Some Advice for Newbies

[JohnnySDG 10]

I've been trading for over 20 years and would like to offer some sound advice to help new traders avoid the quick wipeout.

 

Why do over 95% of people lose money trading?

Because they think they can make several trades per day and make enough profit to offset loses and COMMISSIONS.

Lets say you have a $10k account and trade 4 ES contracts at a time. You're paying $20 RT each trade. If you make 5 trades per day that is $100 or 1% of your account. Trade 20 days per month and your 20% in the red before you make a dime.

 

New traders are lured by the talk of riches but that is just not the way it is. Traders are making a return on capital, period. And, the rich ones are rich because they trade a lot of capital - usually someone elses.

 

Newbies are dreaming when they think they can turn a $10k account into a fortune.

What they should be thinking is "I want to trade to make a better return on my capital". Most likely this will be on a part time basis - Don't quit your dayjob. If you think you're going to trade 30 ES contracts with a 10k account (via that $300 daytrade sucker margin) your going to last less than 1 day. Probably a couple hours.

 

When you get a large enough account that the rate of return gives you enough income you can make it a full time career.

 

Who is going to teach you how to trade? The guys on the web who will charge you lots of $$$$$ for some BS. If they had a great strategy why sell it?

 

You will need to spend hours and hours reading and watching markets to get an idea how things work. Its best to try and learn one market.

 

When I trade, my goal is 1% net profit per month. This sounds like nothing and on a 10k account that is only $100 but its will add up in a few years. (1% per month compounds to 43% in three years) I also don't make a lot of trades so my commissions don't eat my profits up.

 

Lastly, I want to point out that I'm an options trader. I have always been successful as an options trader and in the past when I tried to trade contracts instead of options I lost my shirt. The point is that I stick with what works. Others may trade futures successfully but its not what I do and I've lost money trying. Likewise, i'm sure that futures traders feel the same way about trading options. So, find what works for you and stick with it.

 

By the way, when I say I'm an options trader I do not mean that I just buy options to make money. Buying options is usually a suckers play since most expire worthless or at best less that you paid for them. I use various option strategies although there are some times when buying an option outright may be a good risk, but this is pretty rare.

 

I hope this post helps some of you before you give your money away. I'm sick of people getting BS'd by the predators.

 

Johnny

[sevensa 10]

In my opinion, with the low commissions obtainable nowadays, commissions are the least of your worries and is not the reason why traders fail. I think most traders fail due to no edge and low margin requirements allowing them to trade far more contracts then they should and cannot survive a drawdown. You cannot just look at commissions and number of contracts traded and ignore average profit per trade. If your average profit per contract covers your comissions per contract and then some, then commissions become irrelevant and you need to look at leverage and drawdowns. No one should be trading 4 contracts if they are not profitable trading 1.

 

Assuming your average trade is 1 tick profit in ES, then using your example, for the 5 trades of 4 contracts each, your gain for the day is: 12.5 * 4 * 5 = $250. Subtract the $100 commissions and you come to $150 a day and $3000 a month. That is 30% on a 10K account. Not bad for 1 tick profit per contract. Even if you trade one contract, this is still $750 a month, or 7.5% on a 10K account.

 

I don't see how anyone can make a living trading by going for 1% a month, unless you have a very large account. With a 500K account, 1% is $5000. Very few will make a living trading a 10K account, but you surely don't need 500K either and to suggest this is what is required just because you lost your shirt trying, is not very sound advice.

[JohnnySDG 10]

Svensa, in your example the trader makes $250 and pays $100 in commissions. 40% goes to the house so explain to me how commissions are not the least of his worries.

 

I'm not suggesting that $500k is required. I also make more than 1% per month but 1% is my goal. As for very few making a living with a 10k account - very few will make a living at it period. Most people on this site don't even make a living at it. The 95% losing stat is true here too. Forget trying to make a living, very few will do that. Simply try to make a good return on your capital. That should be the newbies goal before trying to trade full time.

