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Account size when trading multiple instruments
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Account size when trading multiple instruments

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Account size when trading multiple instruments

The 2% rule is frequently mentioned on this forum, namely that you should not risk more than 2% of your account on a single trade. This implies a minimum account size of 50 times what you will risk on a single trade in a single instrument. My question is: What is the minimum account size if you are trading more than one instrument? Is there an equation that gives a "safe" account size? Clearly, if you're trading 2 instruments that are 100% correlated, have the same tic size and the same volatility, and you are the same way on both, your account should be twice as large. What if the correlation between the two instruments is 0? Will your "1 contract" account size suffice for both? What if you're trading 3 or 4 instruments simultaneously?

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I would trade minimum, yes MINIMUM (much more is prefered) $5000 per future contract, meaning trading 2 contracts, you have a balance of $10.000

so 3, $15.000

I trade 3 contracts on CL, but wouldn't do it with an account below $25.000, so it depends also on the instrument.

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The 2% is in relation to your risk and is just a general guideline, but one that I firmly believe does more good than harm.

If you are trading more than one markets concurrently then you should already be a successful trader with a proven track record. If you aren't, then don't. That's my opinion But the general advice would be to look at your risk across all trades concurrently, maybe measure your risk hourly or 4 times a day, etc, depending on the frequency and duration of your trades if you are trading a big portfolio.

If you start talking about correlation then your talking about hedging, and if you are talking about hedging then again you should already be a successful trader and should just trust your past track record to make smart future decisions.

Van Tharp has written some excellent money management books, you should definitely buy and read them if you haven't already. But the general idea again is 2% limits your ability to do a lot of damage with a single mistake. Trading is about consistency. It's a marathon not a sprint. So consistency is the most important, and keeping your risk at 2% will allow you to stay consistent, otherwise you might find big swings in your risk-to-reward which will make it much harder to succeed.

I agree with MetalTrade, you shouldn't be trading CL with less than 25k in your account, because even a "scalper" will need a stop of 10-20 ticks on CL. If you trade 3 lots, that's between $300-600 per trade, so 25k is right near at the minimum area for 2%, and will allow you to take some draw down heat before having to scale back your positions.

If you were trading ES, and were a scalper, you might be able to get away with between a 4 and 8 tick stop, so you can see that would require a lot less account size.

Mike

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Big Mike View Post
If you are trading more than one markets concurrently then you should already be a successful trader with a proven track record. If you aren't, then don't. That's my opinion But the general advice would be to look at your risk across all trades concurrently, maybe measure your risk hourly or 4 times a day, etc, depending on the frequency and duration of your trades if you are trading a big portfolio.

If you start talking about correlation then your talking about hedging, and if you are talking about hedging then again you should already be a successful trader and should just trust your past track record to make smart future decisions.

Van Tharp has written some excellent money management books, you should definitely buy and read them if you haven't already.

Mike

Here's why I posed the question.

The cornerstones of my approach to trading have always been edge, managing my own psychology, money management, and having a plan for growth. It is the last of these that I am struggling with now.

Making substantial money in this business requires being able to trade size. Trading size requires two things: enough capital to do it safely, and enough skill to do it well. You have to earn the right to trade bigger by making money trading small, and you have to grow gradually even if you have lots of capital, because markets can change abruptly and you don't want to be trading too large when you encounter a market dynamic you haven't seen before. I would like all of my growth to be funded by my trading. I would rather not dip into money outside my trading account either to fund my growth, or to bail out my mistakes. So the questions are, how much money do I need to have to safely accomplish this goal, and how much time do I need to be sure I have the requisite skill?

I've spent my entire 24 year career trading either a single instrument in a pit, spreading closely related instruments (trading yield curve pairs) or taking directional trades from within a small closely related group of instruments (e.g. I trade Treasury futures, I want to be long, which instrument do I think will give me the most bang for my buck?). My biggest problem trading on the screen is that I get bored easily and lose focus if nothing is happening in the Treasury complex, which is the only thing I had been trading. I've spent the past month trading multiple instruments in Sim, trading only things that have a clear up or down market direction. I've been trading ES, Treasuries, 6E, 6B, 6J (but only one currency at a time against the dollar), CL, GC, and grains/beans. My results have been far better than when I trade Treasuries alone, and I trade the Treasuries better as well.

