trading as usual.
To set up a signal service you don't even need a website; you can do it through Telegram, Youtube or Facebook. A signal service is the simplest and easiest way to start getting some regular income while you continue to build your track record.
Quick and easy to set up.
Does not need a long track record.
High churn rate. You will find that a lot of clients will simply not follow the signals or they find a way to screw them up.
2 — Copy-trading
With copy-trading, your account is connected to a copy account software that automatically mimics your trades to your clients’ accounts. There is huge copy trading community online so finding copy traders and software that offers this solution is not an issue. If you decide to go the copy-trading route, I would encourage you to set up your own website and purchase or hire a copy trading software. It will be a bit more expensive and will take time to grow your customer base, but the alternative of using existing online copy-trading websites is not the way to go.
On these social trading platforms, you will be competing against thousands of traders all trying to climb up the leaderboard. I have nothing against the competition, but sadly, the only way to rise to the top of the rankings on these websites (and get people to copy your trades) is to use excessive risks. What you see on the copy-trading websites is that the lead copy traders change almost on a monthly basis. Traders use high risk, get high returns and quickly climb to the top of the ranking. Once there, they get some copy traders and, of course, most of them just blow the account because of the excessive risk used. Then they start over with another small account and the cycle just repeats itself.
If you want to grow a copy trading business naturally and keep the clients copying your signals, you have to set up your own website and trading copy software. You charge a monthly fee for traders to copy your trades (typically around $100 per month, of which the copy-trading software is usually $25 per month), so with just 50 users, this will give you a regular monthly income of $5,000, before expenses. You continue trading as before and keep building your track record.
It is not that hard or expensive to do. Here are two solutions that offer copy trading software:
Inexpensive to set up.
Does not need a long track record.
Setting up a copy software does require some technical knowledge.
Without using the popular social trading platforms, it can take time for people to find you.
3 — Family and friends
Whatever you do, don't take your aunt’s last $5,000!
But if you have a wealthy family member or a friend, explain to them what you are doing and the risks involved. Show them your trading plan and your track record. For a lot of traders who then go on to manage larger accounts, their first customers are typically family members and friends. Since they will be your first investors and they are taking all the risk, you will need to be generous and offer them at least a 50/50 profit share.
Does not need a long track record; they just need to trust you.
If you promise returns and your family and friends lose money, you lose their trust – which may be more important than extra capital. Before you do this, make sure they understand the risk involved with trading.
You must keep it small. If you get more than 5 friends involved that can count as a money managing service and you could be in legal trouble unless you have the proper paperwork.
4 — MAM accounts
MAM stands for Multi-Account-Manager and is a service provided by your broker. Here other customers from the same broker give a power of attorney that allows you to execute trades on their accounts. All the clients’ funds are pooled into one large MAM account and you just trade on one account. Using MAM accounts is the first step into serious trading business, and you can have a MAM account with millions of dollars, which will generate a solid five-figure monthly income. MAM traders typically charge a 20% performance fee and small spread (1-2 pips) to cover trading costs.
Can scale quickly and grow into a stable and regular five-figure monthly income.
Trade on a single account without worries about copy trading software.
No need to pay for copy trading software.
Requires track record of at least 12 months on minimum a $10,000 account.
Some brokers may ask you to get at least 5 clients with $20,000 each before they open a MAM account.
Depending on the country you reside in, MAM accounts might require you to be regulated as a money manager.
5 — Your broker
Many traders treat their brokers as the enemy, but they really should not. In your trading business, your broker is your most important partner. Your broker will be the first to know when you are making or losing money. If you are serious about your trading, you should have a very close relationship to your broker — they should practically be on your speed dial! Call up your broker and ask for any opportunities that are available to you and explain that you are looking for additional capital. Your broker is well connected in the industry and they can often open doors for you.
Can get you connected with investors and other money managers.
Can set you up with a MAM account.
Can get you clients for an MAM account.
None. The worst that can happen is that they say no.
6 — Prop firms
Prop firms are private trading firms that trade their own capital and are not allowed to use outside money. Search for prop-firms in your local city and call them up to see what the requirements are for you to get a trading desk with them. Prop firms typically work on a capital-share and profit-share module. This means that you may be asked to bring in $25,000 which they will match with $75,000 to give you a $100,000 trading account and a trading desk in their office. Any profits you make are shared 50/50. At first glance, it might not sound like a very good deal but remember that a 50% profit share in a $100,000 account is far better than 100% profit share in a $25,000 account.You will get a great experience trading in a prop firm, and you can use this as a springboard for further developing your career as a trader and a money manager.
Great for building experience.
Great to grow your trading network and establish yourself , especially if you later decide to set up your own fund or prop firm.
Does require minimum 12-24 months’ track record.
Does require collateral, typically around $25,000 or so.
You might need to pay a monthly fee of up to $1,000 for the use of their trading desk and trading softwares.
They might not allow you to trade exactly how you want to trade and force their firm’s rules on your trading strategies.
7 — Online prop firms
This is a relatively new type of business gaining popularity in recent years. The idea is simple – its a prop firm (a firm that trades its own money) but their traders are not chained to the office and can trade from the comfort at their home, anywhere in the world. The idea is pretty good, and I think more and more of these firms will spring up. You can get up to $100,000 trading capital with a minimal track record, and the profit share for these firms are much better than traditional prop firms – up to 70/30 in the favour of the trader.
Here are some online prop firms to check out:
Inexpensive to set up (they do require a small joining fee).
No recurring monthly costs (or very low compared to traditional prop-firms).
You don't need a long track record (even a track record on a demo account is sufficient).
Trade any markets you want with higher leverage since retail trader restrictions on leverage will not apply to these firms.
You don't need to bring any of your own capital.
They will restrict some of your trading. For example, they will limit your risk levels and markets you trade or not allow you to keep trades open over the weekend.
8 — Your own Fund
This is the dream for many aspiring traders and money managers. Running their own fund, managing millions, and spending the holidays with your family on a yacht in the south of France.
With the current market flooded with cheap money, it really is possible for traders to start their own fund. But this task should not be taken lightly and will require several years of track record and becoming an established authority in the industry. The regulatory landscape is changing a lot and is getting more strict, both through capital requirements and the kinds of clients that you can have. . Minimum AUM (Assets Under Management) to consider opening a fund is around $10 million just to make it worthwhile and cover overhead costs. There is also a growing demand for Algo trading funds, which makes attracting capital easier if your trading is done by algorithms. A typical Algo fund would charge a 20% performance fee and 2% management fee to cover the costs of running the business.
The pinnacle of the trading carrier.
Can scale indefinitely as long as the fund is on track producing 20% annualised returns with low drawdowns.
Could make billions.
Requires minimum 3-5 year of audited track record.
Will cost min $100,000 to set up.
Requires at least $10million AUM to make it cost-effective.
High operating costs.
Requires you to get a certification as money manager, which can take years to get depending on the jurisdiction where you are opening the fund.
Requires an office.
Requires hiring staff.
Requires hiring lawyers.
To sum up -
It has never been easier to get funding as a trader. The only question is: are you good enough?