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TimRacette

Don't Waste Your Time Trading a Small Account

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Quite a bit easier said, than done...

 

Yes, absolutely true. Trading is NOT an easy way to make money. It takes a lot of study, work, trial and error, learning from losses, emotional ups and downs, etc.

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"Trading is a hard way to make an easy living"

 

Drawdown doesn't seem too bad in a backtest, or with simulated trading, but when it's actually YOUR money on the line, and you experience drawdown in real time, it's a whole "new ball game".

 

So, I spend a lot of time looking at the losses in my system backtests - not only the trade by trade losses, but the daily equity drawdowns. Early in my trading life I spent most of my time working on systems that would make money. Now, I not only look at how much a system made over a given length of time, but how much did it lose - trade by trade, day by day. I look at the ratio between the gains and the accumulated losses.

 

The best system would be one that made money every day. As this is clearly impossible, I want my systems to have the lowest possible total accumulated daily losses.

 

In other words, I want as much consistency over time as possible.

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I think of trading as a journey -- the destination is profit, the vehicle is your system or method, and the drawdown, either trade to trade, or your daily balance, represents the bumps in the road. The larger the drawdown, and the frequency and size of down days, the more difficult it is to take the trip.

 

If the bumps are too big, you'll pull over and stop the vehicle, or you'll reduce the speed (position size) or you'll just keep moving forward but feel sick from the jostling around.

 

I always look at the drawdown of any system, not only trade by trade, but also the daily losses. It's possible to have a system that has 100% winning trades, and yet has a lot of drawdown during the holding period of the trades - a simple buy and hold comes to mind.

 

The problem I have with buy and hold is that I can't take the drawdown. So, my goal in system development is to maximize gain and minimize drawdown, and I position size by looking at drawdown. I want to make sure that when that drawdown happens again that I will be able to handle it financially and emotionally.

 

Drawdown kills me emotionally as well. I avoid it at all costs. As a result, I make many little trades when I have the most momentum in my favor. This has practically eliminated my draw downs. I also miss positive moves because of this as well though. Some for no reason.

 

On the other hand, I have found that consistently adding smaller amounts, and always moving forward satisfies me. I may be in a trade for only 90 seconds, and only make $84, but at 10 contracts that is $840.00, How many people make $840 in a day?

 

Winning most of the time, allows one to put more money down, and controll more contracts with confidence.

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Drawdown doesn't seem too bad in a backtest, or with simulated trading, but when it's actually YOUR money on the line, and you experience drawdown in real time, it's a whole "new ball game".

 

So, I spend a lot of time looking at the losses in my system backtests - not only the trade by trade losses, but the daily equity drawdowns. Early in my trading life I spent most of my time working on systems that would make money. Now, I not only look at how much a system made over a given length of time, but how much did it lose - trade by trade, day by day. I look at the ratio between the gains and the accumulated losses.

 

The best system would be one that made money every day. As this is clearly impossible, I want my systems to have the lowest possible total accumulated daily losses.

 

In other words, I want as much consistency over time as possible.

 

Yeah, I have to agree here. Smaller consistent wins, with smaller draw downs is much more preferable to the "Hail Mary" pass, entering on a break out of a 1-2-3 pattern, and hanging on for dear life in a trend that you see in your mind....when the market in reality just goes meandering around sideways and aimlessly for weeks on end.....

 

The problem with systems that have large draw downs, is that they assume they know the future, because of some arbitrary rule set thier system follows. It's ridged thinking, in a fluid environment.

 

In reality, the market could care less that you think it should go down, just because a bar closed below your second point in a pattern of congestion.

 

The problem over all, is that market decisions are often made from the *Assumption* that a longer term trend will be in play, because X,Y, or Z occurs. Then that expectation has us making decisions, and placing trades all based on some imaginary market movement or start of some imaginary trend pattern that WE MADE UP in our own heads.

 

In reality, the market is aloof, and loopy, and just as likely to go do a hand stand next to a tree, as it is to write a new chapter in the Bible.