I've never before had a problem figuring out an appropriate level of risk to take relative to my account size. Growth in trading size has always been a function of how much I have earned trading and how much I was able to leave in my account. It was a simple problem when I was only trading one thing. But having possibly 3 or 4 things on at a time with varying degrees of correlation complicates the picture. My account can be as well funded as I need it to be to begin using this approach, but when is it appropriate to increase my size? If I feel I need $5,000 in my account to trade a single ZN, $10,000 to trade a single 6E, and $15,000 to trade a single CL, how much do I need to trade all three at once? The answer to that question is also the answer to the question of how much I have to earn before I can double my size.

My plan is to get as good an answer to that question as I can, "earn" that amount in Sim, then earn it for real trading minimum size (and I understand that minimum size for CL is a very different animal from minimum size for ZF) and then increase my size. Forcing myself to make a substantial and defined amount of money in Sim makes it feel like real trading, because any setback pushes back the date I get to start making real money.

Mike, thanks for the Van Tharp references. If none of the math whizzes here have a good answer, I think I'll start with my old standby, "Commodity Market Money Mangement" by Fred Gehm, which is on my bookshelf. If I can't find what I'm looking for there, I'll move on to Van Tharp. Finally, I'll definitely take your suggestion about measuring my own risk as I'm going along. It will be an interesting exercise to record hourly the value of all open positions as well as those that have been closed out.

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jstnbrg View Post
It will be an interesting exercise to record hourly the value of all open positions as well as those that have been closed out.

Which raises another question I've been pondering. Suppose you have a portfolio of trades on and the net value of the open positions gives you a much better than average p/l for the day, even though none of the individual positions have met the profit goals you've set for them. Do you close out everything and go to the gym, or do you try to milk the max out of everything? Given that none of the individual profits are large, it would be easy for at least some of them to disappear, and then there goes your good day.

Any thoughts?

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I think it is important to remember to be realistic. Too many traders think they can earn $500 a day on a $10,000 account. Can it be done? Sure. Will the majority of traders who try to do it succeed? No. $500 a day on $10,000 would be 125,000 return on 250 trading days from a 10,000 account. Insane.

Take for example either $50 a day on $10,000, which would be $12,500 return per year (250 trading days), or $500 from a $100,000 account, $125,000 a year from $100,000. Still this seems too good to be true, right?

I think that a good consistent trader can achieve the second example ($50/day on 10,000 or $500 a day on $100,000), but I think that is the upper limit of what is "normal". There are always going to be traders who hit homeruns out of the park, making millions from nothing, but it isn't the norm.

So once you've set some realistic expectations, which will be based on both your income requirements as well as your funding ability, you have a good starting point to determine what you can risk per trade (2%). Of course some people may say they need $500 a day, but they don't have a $100,000 account. To those people I say you are better off reducing your per day "requirement" from trading, and go and get a second job until you've amassed enough savings to properly fund an account --- all the while, proving that you can consistently pull a smaller amount (say $50 a day on $10,000 or $100 on $20,000, etc) out of the market.

With regards to boredom trades, they are very costly and dangerous. I try to limit my trading to between 60 and 120 minutes a day so that I can get "in the zone" for this period, and then go about the rest of my day. I suggest something similar for you. Set up your schedule and your office so that you are only trading 1 hour a day, and then stop. If for any reason you are having trouble following this rule, then you know what you need to focus on.

Mike

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Need help?
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2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
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jstnbrg View Post
Which raises another question I've been pondering. Suppose you have a portfolio of trades on and the net value of the open positions gives you a much better than average p/l for the day, even though none of the individual positions have met the profit goals you've set for them. Do you close out everything and go to the gym, or do you try to milk the max out of everything? Given that none of the individual profits are large, it would be easy for at least some of them to disappear, and then there goes your good day.

Any thoughts?

