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Undercapitalization is an extremely common theme among failing traders and for the same reasons you outlined in your post. "You need an account that is just a few times larger than the margin requirement for your market."
And therein lies the problem. How many traders are trying to trade on instruments like CL or ES with an account less than $10k? Brokers almost encourage it. I know before the CL reserve increase, late last year, I had a broker that would allow up to 4 contracts (intraday) with a $5k on CL. Why do they do this? Commissions. Even though the exchange reserve for CL is now $6250, a broker can offer a reduced margin for intraday (as long as the trader isn't holding over).
Why do traders do this? Leverage, volitility, etc.
Being overleveraged or undercapitalized simply hastens the inevitable. If you're profitable, then you'll simply grow more quickly. But if you're losing, it simply quickens the process. Thus, traders who are underapitalized are not afforded any appreciable long term (or even short) term risk tolerance. If they make one massive mistake, or even a short series of small mistakes, the loss takes them below their marginal requirements and bam....they're out.
Higher capitalization also means that a trader is afforded more options when it comes to "making a living."
The trader with a $10k account has to make some serious returns in order to make a living, especially after all the burden, commissions and fees. (platform fees, data fees, internet connection, brokerage commissions, software, training and educational expenses, etc, etc, etc.).
An easy example would be something as simple as a straight equities trade or an options trade. The commission burden decreases the larger the order size....you can actually get so small that you're spending a great deal of effort just to overcome your burdens.
Similarly, the trader with a $1M account, can easily chase 1% a month and live more comfortably than most Kings throughout world history. He doesn't have to lean into every trade, doesn't have to make unnecessary or stupid risk...doesn't need to "chase" trades or feel like he's pressured into trading.
FURTHERMORE, the trader with a large account, has the mental and physical safety net of falling back on his capital if he gets stalled. He doesn't have to worry about the mortgage, or the car payment, etc, if his trading doesn't turn out to be going the way he'd hoped, he always has a large equity pool that he can draw from to survive.
Undercapitalization is probably THE SINGLE MOST COMMON reason that many traders take extraordinary risks (in many facets of their trading), take on too much leverage and are put in a position where they feel like they HAVE to trade in order to earn money.
Like I said, it's also the reason that many people end up "blowing up" their account before they have a chance to sit and reflect on what they're doing wrong.
This can be true for someone with a large account, but at least the larger account has the "option" of trading some of the more popular instruments (that feature all the nice movement and volitility we love) at a much lower leverage position.
I think your statements are coming from the perspective of "I had a small account and made it work" rather than informing people of the commonality of typical mistakes that failing investors make.
Just because JJ Berea is a world champion basketball player, doesn't mean that it's solid advice to tell high school kids who are 5'8" that they have a legit shot at playing in the NBA. And more appripo, it doesn't mean that someone telling a 5'8" kid the cards are stacked against him is bad advice or inaccurate.
If you're trying to trade CL with a $10k account (and you're a full time trader trying to make a living) then I'm sorry, your going to have to take some considerable risks that other traders don't have to bear.
Your comments about drawdown are puzzling to me. Am I to understand that you're trying to tell me you don't ever experience drawdown? If so, we need to talk. I'm willing to pay. If you're that good, sign me up. Because I don't proclaim to be all knowing when it comes to trading, but I've yet to see anyone who didn't suffer some amount of drawdown in their trading. (FYI, saying you never have drawdown means you never lose, which to me, seems a bit nonsensical).
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
Can you help answer these questions from other members on NexusFi?
I think undercapitalizaiton is the most common problem for most failed traders, but not for the sake of undercapitaliztion itself, but rather because they do not yet have a profitable method, nor do they understand about their 'risk of ruin' stats. So, they go in head long and reach the risk of ruin point very quickly within their small account. In other words, they are undercapitalized because they don't know what they are doing. But give that same small amount of capital to a seasoned trader with the right method, they can grow that account without blowing it.
As a new trader, a large account only puts your risk of ruin point further away, thereby giving you the luxury of time and a monetary buffer while you learn to trade, but you will loose just as much money. The answer is not in getting a larger account, the answer is to develop a proven profitable method first, before putting your small account capital behind it.
