It seems to me, from my limited experience, that because my cash account is only a little over the minimal margin required by my broker some of my trading decisions are flawed. Specifically it causes me place my stops to tightly (especially when I am in the money) This means I am exiting good trades to early. Even if I find good entries, which I actually have learned to do, my long term trading will be losing because of under-capitalization.
What do you consider the correct amount of cash to hold per contract to properly trade? Or am I completely wrong?
Thanks for any opinions or advice.
A good start is 10k cash per ES contract. And also a good start is not to start with ES but something cheaper like M6E.
Plenty of webinars on this.
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I had originally heard the 10k rule (guideline) also. It is that rule that I am beginning to question. Or at least think it should be expressed as a ratio to price. What was the price for the ES when the 10k rule was proposed?
What I do know is that if I have a few bad trades I become affected by my lack of trading cash. My signals and setups show a good percentage of success. But occasionally losers come together. Now I am trading scared. I pass on good trades because I am afraid. I start to make my stops a little to tight. I think that is caused by insufficient margin.
Margin should not be the minimum your broker asks for. It should be enough where a few losers do not improperly affect your trading.
( that does not mean you should ignore your loses, or stick to a losing plan)
Any suggestions on what the ratio of margin instrument price to instrument price should be?
I guess it would depend on market volatility and your skills/strategy. You would need to do some basic statistics to figure out the distribution of your PnL in various market conditions, taking into account transaction costs and slippage, as well as pain thresholds and pick something that you're comfortable with. Personally, I'm still a fledging so my best guesstimate for required equity per contract in current situation is no less than $20k.
A good practice that I see in use at hedge funds that allow margin trading in the first place; is to never let margin requirement exceed 15% to 20% of total capital.
In other words, if the CME maintenance margin requirement overnight on ES is $3,500 (your broker might require more, but can't ask for less obviously) then you need a minimum capital of $17,500 per contract.
Of course, this is for overnight positions; if you only day trade and flatten out at the bell, there is no margin requirement from the CME exchange at this point, and you are left to your brokers discretion...
You can find some brokers asking for $500 per ES contract. In that case, you shall need $2,500 per contract to abide by this same rule. But my broker for instance, requires nonetheless $1,750 of intraday margin on ES and that would means that I need $8,750 per contract.
However, margin is not the only consideration or most important one!
You need to check your risk management plan (hopefully you have one) and do some other money management calculations too
Let me give you an example that I apply for my own trading:
1. I do not risk more than 1% of total capital on any trade; this is an unbreakable rule for me.
2. I check the stop price for my entry, and calculate how much would that cost me if I fail.
3. This changes of course on a daily basis and per strategy/entry, I don't know how you do for your stops; but let's assume for the sake of example, that you more or less have a stop equal to 1.5x the average true range of the time frame you are trading.
4. intraday you perhaps want to trade the 10min chart, and you see that the average true range for the last 14 or so bars is 3 points.
5. this means your stop will have to be 4.5 points wide (3x1.5), or an equivalent risk of -$225.
6. back to point number one, the capital in that case needs to be at least $22,500 to trade 1x ES contract.
I encourage you to always start by finding the price point that would invalidate your trade; this will be your stop basically. You then calculate how much would that cost you from your entry, and derive the required capital to trade the instrument.
Only in second consideration, you perform the margin requirements calculations as I described above, abiding by the 20% rule or any other if you have solid financial reasons behind it.
If you have limited cash, you are better trading the NQ instead. Also it is not as thick as the ES, and it is easier to get filled when scalping intraday.
Successful people will do what unsuccessful people won't or can't do!
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Great post. Reminded me of many important things I had learned from professional traders I know and forgot. I used to use the 1% rule to determine how many share of a stock I could buy. Why it did not occur to me to use it for ES I can not say.
As I think you correctly deduced, I was not really just asking specifically about margin only. But the broader question of how trading capital should be allocated. I think it is easy to overextend. To trade to much and to not leave enough cash available.
Some may argue that the more money in the game the more money you make. But I will be opting for the professional approach. And I may try the NQ. Why pay more than you have to for an education?
I think the percentage or ratio based money management systems as you describe are clearly superior to fixed numbers. Thanks again.
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I would suggest to hold initial +maintainance times 2 for a start. Also, you move to tight stops when you are in the money, what might suggest you are trading with some amount of fear. Why would that be? Do you trust your trading plan? Are your stops the same as the stops you used during paper trading?
If you trade trends, early killers will not bring you any profit in the long run.