One thing I'll also add is that larger account traders, particularly in equities and options, can take a small portion of their capital and "let it ride" on options plays and stocks and if spread over a handful of these dice rolls, can result in profitable gains.
The $10M hedge fund manager can afford to take $10k and throw it on Gold and see if it breaks through a significant resistance level or not. If it does, he stands to make a great deal, if it doesn't, he cuts those losses and move on to focus on more meat/potatos trading.
He can also do things like butterfly strategies with options when he knows Visa and Mastercard have a huge court ruling upcoming.
The small account guy could do this in theory, but again, the commissions and fees almost make it unworthy and the drawdowns would kill him.
"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."
The following user says Thank You to RM99 for this post:
can one trade a small account profitably? yes.... using just a single contract and adding as the account grows.
can one make a living off a small account? no... (but keep in mind this depends on where you live, and living arrangements.)
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can one trade a small account profitably? yes
If you know what you doing you can make 1% a day average with no problem in a small account $5k, that a $50 a day. that a $1000 a month
that profitable but you will not be able to pay your bills.
It is a meaningless question.
Of course if you could make money the past few years just being leveraged that much with just buy and hold with such low volatility in the market in general. You would actually be at somewhat continuous kelly optimal leverage the past year.
The problem with the $5k/1 index future idea is that you are guaranteeing to be at 10:1 leverage during drawdown so you basically have no risk management.
Why do you only have $5k is the better question. If you only have 5k you need an income stream and compounding.
Not delusional over betting on index futures.
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What matters is your risk of ruin calculation. Big Mike was also correct about the often overlooked psychological hurdles. But back to risk of ruin, You have to be capitalized enough to sustain drawdowns of normal size for your trading program + be able to post margin for the size you're trading. A trader has to be "free" to trade his program without unnecessary restrictions.
Without being capitalized this much, you're depending on luck to make money for an extended period of time where you're bound to hit a normal drawdown.
I see that this topic is quite old and had been resurrected. But I will provide an answer anyway for those who are reading through.
You have to keep in mind that some profitable traders may possess a strategy which provides them with an edge, an edge that provides them with profit. This strategy may require a specific amount of capital to be implemented. Let's say that Profitable Trader 1 (PT1), uses 250K to run a specific strategy that yields him X% a month. If he were to trade a small account, he would no longer be able to implement this strategy. Now, this could actually lead to PT1 to become an unprofitable trader simply because his refined strategies have become useless with far fewer options due to little capital.
Let's say Profitable Trader 2 (PT2) has a strategy that simply scales in more and more capital further increasing his absolute profits. For ex, he is working with 50-75ES contracts in an average trade, he has worked his way up to this given that he continued to reinvest money into his business. Now if he were to be given an account with 5K, he SHOULD be able to trade 1-2 ES contracts with a similar strategy and still be profitable. Of course, if his strategy involves a lot of scaling in and out, this aspect of his strat will no longer be implemented, but as a whole, he should be able to implement a similar strat and continue taking profits even with the smaller account.
I think the heart of your question revolves around the fear/stereotype of not being able to make money when using a small account. So in short, if you develop a strong strategy and find an edge, yes, of course you can make money with a small account. But, and idiot with a small account can lose just the same with a large account. Yes, having the large account opens new doors to potential edges or strategies, but it doesn't bring profitability by default.
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Yes exactly, this is why I specifically state that an individual can profit with a small account as long as they have a strong/concise strategy opposed to swinging wildly and hoping to get a home run. If your strategy doesn't take into account any sort of risk precaution, then your offense, even if it IS extremely strong, will not make up for your lack of cautionary intelligent risk management.
I have a trading buddy who is the polar opposite of me and my philosophy of "more is better".
He feels that the trading account should be, when you are profitable, only as large as necessary, and never more. He makes decent money on his account, with leverage, on slightly more than $25K. The more money that you make consistently will allow you to do this, provided you aren't on a yo-yo with regards to wins/losses.
Naturally, all of this assumes that you are profitable to begin with...
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