Furthermore, let's expand on this whole idea of "making it" and "primary source of income."
In order for you to make trading your primary source of income, let's begin by laying out some assumptions.
Let's assume that you can "survive" off $1500/month, which is pretty paultry I know, but I'll use a low number just to show you for the sake of argument and no one can accuse me of biasing the discussion.
If you have a $15k account. That means, that you must "net" at least 10% a month after all your trading burdens and commissions (data feed, commissions, platform fee, etc).
So even the trader with a $15k account that's making 10% monthly is simply treading water. He's not building his account at all, he's taking all the profit he makes and using it to live. If he has a bad month, guess what...he has to dip into his capital.
The guy with a $100k account can afford to yield 2% a month, pay his bills and even have some left over to compound and grow his account.
The larger account can afford to be much more selective, pick his spots better, choose optimal or preferntial entries that maximize his odds of winning. If he misses 2 weeks during a "flat" period...hey, no big deal, he can trade 2 weeks out of that month and still not have to dip into his capital.
Now you start to have an understanding of how difficult it is to become a full time trader on a small account. The odds are INSANELY stacked against you. And even if somehow, you're able to be an awesome trader and average a crazy return, you have to be able to overcome your living expenses and grow/compound your account in order to get anywhere.
Why on EARTH do you think that Hedge fund managers won't touch people with small accounts? Because there's nothing gained from it. The manager has to take such extreme risks in order to yield any appreciable profit, that it's not worth it.
To truly "make it" as a full time trader and as your "primary" source of income, there's a direct relationship to the size of your starting capital and the likelihood of your success.
Again, can a large account holder take the same risks and blow out their account? Sure. But at least they're afforded the option of using less leverage, being more selective, being more patient, pushing pause if necessary and re-evaluating, etc.
This isn't to say it's not "possible." Is it possible to show up to an NFL training camp as an unsigned, undrafted rookie and make the team? Sure. Is it likely.....no. It does happen.
So the essence here is that if you don't have a large account, your back is against the wall. You're going to have to be that 5% type guy that's ultra patient, learns quickly.....adapts quickly, doesn't get emotional, doesn't make mistakes, doesn't chase trades when he should wait for the proper setup....etc. Not an easy or common thing to do.....and when you combine the fact that you have to do it CONSISTENTLY (which is always the primary discreminator in financial performance) and in the long term......well, now you know why so many people fail and go back to working a day job.
Being a "professional" trader or having it be your primary source of income has a lot of perks. You're your own boss, you can pretty much make your own schedule, you don't have to worry about employees or employers or customers or other business partners. You don't have to fight traffic every day. You can work from home (or wherever you choose). You can move/live wherever you choose). You have an nearly unlimited earnings potential, etc.etc.
But it does have some drawbacks. Good luck on establishing a line of credit with anyone. Until you have over 3 years of consistent income, most creditors will not give you "credit" (no pun intended) as having any income. That means it's difficult to finance a car loan or a mortgage (which might be a good thing....).
But the worst drawback is that you're putting your livelihood on the line everyday. Your risking the very thing that's enabling you to work and make these potentially extraordinary income levels.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
Even the most seasoned trader, if I handed him $10k and said "hey, I wanna make enough to live off and I have to have $2k/month to live on from here to eternity, so get cracking." Most seasoned pro's would say "no way." Or they'd say, that's fine, but you'll have to wait until I grow the account up to a stage where your $2k monthly withdrawl isn't totally stifling the account.
Your capital has a direct effect on the risks you can take, the risks you choose to take and the risks you're forced to take in order to yield some level of return.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
I think you are all right. I think you are all in agreement except you are not considering or putting as much weight on some assumptions. All traders are not the same, too many variables to measure.
The key assumption is that all persons with a 5K account can do it, but FIRST the big issue is to become profitable and consistent. So, the #1 problem that I see is traders going live and not earning their stripes and hence like @monpere was saying they can lose it, but if they do earn their stripes then of course they can mold that into more.