 

You also said that I "lost my shirt trying". You clearly took that WAY out of context.

 

Here is my quote...

 

"I have always been successful as an options trader and in the past when I tried to trade contracts instead of options I lost my shirt."

 

I said I lost my shirt trading what is not my expertise.

 

I do agree with you 100% that over leverage and no edge are major factors. But, commissions are definitely a factor as well. In fact I would say that no edge is the biggest factor. If you re-read my post I said they can't make enough profit to offset "loses and commissions". I was illustrating that they have to pair winning trades against both. Not to mention slippage.

How can they possibly do this when they are basically shooting blind?

 

I'm not ignoring average profit per trade. But, how will they make this profit?

 

I know a lot of guys laugh when I tell them my goal is 1% per month. Its funny that none of the people who laugh are pros.

 

Johnny

[sevensa 10]

Svensa, in your example the trader makes $250 and pays $100 in commissions. 40% goes to the house so explain to me how commissions are not the least of his worries.

 

I'm not suggesting that $500k is required. I also make more than 1% per month but 1% is my goal. As for very few making a living with a 10k account - very few will make a living at it period. Most people on this site don't even make a living at it. The 95% losing stat is true here too. Forget trying to make a living, very few will do that. Simply try to make a good return on your capital. That should be the newbies goal before trying to trade full time.

 

You also said that I "lost my shirt trying". You clearly took that WAY out of context.

 

Here is my quote...

 

"I have always been successful as an options trader and in the past when I tried to trade contracts instead of options I lost my shirt."

 

I said I lost my shirt trading what is not my expertise.

 

I do agree with you 100% that over leverage and no edge are major factors. But, commissions are definitely a factor as well. In fact I would say that no edge is the biggest factor. If you re-read my post I said they can't make enough profit to offset "loses and commissions". I was illustrating that they have to pair winning trades against both. Not to mention slippage.

How can they possibly do this when they are basically shooting blind?

 

I'm not ignoring average profit per trade. But, how will they make this profit?

 

I know a lot of guys laugh when I tell them my goal is 1% per month. Its funny that none of the people who laugh are pros.

 

Johnny

 

Ok to quote you:

 

"I have always been successful as an options trader and in the past when I tried to trade contracts instead of options I lost my shirt."

 

I said I lost my shirt trading what is not my expertise.

 

If this is not your expertise, why do you think then you are qualified to provide advice on this topic?

 

You are focussing on the percentage commissions of the total account. If you are profitable after commissions, the commissions you pay will not be the reason you fail as a trader. The ratio of commissions to contracts stays the same . Actually in many cases it comes down as you can negotiate lower commissions with higher volume.

 

In my example the trader is profitable with 1 tick profit that is enough to cover commissions and make a reasonable return per month. My point is that comissions are not such a big deal as you want to make it sound. Comissions are the least of his worries, since even with one contract, he still makes 7.5% which is still much higher than the 1% you advocate. Why then are commissions a concern?

 

In your arguement above if 40% goes to the house on 4 contracts, then 40% is going to the house in 1 contract. If you pay $5 for 1 contract, you pay $10 for two. If you are a scalper type trader, your percentage pay for comissions will always be higher than if you hold for bigger profits. If your average trade is 1 tick for one contract, it is 2 ticks for two contracts. If you are profitable for 1 contract after commissions, you are profitable for 2 contracts after commissions, regardless of what percentage you pay for comissions. That is all that matters. A trader needs to be more concerned about levarage and make sure that even a small drawdown wouldn't wipe him out. That is what would wipe him out. Not comissions.

 

Do you trade for a living with trading profits your sole income? Is 1% enough for you to live on? How much of that 1% do you actually take out each month as I assume you also like your account to grow, so you would actually live on less than 1% a month?

[JohnnySDG 10]

Sevensa, commissions ARE important. In any business you have to manage your costs. If you tade for 2 points on the ES you are making $100 less $5 commissions for a net of $95. The Commission percentage is only 5%. In your example its 40%. That is why scalping for ticks is a losing proposition. Its like playing the slot machines - you can't win.

