Reader Question: Size Matters

How does one start out given that with a small account ($10K-$30K) one seems to be “priced out” of some of the markets, and the risk seems to be a higher percentage-wise (relative to the account size) with fewer markets available?

Great question and it’s one that we all had to face at the beginning of our careers. I knew ahead of time that my own account was NOT going to be my model account. Therefore, I didn’t have to worry about wild swings in my equity – which you can experience with a smaller account – although I always tried to keep small drawdowns.

That said, you are correct – it’s hard to run a systematic, rules-based methodology with a small account. However, you can pick one market in each of the areas of the metals, grains, indices, etc. and trade them with your model or rules until your equity grows. For example, you might consider gold, crude oil, S&P, soybeans, US Dollar Index, and the 10-Year Note —- just as an example. I’m just giving you a for instance.

If that’s too much, just go with one of them like gold and apply your rules there. Plenty of traders became experts in one area before branching out. Eric Bolling comes to mind. You can do that too.

Many traders normalize risk using an expression of the Average True Range (ATR) so that emotionally, they are indifferent from one contract to another. In doing so and adjusting for volatility, 3 Gold contracts, 1 soybean contract, and 2 S&P contracts might all be equity with respect to the overall risk to your portfolio. If that’s too much for you at this point, trade 1-lots. The idea is if you lose all your marbles, you can’t come back and play tomorrow.

One reality is that your margin to equity ratio will be high compared to the level of larger CTAs. Nothing you can do about it at this stage. Most large CTAs will have no more than 15% at the max, and that is probably high. For example, if you trade 1 Comex gold contract with a $30,000 account, your M/E ratio is (5,400/30,000) or a little more than 16% – more than any large CTAs would have for their entire portfolio of maybe dozens of commodity positions. You can trade the mini contracts too, nothing wrong with that.

You’ll have to measure your risk as the distance between your entry and your exit stop, multiplied by the # of contracts and what percentage that is of your overall equity. $300 is 1% of $30,000. I would focus on that as you begin your trading. I’ve never thought of my initial margin as the amount I was willing to risk on a trade.

Things to consider

—Don’t pyramid or add to winning positions at this stage. Grow your equity along the slow and steady route. You hear romantic stories about guys ramping up their accounts 10-fold over the course of a year, but in my experience, there are hundreds more who have blown up and lost it all going for those same gains. The Ex Ante Expectation of high reward comes with the Ex Post Realization of losing all your capital.

—Manage your losses as a percentage of your total equity and be very rigorous in placing your offsetting/exiting Stop Orders. Mental stops are for Professionals – which is not you at this stage. Enter your orders into the computer. No one cares about your model and no one is going to try to reverse-engineer it.

—Write your trades down on a piece of paper BEFORE you type them or call them in. This will minimize the severity and frequency of the mistakes that you can make. And you will make them too.


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