Something that bothers me about my original trading mentor and coach was that he didn't want to set limitations on how someone would be successful. The first question most people will ask is, "How long will this take for me to be profitable daily?".
If you are a vendor, you probably won't be closing many sales if you say, "Well, that depends upon you, look into the mirror and come back to tell me..." OR "Some do it in 30 days, some in 3-6 months, others in 3-6 years and others never!"
If someone had told me or I would have read more threads like this, then I would probably have saved significant $'s. Of course, there is the possibility of my EGO taking over and saying, "Well, I am too smart, and too successful in everything I do, so it will probably take me a week!"
This isn't popular with many, but if someone starts from a 0 background of trading, they should paper trade in my opinion for at minimum 2 years.
But, if that was the case it would probably remove a great many from the business. I have only read of one person who after a few months (I think about 8) was consistently profitable. Every single other person has YEARS of experience and nothing wrong with building a huge portfolio of paper money in my opinion. That is what my kids will be doing.
Undercapitalization is an extremely common theme among failing traders and for the same reasons you outlined in your post. "You need an account that is just a few times larger than the margin requirement for your market."
The problem is most that attempt trading, have no idea what they are doing. If one is a net loser then no amount of money will save them.
And therein lies the problem. How many traders are trying to trade on instruments like CL or ES with an account less than $10k? Brokers almost encourage it. I know before the CL reserve increase, late last year, I had a broker that would allow up to 4 contracts (intraday) with a $5k on CL. Why do they do this? Commissions. Even though the exchange reserve for CL is now $6250, a broker can offer a reduced margin for intraday (as long as the trader isn't holding over).
Why do traders do this? Leverage, volitility, etc.
Unaccomplished traders attempt trading overzealously because they have no idea what the sh$t they are doing. Everyone wants to blame everyone else (see your paragraph above), when the problem lies within the trader’s inexperience. Leveraged or not, if one has no idea as to what they are doing, they have little to no chance at survival.
Being overleveraged or undercapitalized simply hastens the inevitable. If you're profitable, then you'll simply grow more quickly. But if you're losing, it simply quickens the process. Thus, traders who are underapitalized are not afforded any appreciable long term (or even short) term risk tolerance. If they make one massive mistake, or even a short series of small mistakes, the loss takes them below their marginal requirements and bam....they're out.
Your sentence, which I’ve highlighted in red for clarity, precisely illustrates my point. If one does not know sufficiently what they are doing, it won’t matter what their account size is. Losses are inevitable to those that are not properly prepared. Undercapitalization is not the root cause. It is true that many failed traders over-leverage themselves, but luckily, correlation does not imply causation.
Higher capitalization also means that a trader is afforded more options when it comes to "making a living."
Of course, but then, if one’s methodology is good enough, they don’t need other options.
The trader with a $10k account has to make some serious returns in order to make a living, especially after all the burden, commissions and fees. (platform fees, data fees, internet connection, brokerage commissions, software, training and educational expenses, etc, etc, etc.).
$10,000 is more than enough for many to “make a living” from. However, trading, to me, is not about “making a living”, it’s about wealth accumulation. If an interested party is looking to “making a living”, I would suggest the corporate ladder instead of the price ladder.
An easy example would be something as simple as a straight equities trade or an options trade. The commission burden decreases the larger the order size....you can actually get so small that you're spending a great deal of effort just to overcome your burdens.
There are costs to surmount for any trader. So what? No trader with retail commissions should be “scalping”, but that is another matter entirely.
Similarly, the trader with a $1M account, can easily chase 1% a month and live more comfortably than most Kings throughout world history. He doesn't have to lean into every trade, doesn't have to make unnecessary or stupid risk...doesn't need to "chase" trades or feel like he's pressured into trading.
Nor does a professional futures trader, with a comparatively small account, need to take “unnecessary or stupid risk”. But then, winning futures traders would not bother actively trading equities. Why should they?
FURTHERMORE, the trader with a large account, has the mental and physical safety net of falling back on his capital if he gets stalled. He doesn't have to worry about the mortgage, or the car payment, etc, if his trading doesn't turn out to be going the way he'd hoped, he always has a large equity pool that he can draw from to survive.
