Capital Requirement for Algorithmic Trading : Myths and Facts

There are several underlying myths associated with Algorithmic Trading, and the most common among them is about the capital requirement. People hesitate to pursue algorithmic trading just because they have been told that it requires huge investment. In this post, we’ll try to figure out how much of this statement is actually true, and give you a fair idea on the capital requirement for Algorithmic Trading.

Broadly we can divide the algorithmic trading setup expenses into 3 categories:

1. Initial Setup Costs
2. Ongoing Costs
3. Trading Capital to get Started

Initial Setup Costs

The initial setup requires hardware and software procurement to get started with algorithmic trading. Plus, if you are going to indulge in high-frequency trading, you may need a dedicated leased line to your exchange. Listed below are the most common expenses with the approximate cost mentioned in USD:

1. Laptop – The very first thing you’ll need is a laptop or a PC. Remember, you don’t need a high-end computing device for 90% of algorithmic strategies. So, to begin with, you can invest in a mid-sized laptop with a decent configuration. It may cost you $700 to $1000.
2. Softwares – For algorithmic trading, you’ll need a software to create, test, and execute your trading algorithms. The cost really depends on the software you are opting for. It may be a one-time purchase or a monthly subscription. For example, Amibroker starts at $279 for a perpetual license.
3. VPS – VPS stands for virtual private server. It is like another computer hosted on a cloud that remains ON forever. You’ll require a VPS to host your algorithms so that it scans and signals profitable trading opportunities continuously. The same can be done through your PC too but internet and power fluctuations may jeopardize your trading setup. VPS cost depends on its computing power and bandwidth, typically you may find a VPS with a decent configuration at around $20-$30 per month

In total, you’ll require about $1000 to get started with algorithmic trading. And if you already have a laptop with decent configuration, you’ll save a big chunk of this initial cost.

Ongoing Costs

The ongoing costs are something that you’ll need to spend regularly (monthly or yearly) to keep your algorithmic system up and running. They can be broadly categorized under below heads:

1. Data Costs: Any algorithmic system requires accurate realtime and historical data based on which the buy-sell opportunities are identified. This data is directly fed into the software you use to develop your algorithms. A realtime data subscription (with a historical backfill) may cost you $10-$20 per month per exchange.
2. Internet: You’ll need a high-speed internet connection (minimum 100 Mbps) to do algorithmic trading without any connection glitches. It may cost you $20-$100 based on the country you reside in.
3. Other Subscriptions: This includes software subscriptions or VPS subscription that we covered under initial cost. Try to go for an annual subscription or a lifetime license of any product you invest in, this will keep your ongoing expenses lean.

Keeping all of the above in consideration, your ongoing costs may range from $50-$150 per month.

Trading Capital

There is no minimum capital requirement for algorithmic trading. Any good system would have position size as a configurable element; hence you can start with any capital.

Few things you can keep in mind on the trading capital requirement:

1. If your system trades in futures instruments, then the capital requirement would be based on the lot size of that instrument.
2. If your system requires hedging in the opposite direction, then the capital requirement would reduce considerably as most of the exchanges allow lower margins on hedged positions.
3. Similarly, cover orders or bracket orders require lower margins.
4. If your system does scalping (20+ trades a day), then you must consider opting for a broker that charges minimum commissions.

Also Read: 5 Excellent Algorithmic Trading Platforms

To Wrap Up

The moral of the story is that – “You do not require huge capital to get started with Algorithmic Trading”. If you already have a laptop and internet connection, just invest in an algo trading software and data subscription. It may not cost you too much.

And about the trading capital, keep it as low as possible initially and gradually scale up based on your profits and confidence in the system.