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As a business owner myself and co-founder of venture-backed start-ups, these points are right on. I don't trade for a living because I'm under capitalized but I keep in the game to keep learning and slowly grow my account so if/when I am able to put together some capital I'll have the skills and tools ready to go to make the switch. In fact, even with a small account, if I can string together a good track record where I am yielding good returns, on a percentage basis, you can use that to raise money to trade other people's money, once you get the proper licenses (CTA, Series 7, Series 3, etc) but now you have a new set of headaches: anxious investors and their lawyers ready to pounce on you if you have a draw-down of negative months more than they can handle.
I know several traders that are former business owners mainly just looking to simplify their life, have lower overhead, and not have to babysit a bunch of employees and customers and they are very happy they made the switch. But the ones that have switched usually have attained a fair amount of wealth from selling their business or long-term savings, or some other capital event, like maybe an inheritance. I don't know anybody that started with $5-10K and worked their way up to enough capital to trade full time.
Platform: NinjaTrader (It's a love/hate relationship)
Trading: CL, TF, 6E
Posts: 169 since May 2010
Thanks Given: 60
Thanks Received: 314
This makes sense because a small account always forces traders to overtrade in an attempt to get meaningful returns.
When you have a sufficiently funded account, it's easy to be patient and disciplined, because you know that one good trade is going to pay the bills. When you have a small account and you see you only made $100 for all that hard work, there is immense pressure to continue trading... often giving back most of your profits.
“Overtrading “ is a definition that is less understood by many and often used as an excuse to justify the trader’s impulse while losing. If overtrading is explained as an action to engage in trading to a degree that is in excess of one's finances or the demands of the market, that should be true. But note the two variables, “excess of one's finances” or “the demands of the market”.
Case 1. JohnDoe (JD) a trader who has an account of $2500 or 250 ticks on CL
(a) selecting a product to trade has also relevancy on the trader’s cost per trade. If the cost per trade is $5 it makes sense to consider NQ where gaining on two ticks would result in a 50/50 with your broker+GOV fees/trade. A $6.5/trade cost would justify ES and can include CL. (the example excludes the often found slippage and inconsistent data sent to the trader’s terminal)
(b) selecting the stop value is based on the market demand per particular product/instrument. Argue or not a good style on CL is to enter the order S30-T30 meaning $300 up or down. Applying this style JohnDoe can enter the market about 8 times but rather 4 times until the Risk-Department steps in.
(c) closing your running order; JohnDoe is aware of trading with a small account (sensible to losses) and wouldn’t run any order at a greater gain/loss than $100/trade (10 ticks on CL that is) – by doing this JD did increase his chances to enter the market with a good trade about 3 times. And that means 12 order entries before Risk-Department comes in.
(d) money management – JD has his own rules and thinks that $300/day-trading loss is the most he can afford. Of course JD likes CL and his focused on that instrument.
(e)MIN/MAX – (i) trading-loss-span in the worst scenario is that JD has no trade-gains which means 12 x100 = 1200 USD or four trading-days – (I would call that a week of trading with a small account) (ii) trading-gain-span, which is a choice of JD to consider $300 gain per trading-day before he stops trading.
(f) overtrading assumption: (i) should JD incur 30 trades per day at a loss of only $100 would that be overtrading? (ii) should JD incur $300 gain from 3 trades on one day-trading should he stop trading since limits are reached (and overtrading fear exists)?
Radical case example or not I think explaining overtrading is not that easy when facts are omitted.
My take is that before overtrading occurs, JD should trade at (i)3x-Lost-orders to 0x-Gain-orders or (ii) up to $240 trades/day which should not exceed 12 trades/day.
And I do believe that (f)(i) is not overtrading although seems like it. Overtrading would be more than 12 trades with a loss of over $240/day – the basic math formula would be [number of trades] times [cost per trade] less [money management decision in JD’s case $300] – and that is 12x5-300=240 (where the number of trades+cost reached the limit afforded).
Therefore, 30x5-300=150 see (f)(i)
Note: trades or orders are in reference to the number of market entries with one contract. Over all investment or futures-trading is not for those cannot afford losing 12-15 hundreds. I see the small 2500 account to be good enough to get started. Beyond above overtrading explanation is the trader’s decision to remain with the broker DataFeed and clearing house or to choose another system that is better suited for his trading style. I would say try something else if one can afford trying.
Furthermore the overhead was not included (ie Software, Indicators, data, computer, labor(your time), utilities and may be interest rate – just to name few of them).
I do and DONT understand the fixation on account size. At the end it all boils down to "profitability/drawdown/trade opportunity/risk/money management".
For example:
Starting Account Size $5,000
Average trades per day = 10 to keep it simple
70% wins 30% losses
Average Loser 8 ticks
Average Winner 6 ticks.
Statistically on average the results would be as follows
Thats a net win on average of 12 ticks per 10 trades.
Lets say half a tick ($5) of commission per trade and you have:
GROSS PROFIT: 12 Ticks
COMMISSIONS: 1/2tick x 10 trades = 5 ticks
NET PROFIT: 7 ticks
$70 net profit on an account of $5000 is 1.4% per day !
MORAL OF THE STORY:
Account size protects against the risk of ruin, and effects the number of contracts traded but has NOTHING to do with the Expectancy/Profitability of the strategy.
Your STRATEGY is what will dictate what your account size can be.
Obviously the sample size of 10 is very very small and does not represent the real life scenario of say 8 losers in a row.
So a drawdown of (8 x $80) = $640 is likely. But even in that case the drawdown on a $5,000 account is only 12.8% ( $640/$5000)
If you are netting on average 0.7 ticks per trade it would take you about 92 trades ($640 drawdown/ $7 per trade average win) to get back to even.
If the system generates 10 trades a day its about 2 weeks (10 trading days) to get back to even.
ACCOUNT SIZE MATTERS, don't get me wrong.
But telling people they need a $50,000 account is as crazy as telling someone they need one of those fire fighting helicopters with the giant bucket of water to fill a swimming pool.
A garden hose will do just fine. It just takes a bit longer
If I had to start over again, knowing what I know now, and I had a small account to trade I would look into trading forex. You can start with micros which are $0.10 a pip and this allows you to trade higher time frames without a big loss wiping you out, though a big win won't add a large chunk of cash either, but if you want to risk a limited amount on each trade while you are learning check out forex. Even using standard lots, usually about $1.00 a pip, that's still 8% the size of a 6E futures contract tick ($12.50 per tick/pip) and you have the choice of paying a spread instead of commissions.
First, there is a difference between making money from something and earning a living from something. I have rental properties that I make money from, but I earn a living from trading. Second, I would consider operating a trading website to be directly correlated to trading for a living. Third, regardless, things change. Fourth, I don't understand why people get pissed off or call Big Mike a sell out for possibly making money off this site. This is America, that's what we do here. Because the site is intended to help people he can never allow advertising? He can never charge a monthly fee? He had the ingenuity to create this site, he can do with it what he wants to. If he chooses not to, then he chooses not to, but people shouldn't be giving him crap for it either way.