What you are talking about here is whether or not someone can afford to trade. This is beyond the scope of our exchange.
Undercapitalization is probably THE SINGLE MOST COMMON reason that many traders take extraordinary risks (in many facets of their trading), take on too much leverage and are put in a position where they feel like they HAVE to trade in order to earn money.
Traders take unnecessary risks because they don’t know better, or worse, can’t control themselves. If they can’t determine an appropriate allocation of risk capital, they do not know what they are doing, and have no business trading. This is not an undercapitalization problem. It’s an ignorance problem.
Like I said, it's also the reason that many people end up "blowing up" their account before they have a chance to sit and reflect on what they're doing wrong.
One can blow up 100K just as fast as 5K, and the prior will hurt a whole lot more. One needs to know sufficiently what they are doing in either case.
This can be true for someone with a large account, but at least the larger account has the "option" of trading some of the more popular instruments (that feature all the nice movement and volitility we love) at a much lower leverage position.
ES, NQ, YM, TF, and similar instruments are not popular? All of these products are easily accessible to a $5,000 account. More importantly, a good trader can rather easily "make a living" off of an account of that size. However, I would never advise the ES for intraday trading purposes. Ask Fat Tails for a reason why.
I think your statements are coming from the perspective of "I had a small account and made it work" rather than informing people of the commonality of typical mistakes that failing investors make.
No, my statements come from simple arithmetic.
Just because JJ Berea is a world champion basketball player, doesn't mean that it's solid advice to tell high school kids who are 5'8" that they have a legit shot at playing in the NBA. And more appripo, it doesn't mean that someone telling a 5'8" kid the cards are stacked against him is bad advice or inaccurate.
This is hardly an appropriate analog. Trading does not require exceptional physical abilities and can be taught, to presumably anyone. How do I know this? My methodology can be described as a set of rules that anyone could follow.
If you're trying to trade CL with a $10k account (and you're a full time trader trying to make a living) then I'm sorry, your going to have to take some considerable risks that other traders don't have to bear.
Wrong. One can easily trade one CL contract with a 10K account, on an intraday basis. That is, at the risk of sounding like a broken record, if one sufficiently knows what they are doing. Again, you are imposing your perceived limits on others. I will however, grant you this: I would personally never trade CL interday with a 10K account, but then, I would never trade CL interday on any size account.
Your comments about drawdown are puzzling to me. Am I to understand that you're trying to tell me you don't ever experience drawdown? If so, we need to talk. I'm willing to pay. If you're that good, sign me up. Because I don't proclaim to be all knowing when it comes to trading, but I've yet to see anyone who didn't suffer some amount of drawdown in their trading. (FYI, saying you never have drawdown means you never lose, which to me, seems a bit nonsensical).
In my original post I said that intraday losses and washes will occur. However, I also implied that interday drawdowns should be rare, and interweek drawdowns should be rarer still. In fact, interweek drawdowns should be virtually nonexistent. The drawdown paradigm is a self-fulfilling prophetic way of thinking about markets. It is not a requirement. One can, and many do, make net gains on a daily basis with only rare exception. The aim should be nothing less.
Firstly, I agree with most of what your saying, but your conclusions are wrong. Again, the proof is in the reality and the facts.
A person with a larger account is afforded options that a smaller account is not. Doesn't mean that a person with a larger account is automatically going to succeed. Doesn't mean that a person with a smaller account is doomed to fail.
It simply means that if you're trying to make a living as a trader, full time as your primary source of income, all the things I outlined still hold true. You're going to have to seek returns that a trader with a larger account does not.
Why do you think we have members on futures.io (formerly BMT) that come on here asking "Is it possible to develop a system on ES that nets 2 points a day?" Why do you think they chose that number (2 points?) Because they have a return in mind (rather than being profitable).
You're talking about what "should be" and I agree with everything you said. I'm talking about what "is."
If you fail, you cannot "blame" it on a small account. But again, a good majority of traders that get busted out, is because they start off with too much leverage and too little capital. This encourages them to take risks and positionsizes that a person with a larger account has the option of passing up.
