To make matters worse, the trades I am currently in have gobbled up all my initial margin, so I cannot put on any more trades. Of course, the few trades I've missed already have cost me probably a couple of thousand dollars.
Both of these facts are a result of starting out with a small account. There is a good lesson here for people with small accounts - realize your drawdown will likely be more severe, and you might have to skip good signals.
But, I'll continue to forge on. Hopefully things will turn up soon.
Kevin, how do I establish the right size of an account (to both avoid risks mentioned in your post and not to tie too much capital) for a particular futures trading system?
ReplyDeleteAnd many thanks for being so open and honest and sharing your ups and (unfortunately) also downs. I find the insights extremely helpful.
Thanks for the comment, Kapitan.
ReplyDeleteI'll have more detail on overleveraging in step 13 of my "Trading Process" series, but in the meantime, you could do something like this:
- From your historical testing, take 1.5 to 2 times your maximum drawdown, and add to it the initial margin required to trade 1 contract. That could give you the minimum acct size.
Example: Let's say you have a Gold system (initial margin currently $9113). Based on historical testing, the worst drawdown experienced was $14,200.
So, Min Acct size = $9113 + 2*$14200 = $37,513
Many people use 3 x intial margin, but I don't like that, since it completely ignores your particular system.
So, Min Acct size = 3 * $9113 = $27,339
Based on this, with about $37500 in your account, you could likely safely trade this Gold system.
You could also take on more risk, trading with a smaller account, if you decide to quit if the max historical drawdown is reached.
The point is there are a lot of ways to calculate a "reasonable" number, and one you are comfortable with.
Kevin, sorry to hear about your drawdown, you made a great point about what it means to trade with a small account. I have questioned myself why I have traded so many years with a small account. I have chalked it up as paying tuition.
ReplyDelete@ Kapitan, trading with a small account is never advisable and is not a recipe for long term success. Not to say it is not possible, but trading is hard enough with a well funded account.
If trading part time/sporadically with a small account, don't beat your self up if your consistency/P&L is all over the place. Trading for a living, requires a account to be well funded to have a chance... IMO.