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There are really 4 outcomes to any trade, BIG Winner, small winner, small loser, BIG Loser. Eliminating that BIG Loser is over half the battle. Over time I've found too that taking profits on a bulk of my position and letting a small portion 'run' trailing my stop yields the highest returns.

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There are really 4 outcomes to any trade, BIG Winner, small winner, small loser, BIG Loser. Eliminating that BIG Loser is over half the battle. Over time I've found too that taking profits on a bulk of my position and letting a small portion 'run' trailing my stop yields the highest returns.

 

 

I don't trail stops myself. I enter, and exit manually every time. My stops are set for emergencies such as a power failure, or I have a stroke or something.

 

I like to enter on my set up, then use Bollinger bands to determine when it's over bought/sold, and exit near the peak of that leg's run. The market is usually still going my way when I exit.

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I don't trail stops myself. I enter, and exit manually every time. My stops are set for emergencies such as a power failure, or I have a stroke or something.

 

I like to enter on my set up, then use Bollinger bands to determine when it's over bought/sold, and exit near the peak of that leg's run. The market is usually still going my way when I exit.

 

You shouldn't let a stroke interfere with a good trade.

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If you have $10,000 to put towards your trading account, don’t waste your time. As a matter of fact if you have $15,000 or even $25,000 in your trading account, don’t waste your time. That is, don’t waste your time with careless mistakes because every trade counts.

 

The Learning Curve is Flat

The learning curve for learning how to trade futures for a living can be extremely flat, that is you may spend countless hours learning all there is to know about the trading the markets, but you aren’t seeing a return in profits. Your time spent learning increases, but your account stays the same, or in many cases shrinks.

 

If you want to win at this game and become consistently profitable over time then you absolutely, positively, must be disciplined 100% of the time, all of the time.

 

Don't Waste Your Money on Tuition

Many people like to credit their trading losses in the early years towards “tuition” or “paying their dues” and while there is something to be said for learning by doing, there is no reason for justifying a trading mistake. Every error you make in trading is costing you money.

 

That First Step

When starting out as a trader, you probably traded a practice account for a couple of months and began to learn the ropes, testing your strategy (my broker of choice is Infinity Futures for both practice accounts and live trading). After becoming anxious you make the switch to live trading and realize that most of what you learned goes out the window when you’re in a live trade. Your emotions come into play and your methodology becomes foggy.

 

And the Light Bulb Goes Off

There are many “light bulb moments” along the way, but limiting the mistakes when you’re trading a small account is crucial if you want to prevent blowing up your account. Along with reading the material on the EminiMind Blog I recommend reading and learning from the mistakes of other top traders in the Market Wizards series.

 

3 trading mistakes that will lead to disaster:

 

Impulse trades – If you find yourself clicking sporadically on the trading ladder you need to stop immediately and reevaluate your trading plan.

 

Revenge trading – Just because you had a loss doesn’t mean your next trade needs to be a home run, try for consistent singles and doubles with a few strikeouts in the mix.

 

Trading too big for your account size – If you’re trading an account size of $10,000 then the max number of contracts you should be trading on the ES or 6E is 2, enough said.

 

The Only Guarantee

While no one can guarantee your success trading the markets (if you come across such claims be leery) I can guarantee you that if you make any of these 3 trading mistakes you will lose money. Treat your trading capital like you would your children, or if you don’t have children, like a one of a kind Porsche, you wouldn’t throw your kids in front of a bus so don’t piss away your trading account with avoidable mistakes.

 

Patience pays in trading the markets so don’t waste your time trading a small account. Every trade is a valuable step towards generating consistent income trading futures for a living.

 

Hi, thanks for the article. I have written on a similar topic here:

 

http://www.traderslaboratory.com/forums/forex/18608-trading-small-account-sizes.html#post193800

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I may agree with the topic of the post cause most of the time small trading accounts suffer wipeouts or a loss for which no necessary capital is there to cover it or recover it overtime. Big accounts often ensure stability in trading and long term prospects of trading.

