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Busting Myths: Capital Requirements for Algorithmic Trading

One of the biggest myths surrounding Algorithmic Trading is the notion that it requires a substantial investment. This post aims to clarify this misconception and give you a clear picture of the actual capital requirement for Algorithmic Trading.

Breaking Down the Costs of Algorithmic Trading

Generally, the costs involved in setting up an algorithmic trading system fall into three categories:

  1. Initial Setup Costs
  2. Ongoing Costs
  3. Minimum Trading Capital Required

Initial Investment: Setting Up Your Trading System

To kickstart your journey in algorithmic trading, you’ll need to invest in hardware and software. If high-frequency trading is on your radar, you might also consider a dedicated internet line. Here’s a breakdown of these expenses:

  1. Laptop – A laptop or PC is essential. However, most algorithmic strategies don’t require high-end computing power. A mid-range laptop costing between $700 to $1000 should suffice.
  2. Software – The choice of software for creating, testing, and executing algorithms affects the cost. Options range from one-time purchases to monthly subscriptions. For instance, Amibroker offers a perpetual license starting at $279.
  3. VPS – A Virtual Private Server (VPS) hosts your algorithms on a cloud server that runs continuously. It ensures your trading system remains operational without being affected by local internet or power issues. The cost for a VPS with decent specs is around $20-$30 per month.

In total, expect to spend around $1000 initially. If you already own a suitable laptop, this cost is reduced significantly.

Ongoing Expenses: Keeping Your System Running

There are recurring costs involved in maintaining your algorithmic trading system, which can be categorized as follows:

  1. Data Costs: To feed real-time and historical data into your algorithms, you’ll need a data subscription. This typically costs $10-$20 per month per exchange.
  2. Internet: A reliable, high-speed internet connection (at least 100 Mbps) is crucial. Depending on your location, this could range from $20-$100.
  3. Other Subscriptions: Include ongoing software or VPS subscriptions. Opting for annual subscriptions or lifetime licenses can help reduce these expenses.

Overall, your ongoing costs will likely range from $50-$150 per month.

Trading Capital: How Much Do You Need?

There is no fixed minimum capital requirement for algorithmic trading. You can start with any amount, as good systems allow adjustable position sizing.

Here are some considerations for determining your trading capital:

  1. If trading in futures, capital depends on the lot size of the instrument.
  2. For strategies involving hedging, capital requirements may be lower due to reduced margins on hedged positions.
  3. Cover orders or bracket orders also require lower margins.
  4. For scalping strategies (20+ trades a day), choose a broker with minimal commission fees.

Recommended Reading: Top 5 Algorithmic Trading Platforms

Wrapping Up: Starting Small in Algorithmic Trading

The key takeaway is that large capital is not a prerequisite for entering the world of Algorithmic Trading. If you already have a laptop and internet connection, your primary investment would be in trading software and data subscriptions, which are relatively affordable.

As for trading capital, it’s wise to start small and scale up gradually based on your system’s performance and your growing confidence in it.