Staggering Growth?

A question came in from a reader today, and I thought I’d answer it for everyone’s benefit.

hey mike

i was hoping to get your point of view on something. i’ve heard several times the phrase “small traders/accounts make the most money.” does this mean that if you have a small account (e.g. 10k or less) using a portfolio heat of 30%…you would use a portfolio of 6 futures betting 5% on each trade in lieu of using a 10 future portfolio betting 3%? is this how you would make money with a small account or am i missing the point entirely?

Great Question and thanks for writing.

Regarding “small traders/accounts make the most money” – I think it means that you can have $10,000 in equity, trade one crude oil contract for $9,500 in initial margin, and make $40,000 over the year on your equity. In this instance you will have made a few hundred percentage points, as well as tens of thousands of dollars.

When your account grows to the millions or tens of millions, there are markets that are a little more tricky to trade due to volume/liquidity constraints, so you can’t take gigantic positions b/c you might not be able to get out of them.

If you desire to run public money – for allocators like a CTA would – returns over 50% will raise more negative eyebrows than favorable ones…and that number might be high. It might be more like 30%. Friends and family will want you to run and gun for giant returns b/c they can afford a full loss of their capital. IMHO, you’ll want to show a slow and steady, positive slope to your equity curve: trade your model, not the emotional constitution of your clients.

Most importantly, if you can find a way to keep your drawdowns in the 10 – 15% range you’ll really be onto something. Allocators are more concerned with risk adjusted returns. Most large CTAs have drawdowns over 20%.

Please note: I reserve the right to delete comments that are offensive or off-topic.