 

You have to manage commissions, slippage and every other cost. Including the cost of losing trades. In your scenario you win every trade. 5 trades per day. You won them all! Are you really going to tell me your are right 100% of the time? If you traded for 1 ES tick and won 4 trades and lost 1 tick on one trade you would make $30 for the 4 winning contracts (12.5 * 4 - $20 commissions) and lose $17.50 on the one losing trade ($12.5 + $5 commission) so your net is $12.50. You went from a $37.50 profit to a $12.50 profit with only 1 loser and 4 winners per day.

 

If you traded four contracts in a $10k account that 80% winners would net you $250 or 2.5% per month (20 trading days). And you need to be right 80% of the time to do it.

 

If you hit 3 out of 5 you make $22.50 (12.5*3 - $15) and lose $35 (12.5*3 + 10) for a net loss of $12.50 per contract. If you trade 4 contracts in a 10k account you lose $50 per day or $1000 per month. (10% loss per month!)

 

That is the math, we can use words to try and confuse but the numbers are what they are.

 

As for your other question...

 

I live off my investments. I have others besides trading.

[sevensa 10]

Sevensa, commissions ARE important. In any business you have to manage your costs. If you tade for 2 points on the ES you are making $100 less $5 commissions for a net of $95. The Commission percentage is only 5%. In your example its 40%. That is why scalping for ticks is a losing proposition. Its like playing the slot machines - you can't win.

 

You have to manage commissions, slippage and every other cost. Including the cost of losing trades. In your scenario you win every trade. 5 trades per day. You won them all! Are you really going to tell me your are right 100% of the time? If you traded for 1 ES tick and won 4 trades and lost 1 tick on one trade you would make $30 for the 4 winning contracts (12.5 * 4 - $20 commissions) and lose $17.50 on the one losing trade ($12.5 + $5 commission) so your net is $12.50. You went from a $37.50 profit to a $12.50 profit with only 1 loser and 4 winners per day.

 

If you traded four contracts in a $10k account that 80% winners would net you $250 or 2.5% per month (20 trading days). And you need to be right 80% of the time to do it.

 

If you hit 3 out of 5 you make $22.50 (12.5*3 - $15) and lose $35 (12.5*3 + 10) for a net loss of $12.50 per contract. If you trade 4 contracts in a 10k account you lose $50 per day or $1000 per month. (10% loss per month!)

 

That is the math, we can use words to try and confuse but the numbers are what they are.

 

As for your other question...

 

I live off my investments. I have others besides trading.

 

I said average profit per trade and never said you have to win them all. Average profit per trade of 1 tick means that sometimes you will win more and sometimes you will lose, but on average after 5 trades you would be 5 ticks ahead, minus commissions. I am surprised that you do not understand the concept of average profit per trade.

 

In your "math", your average profit is less than 1 tick ((1 + 1 + 1 + 1 -1)/5 = 0.6). You are changing the math to try and prove your point. You don't need to be correct 80% of the time. You can easily be correct only 50% of the time and still net 1 tick average profit per trade.

 

Scalping is not a losing proposition. Scalping is a losing proposition for you. There is a difference. Just because you cannot do something does not mean it cannot be done. You are not helping any newbies by not understanding core concepts and making generalizations based on your own inability to trade a certain way.

[JohnnySDG 10]

No, Svensa you are misleading the Newbies. Even if your are successful its not likely that others will be. In fact if you are a successful scalper then you should KNOW that they don't stand a chance. Lets be real, if Derek Jeter came up to you and said "I play baseball for the yankees let me show you what I do and you can do it to!". Do you really think you would play for the yankees?

 

Very few people can trade successfully let alone scalp. That's just the way it is. Its like trying to become a pro athlete, it not something you just decide to do and can "learn" to do. You need to have the talent.

 

With that said there are different types of trading some more difficult than others. The problem is that people say they want to "trade for a living" when they should be saying they want to be a successful (profitable) trader. The latter is more realistic although stll difficult.

