Capital plan: how much capital you need

What a capital plan is and who this lesson is for

A capital plan is a written answer to three questions: how much you deposit, how much of that you can lose without changing your life, and what losing streak the account must survive so you never have to top it up. This lesson is for anyone choosing starting capital by arithmetic rather than gut feeling. It gives a rule for qualifying money, formulas for a losing streak and drawdown, a minimum-capital formula from transaction cost, a monthly budget to fill in, and four “do not deposit” conditions. There is no amount you “should” start with: none exists independently of the instrument, the costs, and the size of the risk.

The rule: capital from money whose loss does not change your life

Trading capital comes only from money whose loss does not change your plans or obligations — not from savings set aside for other goals, not from borrowed money. This is a qualifying rule, not a slogan: if losing the deposited amount would change your rent due date, an instalment repayment, or a decision about medical treatment, it is not trading capital. Money with another job also has a different time horizon, and the market does not run on your horizon.

The practical form of this rule is one operation:

study_capital = liquid_assets − living_buffer − liabilities

You determine each component; every number here is yours, not this lesson’s. liquid_assets is money you can access without selling your house or flat. living_buffer covers several months of expenses that you do not touch. liabilities is everything you must repay. If the result is negative or close to zero, the answer is not “I will deposit less” but no deposit. More on the costs that burden every transaction is in round-trip costs.

Formulas: how much capital a losing streak will absorb

The formulas below translate capital into risk and check whether the account survives an ordinary run of failures. The risk percentage, the cost threshold, and the number of losses are illustrative numbers — plug in your own.

risk_per_trade        = capital × risk_percent
account_value_after_n = capital × (1 − risk_percent)^n
drawdown_after_n      = 1 − (1 − risk_percent)^n
minimum_capital       = round_trip_cost / risk_percent
cost_share            = round_trip_cost / (capital × risk_percent)

What the quantities mean:

• risk_per_trade is the amount you lose when your stop loss is hit. The starting point is the 1–2% of capital rule, though its meaning depends on transaction cost.
• drawdown_after_n describes the decline from the peak after a run of n consecutive losses. A losing streak is a statistical norm, not bad luck, which is why you calculate it in advance.
• minimum_capital follows from the condition that one R covers the round-trip cost. If 1R does not cover the transaction cost, the account runs at a loss before the first mistake.
• cost_share tells you what fraction of your risk you hand to the broker on every transaction. A threshold of 0.1 (illustrative) means the cost eats at most one tenth of what you risk.

Worked example — all numbers illustrative. Capital $20,000, risk 1%, round-trip cost $20. Then risk_per_trade = $200 and cost_share = 20 / 200 = 0.1, one tenth of the risk. Five losses give drawdown_after_n = 1 − 0.99⁵ ≈ 4.9%, ten losses ≈ 9.6%. At 2% risk, ten losses are already 1 − 0.98¹⁰ ≈ 18.3% of the account. minimum_capital at a $20 cost and 1% risk is $2,000. The same calculation on a $500 account differs: 1R is $5, so cost_share = 20 / 5 = 4.0 — four times the risk. Such an account does not “start small”; it starts with negative expectancy before any signal appears.

Monthly budget: a table to fill in

Capital accumulates from surplus, not a one-time resolution. Fill in the table with your own amounts and work out how much you can realistically put aside for learning. The row “capital for learning after 12 months” is a result, not an assumption; leave the empty rows for your own categories.

If the “free amount” row comes out at zero or negative, the capital plan has nothing to grow from, and leverage will not repair that. This is not a moral judgment, just the arithmetic you apply to transaction cost. The amount you can afford to lose is measurable and changes month to month — so fill the table in again, not once and for all.

Transaction costs as part of capital

Capital is not what you deposit but what remains after costs. Commission, spread, swap, and currency conversion burden every transaction regardless of outcome, so a small account hands the broker a larger share of its risk than a large one. The cost_share formula above is the only way to see this in numbers rather than in feeling.

The consequence is practical: with low capital, transaction count works against you even with a positive hit rate. If the cost eats one tenth of the risk, ten transactions hand the broker a full 1R — an entire risk in fees alone. At a cost equal to half the risk, two transactions suffice. So a small account should pick instruments with lower relative cost and trade less often. Keep cost metrics in your journal: that is the only place you will see whether the problem is the method or the friction.

When the capital plan says “do not deposit”

Four conditions, each a rule. Meeting any one means no deposit or a return to testing — not “a smaller amount” and not “one trade as a trial.”

1. The capital comes from a loan, a credit card, or an overdraft. Test: if repaying the obligation depends on the market result, the capital is not yours. The deadline and interest then force decisions you would not make with your own money, and leverage accelerates a margin call instead of building an edge.
2. There is no living buffer. Test: if trading capital does not exist after subtracting several months of expenses, there is nothing to deposit. Set the number of months yourself, then check the account still makes sense.
3. One R does not cover the transaction cost. Test: calculate cost_share. If it exceeds the threshold you set, the edge would have to be larger than the friction, and that rarely happens.
4. There is no written maximum losing streak or drawdown limit. Test: if you cannot answer at what account decline you stop trading, you have no capital plan, only a deposit. The limit is described in daily limit and drawdown.

Until these conditions are met, a demo account and data collection remain — the sequence is in from demo to live.

Common mistakes when setting starting capital

• “Small capital means small risk.” With a small amount, fixed costs dominate, so relative risk grows rather than shrinks.
• Depositing all your savings. That is not capital for learning but a decision held hostage to a single outcome.
• Leverage as the solution to a small account. Leverage increases exposure, not edge. It changes the size of the loss, not its probability.
• Capital without a losing streak in the plan. An account that cannot survive an ordinary run of five losses will not survive an ordinary month either.
• Scaling position size before you have a sample. A larger size increases both profits and drawdown. The sequence is in scaling size.
• Capital calculated from profit, not from cost. “How much I want to earn” is not a plan parameter. The parameter is how much I can lose.

A measurable exercise

Calculate and write down six numbers: study_capital from the qualifying rule, risk_per_trade for 1% and 2%, drawdown_after_n after five and ten losses, cost_share for the real round-trip cost on your instrument, and minimum_capital. Fill in the monthly budget table and note how many months it takes to accumulate the planned amount. Then answer in one sentence whether any of the four “do not deposit” conditions holds today. Repeat the calculation after a month and compare both sets — a change in the numbers says more than a change in attitude.

Common questions

Can I start with $100–$200?

On a demo account — yes, and that is the right place to start. On a live account, commission and spread can eat the entire risk of a single transaction. Before you deposit, calculate the round-trip cost and compare it with 1–2% of the planned capital.

Does leverage not solve the problem of small capital?

No. Leverage increases exposure, not edge, so it changes the size of the result, not its expected value. A small account with leverage reaches a margin call faster than it grows. How the mechanism works is in the glossary entry on leverage and round-trip costs.

How much money should I deposit to start?

Only an amount whose loss does not change your plans or obligations. Capital is a tool for learning and collecting data, not a guaranteed deposit. The deposit size follows from the qualifying rule and the monthly budget, not from comparison with other traders.

Why calculate the cost of one transaction relative to capital?

Because only that ratio shows whether the account can work in its own favour. Capital alone says nothing: the same fee is irrelevant on a large account and dominant on a small one. The cost_share formula reduces cost and risk to one common unit, so you can compare instruments and accounts. The recorded numbers also show after how many transactions the fees eat a full one R. Without that measurement, all you have is the impression that the method does not work, when the problem is friction. Use your own amounts and thresholds — confirm the instrument parameters, commissions, and conditions with your broker.