Secondly, your logic surrounding drawdown is confusing.
Drawdown is drawdown, I don't care what time frame it's on. Just because you recover and end up positive on the day, doesn't mean that you experienced no drawdown.
If you have a single loss, guess what? That's drawdown. Granted, the less you lose, the less your drawdowns will be, but the fact remains there's no system, no trader in the world that wins 100% of the time.
If you wanted to be biased, you could change your time frame to suit your equity curve and claim no drawdowns on whatever timeframe you wanted.
As easily as you framed it around the close of the day, I could frame it around the hour. Losses are still drawdown, the fact that you recover by the end of the day is simply a mental anchor point for which you're grading yourself.
If a trader drawsdown 20% during the day (but recovers and ends up positive on the day) guess what? That's still drawdown. You still have to feature enough capital to weather that drawdown.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
Firstly, I agree with most of what your saying, but your conclusions are wrong. Again, the proof is in the reality and the facts.
From my perspective, you have offered nothing compelling to support your arguments, whatever they actually are.
A person with a larger account is afforded options that a smaller account is not. Doesn't mean that a person with a larger account is automatically going to succeed. Doesn't mean that a person with a smaller account is doomed to fail.
A futures trader is offered a sh$t ton of points every day, and they do not need a large account to take advantage of that. There are no missed opportunities. Futures markets are where it’s at, and there is no futures market that is completely inaccessible to a micro trader with a small account. Sure, some markets like CL and FDAX are best left to more advanced participants. So what? In one eye and out the other, I guess.
It simply means that if you're trying to make a living as a trader, full time as your primary source of income, all the things I outlined still hold true. You're going to have to seek returns that a trader with a larger account does not.
When you have a solid methodology, there is no seeking. There is only trading. I don't wait for setups, I trade the day. As a futures trader, I would trade exactly the same way I am now with a much larger account, until either I hit a liquidity ceiling, or I start affecting my market in a way that changes my expectation.
Why do you think we have members on futures.io (formerly BMT) that come on here asking "Is it possible to develop a system on ES that nets 2 points a day?" Why do you think they chose that number (2 points?) Because they have a return in mind (rather than being profitable).
They ask because they don’t know better. I commented in the '2 points in ES' thread days or weeks ago. Traders should be after what is offered, not some silly fixed integer of points.
You're talking about what "should be" and I agree with everything you said. I'm talking about what "is."
You agree with everything I say, but yet you badger me? Honestly, I really don’t at all understand what you are trying to achieve in this conversation. You are apparently offering a solution looking for a problem. That, or you are just bent on being right and/or having the last word.
If you fail, you cannot "blame" it on a small account. But again, a good majority of traders that get busted out, is because they start off with too much leverage and too little capital. This encourages them to take risks and positionsizes that a person with a larger account has the option of passing up.
Traders get “busted out” because THEY DO NOT SUFFICIENTLY KNOW WHAT THEY ARE DOING. It is a function of ignorance, not money. Do I really need to state the obvious again?
Secondly, your logic surrounding drawdown is confusing.
I’m sorry this concept overwhelmed you.
Drawdown is drawdown, I don't care what time frame it's on. Just because you recover and end up positive on the day, doesn't mean that you experienced no drawdown.
If you have a single loss, guess what? That's drawdown. Granted, the less you lose, the less your drawdowns will be, but the fact remains there's no system, no trader in the world that wins 100% of the time.
If you wanted to be biased, you could change your time frame to suit your equity curve and claim no drawdowns on whatever timeframe you wanted.
As easily as you framed it around the close of the day, I could frame it around the hour. Losses are still drawdown, the fact that you recover by the end of the day is simply a mental anchor point for which you're grading yourself.
If a trader drawsdown 20% during the day (but recovers and ends up positive on the day) guess what? That's still drawdown. You still have to feature enough capital to weather that drawdown.
You just don’t get it. Unfortunately, I don’t have the time to educate you. I need to get some sleep for what would appear to be a big day tomorrow. I will do my best not to drawdown my account 20% intraday.
I think you are 