There is no right or wrong answer. There is the camp that says if you have an edge you want to push it every day, every trade, there is no "maximum" you just keep going.

There is another camp, which I am a member of, that says stop at a daily or weekly goal. To me it helps keep me focused. I can always raise the goal amount later.

Mike

Due to time constraints, please do not PM me if your question can be resolved or answered on the forum.

Need help?
1) Stop changing things. No new indicators, charts, or methods. Be consistent with what is in front of you first.
2) Start a journal and post to it daily with the trades you made to show your strengths and weaknesses.
3) Set goals for yourself to reach daily. Make them about how you trade, not how much money you make.
4) Accept responsibility for your actions. Stop looking elsewhere to explain away poor performance.
5) Where to start as a trader? Watch this webinar and read this thread for hundreds of questions and answers.
6)
Help using the forum? Watch this video to learn general tips on using the site.

If you want
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  #9 (permalink)
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Big Mike View Post
I think it is important to remember to be realistic. Too many traders think they can earn $500 a day on a $10,000 account.

With regards to boredom trades, they are very costly and dangerous. I try to limit my trading to between 60 and 120 minutes a day so that I can get "in the zone" for this period, and then go about the rest of my day. I suggest something similar for you. Set up your schedule and your office so that you are only trading 1 hour a day, and then stop. If for any reason you are having trouble following this rule, then you know what you need to focus on.

Mike

What, 5% per day is unrealistic?!! Damn, there go all my hopes and dreams!

Concerning boredom trades, I'm with you 100%. My problem has not been so much making boredom trades as missing good trades because I am bored and stop paying attention. In the pit, it was easy to stay engaged in the market. Even when it was quiet, I often had something small on, or brokers would request quotes, or there was a good fight going on somewhere or some kid was eating a cockroach on a dare.

What I've found over the past month is that the same methodologies I've been using to trade Treasuries, which were a bit better than breakeven even when my boredom or impatience caused me to execute them badly, translate well to other instruments. Now, rather than sitting on my thumbs waiting for a ZN breakout that may never come and wind up missing it during a game of Minesweeper, I'm long wheat, fully engaged, and awake when something does develop in ZN. Often I make money on both.

In the pit, many of my fellow traders thought I was lazy because I left early so often. I had a defined, easy to reach money goal and once I closed out the position where I met it, I left. This wasn't due to laziness, it was just the only way I could hang on to my earnings. I'd often be on the floor by 7:20 and off it by 8:10. If I was still there at 12:30, that meant I was having a bad day. My focus for the short time I was there was great, and because I set modest goals for myself I didn't feel a need to take marginal trades.

Slightly off topic, my story and those of the pit traders like me is a cautionary tale to anyone who thinks he can make money forever doing what he is doing now. I knew a number of good traders in the T Bond pit who were satisfied with the $300,000/year they were making. They could live well on this income, so they stopped trading larger. When the government started having surpluses in the late '90s and stopped selling cash 30 year bonds, liquidity in that pit dried up and a lot of those guys left the business. Rather than go from being a 30 lot trader to a 50 lot trader to a 200 lot trader and accumulating real wealth when they had the chance, they wound up having to get jobs that didn't pay so well. I did push the envelope (in a disciplined way), so when technology forced me out of the pit I had a solid nest egg. I would never recommend getting comfortable at some level of size because you're making enough money. Things change, and then you can't do it any more. IMO the name of this game is capital acquisition. If you have the skill, USE IT! If you double that $10,000 account, double your size as well. Stop increasing your size when it gets too big for the liquidity of the market to handle it.

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Last edited by jstnbrg; December 30th, 2010 at 05:30 PM. Reason: It's better this way
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Big Mike View Post
There is another camp, which I am a member of, that says stop at a daily or weekly goal. To me it helps keep me focused. I can always raise the goal amount later.

Mike

I've been in your camp since 1988. But this is new ground for me, so I'm interested in what others have to say.

"You don't need a weatherman to know which way the wind blows..."

Last edited by jstnbrg; December 30th, 2010 at 06:51 PM.
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