My first ever trading account was a small one and it got wiped out within a week or two but the bigger one afterwards never saw such fate.

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    • You should never give in to the rumors as it could lead you to bankruptcy if it isn't true.
    • Yeah, and you should never stop learning. If you wish to survive in the Forex Market, the only way to do it is by learning all the time.
    • Date : 1st December 2021. Market Update – December 1 – Taper gets a boost & Transitory gets “retired”. Powell “retires” Transitory in light of Omicron & surprisingly suggests faster taper – Stocks tank, Dollar& Yields rise on faster tightening expectations.   USD (USDIndex 95.90) back down from leap to 96.60 on Powell testimony. Saw fresh wave of risk aversion as Treasuries sold off, yields spiked (particularly the 2yr) , Stocks fell significantly with USA100 down over -2.4% (APPL bucked the trend +3.16%) USA500 -1.90% (-88pts) 4567 & USA30 off 652 pts or -1.86%. Consumer confidence saw a slump in the headline, and a rise to a 13-year high in the inflation component. The Chicago PMI fell to 61.8. Home prices increased to fresh record peaks. US Yields 10-year rates were down over 7 bps to 1.41% before closing at 1.443% before recovring to 1.468% now. Asian Markets – Equities – Topix and Nikkei are currently up 0.4%, the Hang Seng bounced 1.1% and the CSI 300 is up 0.1%. The ASX, which outperformed yesterday, dropped back -0.3%. Data over night – Japan’s manufacturing PMI came in stronger than expected and while China’s private PMI reading signalled stagnation at 49.9, that was compensated somewhat by the stronger than expected official manufacturing PMI released yesterday. AUD GDP was not as bad as expected -1.9% vs -2.7% & 0.7% last time. USOil – continues under pressure, down to $64.08 (14-week lows) yesterday – recovered to test $68.00 today – expectations continue to grow that OPEC+, will put on hold plans to add 400,000 barrels per day (bpd) of supply in January at their meeting tomorrow. Gold finally some intra-day volatility – Powell surprise spiked to $1808 – before testing $1770 with a couple of hours, back to $1788 now. FX markets – Yen rallied USDJPY dipped to 112.50, back to 113.40 now, EURUSD now 1.1326 & Cable steadied to 1.3300-1.3330. European Open – December 10-yr Bund future down -11 ticks at 172.26, slightly outperforming versus Treasury futures. Central bankers may be getting more nervous about inflation outlook, but Omicron clearly is clouding over growth outlook & in Europe at least that will boost the arguments of the cautious camp at the central banks. US yields remain firmly below the levels seen before the new virus variant hit the headlines & sentiment is likely to remain jittery, even if stocks are set to back up from yesterday’s lows, with DAX & FTSE 100 future posting gains of 0.9% and 0.7% respectively & a 1.4% jump in the NASDAQ leading US futures higher. Data releases today kicked off with a big miss for German Retail sales (-0.3% vs 1.0%), higher UK house prices & firmer CPI from CHF. Today – PMIs (EZ & UK),US Markit Final Manufacturing PMIs, US ADP and ISM Manufacturing PMI, JTC and OPEC meetings, BoE’s Bailey and Fed’s Powell & Yellen testify. Biggest FX Mover @ (07:30 GMT) NZDJPY (+0.60%) Risk-sensitive currencies remain volatile, from a slide to 76.65 yesterday, today a rally to 77.80. Currently MAs aligned higher, MACD signal line & histogram over 0 and rising, RSI dipping from 70.00 at 58, Stochastic remain OB. H1 ATR 0.172, Daily 0.84. Always trade with strict risk management. Your capital is the single most important aspect of your trading business. Please note that times displayed based on local time zone and are from time of writing this report. Click HERE to access the full HotForex Economic calendar. Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! Click HERE to READ more Market news. Stuart Cowell Head Market Analyst HotForex Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
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