Hey everybody. Happy Thursday. So I want to clarify a few points that I made about smaller accounts and trading that I kind of answered on the YouTube channel, but someone had asked about why is it so small or why do I recommend say 25 k? And Roman had answered an answer, which on some level is true, but it wasn’t the point that I was making. Apparently there’s a thing at the $25,000 level where firms are trying to protect you from harming yourself and they limit the number of trades that you can do and all this and that. I can’t tell you I’m an expert on what those rules actually are. It has to do with the number three and pattern day trading, and I don’t even know what the hell that means, to be honest with you. Don’t care to. But I do know that at that point in time when you have to think about what is your bed size, when your bed size is a number that you can live with, that’s okay financially for you, but it’s okay.
It’s also okay for you emotionally. And so you have to figure, and I know that there’s many in micro contracts that kind of help the smaller person. And by all means, if you’re out there hustling and you’re trying to knock it out of the park, by all means, I would be like, do what you can. So this is not me picking on you. This is me trying to give you some insight as to why it might be difficult for you to really make a lot of progress with a smaller account. In today’s day and age. Let me go back when I first started, bed sizes for that time were ranging from two to 5%. Hello, put on your frigging depends bladder control because that’s the ultimate stop order for the love of Christ, the king, 5% risk units. Now over time with for a whole slew of reasons that I don’t want to get into, including those that are kind of imposed upon traders by the allocators who want lower vol returns.
Lower vol just means when you look at your account balance, not the instruments that you’re trading, they don’t want to see your account up 10% in a day. Of course, every prop trader on planet Earth wants that, but if you’re getting an allocation from a third party, it became more common for them to seek 25 basis points, not 25%. And so you had to gear down the leverage in your account even if you were trading commodity futures to a lower range of leverage. Now, margin to equity ratio is not necessarily a risk management tool, but it does give you a little bit of a barometer on the level of aggressiveness for your style of trading. So what ends up happening is when you have say,
$5 in your account, so let me actually, I’m sorry, I’m all over the place. So we went from two to 500 basis point bed sizes to today where you’re looking at one 10th to maybe one half of 1% at the pro level on average to garner returns. The 2% bet sizing, 1% to 2%. That’s of course a personal preference. If you’re trading your own money, that’s fine. It’s just that if you are trying to go and get an allocation from anyone, you want to be mindful of what the environment is like. Okay, so having said that, when you look at having a funded account, meaning your own money, not one of these paper trading online thingies, I’m talking about your own money and you’re looking in today’s day and age, what would be considered a whopper of a bed size at 2%, that’s a hundred dollars if I do the math right, a hundred dollars for a $5,000 account.
And so now you have this kind of, it’s not that it’s incongruent because 2% of five K is a hundred dollars. It’s just that it’s so easy to hit it when you look at stop, stop-loss placement, it’s too easy to hit $100. And so I think the smaller trader in that regard, or the trader who can be tomorrow’s whale is a little bit behind the eight ball in that there’s not a lot of room in the account. There’s not a lot of give and without knowing other external conditions, like you can refund your account from time to time and you’re willing to do that to learn your craft by all means, because kind of what I did, I took much bigger risks though rather than 2% because I needed to grow my money much more quickly. So I was willing emotionally and financially to withstand larger drawdowns.
And that was true well into my professional career too. And so just be mindful of the fact that you might be more sensitive to how those things work and how the nature of what you think your protective stop is, right? Obviously if you’re dealing with the ein, if you can even trade that with five K, you’re looking at two points. Now, you could scale it down and trade the minis and the micros. I don’t know if that’s appropriate for you. Again, I’m not recommending you do that, so you have to hold me harmless. You have to figure that out for yourself. But then you have to say to yourself again, are you putting yourself deliberately in the environment where you’re going to be the small trader who takes small losses but also small gains? And so those kind of things all live in the same neighborhood. It’s very difficult to find yourself with a 10 to one, 10 R to one R trading situation unless you just happen to be in the right
Place the right time. So it was very, very difficult to grow your account from those small levels. It’s an enormous amount of work. Now, do what you can, but I think I owe it to you when everybody out there is trying to sell you stuff on their small term, short term, small time trading systems because it’s emotionally appealing for you and you want it to be true. So you’ll kind of lead yourself to believe whatever they say, which might not be in your best interest. And that can be, that can be other types of chat rooms or research or alerts via text or dms on Twitter or stock twits of course.
And again, be aware of what your emotional needs are. They could be driving the whole show here in the end. You have to eat your own cooking, you have to do your own research. You’re not going to trade your way to financial freedom by subscribing to somebody else’s system. And they send you 15 ideas every day. Which one are you going to pick? Again, you can disagree with me, you can dislike what I’m saying, but I’ve been there, I’ve done it. So in terms of that, it’s not contested. And I feel like the marketers absolutely want your money because to you, you are annuity for them. And the more people that they can get as a member paying them monthly fees, that’s their asset. So the membership, what you think is helping you is actually helping them generate revenue. So again, I’m not trying to be cynical.
Maybe there’s some gems of interest out there that can be helpful, but in my experience, the pros out there, and again, even if you don’t want to go pro, you have to do the things that the pros do in order to get the results that they get because it’s all behavioral at the end of the day. So in my experience, whereas the professionals and the hedge funds, sure they might get the research part of some soft dollar arrangement or otherwise, and it helps generate commissions for the clearing members or the prime brokerage firms, they ultimately have to live like and die by their own sort. They have to eat their own cooking. The responsibility of the trade, including how do you get the name on your list to the postmortem that you do when you’re out of the trade winner or loser, really comes down to you.
And the more that you’re willing to go to that spot of personal responsibility, the better off you’re going to be. Part of that’s going to be to make sure that you have an adequately funded account. And so while you might be able to get into the market and try a few things and try your hand at things with a smaller account, I think you’re putting yourself in a much harder spot because of the sensitivity to what small dollars mean. Small losses on a dollar basis mean as a percentage of your overall account. You really want to break up your money in as many ways as possible. And by that
2% risk unit, you’ve got 50 betts in your account. If you break up a hundred percent of your money into one 10th of 1%, now you’ve got a thousand mistakes. See, it’s very, very different when you have more money. So yes, you can break up your money, but divide five K by a thousand, what’s your bed size going to be at that point? Because the bid ask spread might be what your max loss is. You see, it’s harder. You put yourself in a bit of a financial corner if you’re trying to do this with smaller accounts is all I’m saying. That’s the point I wanted to make. I wish everyone the best, and I hope things go very smoothly for all of you. But I think as far as that’s concerned, there needs to be someone in the community who can have a little straight talk with you just to kind of give you some insight because again, we’re talking about self-awareness and what happens in your subconscious when you put in an account that’s in my mind’s eye underfunded.
You can find yourself developing bad habits because of this percentage, high percentage, low dollar amount equality. You see what I’m saying? And the goal is to learn about yourself so that you can understand why you behave the way you behave and why you do what you do. You might be reacting to the pressures of having an underfunded account. Anyway, all good here. I’m happy to, I don’t have all the answers, but I have a lot of good insight on these things because kind of how I started. But anyway, I appreciate you all being here, and I’ll see you tomorrow.
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