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Looking for TF traders: what max # of contracts do you feel comfortable trading?
Looking for TF traders: what max # of contracts do you feel comfortable trading? Since it is so much smalller than ES: trying to exercise caution in increasing contracts.
Can you help answer these questions from other members on NexusFi?
There is no general answer to this question, as the answer depends on
- the size of the account traded
- your trading style
- your risk tolerance
Let us assume that you have an account of USD 50,000 and that you are comfortable losing 1% + slippage per trade. In this case your money management stop is USD 500.
Now let us further explore two different trading styles and define the initial stops in terms of the average true range
- scalping: your initial stop is set to the ATR (279) of your 5 min chart for TF (0.8 points)
- swing trading: your initial stop is set to the average true range(24) of your 60 min chart for TF (3.2 points)
With a point value of USD 100 for TF
- 0.8 points translates to USD 80, you may therefore trade up to 6 contracts
- 3.2 points translates to USD 320. you may therefore just trade a single contract
A Conservative Approach
Personally, I do not believe that you are competitive as a retail trader by trading the shortest time frames, so I would not opt for scalping but for longer intraday trades.
Let us therfore assume that you use a stop of 2 points. For psychological reasons it is better to trade at least two contracts, so this would put your risk at 2 contracts * 2 points * 100 USD/point = 400 USD + slippage per trade. Then you need a bank account of at least USD 50,000 to trade two contracts of TF, as you should allow for a drawdown.
In my opinion, if your bank account is smaller than USD 50,000 you should refrain from trading TF and go for something else.
Higher Risk Tolerance or The Kelly Criterion
If you have a higher risk tolerance, you may trade half Kelly or even Kelly and get along with a smaller account. However, if you risk more than 1%, let us say 5% per trade, and you encounter a series of 10 trades that are stopped out, you will experience a heavy drawdown around 50%, wiping out half your account. With a 1% risk per trade, you would have been down only 10%. Although it is possible to take a higher risk, I am not doing this, and I would certainly not recommend to do it, unless you basically trade for thrill and entertainment and are willing to pay for that entertainment.
Thank you for such prompt response. I agree completely with everything stated, but I was refering to overall contract size not account ratios and stops. Lets say: account size 500k: would you trade TF 10-15 contracts as a retail trader? or due to concerns that Ice is such a small exchange as a retail trader you should never go above certain contract size?
Once you've started, your trading account will move according to your win/loss, a good formula that you might implement in an excel journal file is from Larry Williams:
(account balance * risk percent) /largest loss = contracts or shares to trade
e.g.
(50.000 * 1%)/250=2
you will consequently increase and decrease your contracts according to your drawdown and account balance.
I will assume you ask not because of money management but rather because you might want to have an idea as to what can be hit at the b/a in one swoop with little impact to price ... with that assumption, my advice would be to see how many contracts per second (1s-15s) get executed during the times of greater liquidity... you will find that dending on the time of day and hour, you can easily do 5-10 contracts with little effort, and 20-50 with some slippage...
@Fat Tails has an indicator that can help with that on the NT7 side, look for it on the download sections.. if you have IRT/MD, it can generate those type of metrics for you rather easily..
With an account size of 500 k, I would be comfortable trading up to 20 contracts during the market hours (RTH). But this is just a question of liquidity. Would expect some slippage though, so if I was a scalper, I would look for a more liquid market.
500,000
100(a point on the TF)X800(Estimated Index Level Now) = 500,000= About 6 Contracts
80,000
Now you 6 contracts using no leverage. Maybe you should start here.
As you see, larger account size don't have to take such a big leverage and you can increase your size by 1-2 until you reach a level that the impact on the account is too much for your taste.
I have not posted in a long time...good to be back.
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