 

 

Johnny

[sevensa 10]

No, Svensa you are misleading the Newbies. Even if your are successful its not likely that others will be. In fact if you are a successful scalper then you should KNOW that they don't stand a chance. Lets be real, if Derek Jeter came up to you and said "I play baseball for the yankees let me show you what I do and you can do it to!". Do you really think you would play for the yankees?

 

Very few people can trade successfully let alone scalp. That's just the way it is. Its like trying to become a pro athlete, it not something you just decide to do and can "learn" to do. You need to have the talent.

 

With that said there are different types of trading some more difficult than others. The problem is that people say they want to "trade for a living" when they should be saying they want to be a successful (profitable) trader. The latter is more realistic although stll difficult.

 

 

Johnny

 

I don't see how this is misleading to say that if you have an edge that result in average profit that covers commissions and then some, that you do not have to be concerned about commissions and that you can make a decent living that way. Maybe you can explain if you average $12.5 a trade and pay $5 commissions to achieve that for an average profit of $7.5, how commissions will cause a trader to fail, even if trading 4 contracts, 5 times a day? I still stand that comissions is probably the last reason why a trader fail and the main reason is over leveraging and lack of a real edge.

 

I also fail to see the relevance of your example and look to be a bit of a stretch. Why would your Derek Jeter example above only relate to scalping and commissions and not any kind of trading? I don't see how you draw the line from that to scalping, nor to your statement about commissions.

 

I think this conversation has run its course since the topic has moved on from the original premise and apparently now is if one can learn to be a trader or not. An interesting topic indeed, but not one I am interested in debating.

[BlowFish 10]

An observation. One only needs a positive expectancy after commission and slippage to succeed. Most instruments a single tick actually nets a profit. Sure the bank will take a higher amount on a percentage basis but you get your chunk too. I am not commenting on whether 'scalping' is a good way to trade but it certainly is a way. Personally, I would not really think of someone trading 4 or 5 times a day for a couple of points a 'scalper'.

 

This is a part of trading that a trader has complete control over, the instrument they trade, and the size of swing they target, the average time they hold will be dictated by the swings they are targeting. Of course capital risk and personal objectives will all influence this observation. It is certainly worth giving some serious consideration to but I don't think there is a one size fits all.

[JohnnySDG 10]

I would not really think of someone trading 4 or 5 times a day for a couple of points a 'scalper'.

 

I agree.

 

I was speaking about trading for ticks.

 

 

Svensa, I agree that the conversation is going off topic. So I done debating you as well.

[Ericthetrader 10]

Johnny,

 

Learn a lot of good points. Thanks

[mahesh 10]

All of you are right.

It is not easy to day trade even with a good trading strategy.However successfull it might be and however many contracts you may play at a time. What you need to remember is that when you are day trading, your emotions play a great deal. It is like going into the darkness when you are alone where you do not know who is going to attack you.

 

Before you start trading, think about 1 thing only: What will you do if you loose 20 times consecutively. Will you still be able to play this game? Money management is something you can only look about after you decide to trade.

[ACS 10]

Am I the only one who thinks it is insane to trade 4 ES contracts with a $10,000 account?

[estrader 10]

Am I the only one who thinks it is insane to trade 4 ES contracts with a $10,000 account?

 

With a $5,625 initial margin to open 1 contract I would think it's impossible.

[Tams 20]

Am I the only one who thinks it is insane to trade 4 ES contracts with a $10,000 account?

 

With a $5,625 initial margin to open 1 contract I would think it's impossible.

 

certain broker only require $500 to daytrade. LOL

[estrader 10]

certain broker only require $500 to daytrade. LOL

 

My broker allows a $500 day trading limit but that does not get around the $5,625 initial margin set by the exchange to open a contract. The $500 limit comes into effect after the contract has been opened. Simply put, it is impossible to open 4 contracts with $10,000 in the account.

 

I would also add, I don't know why anyone would set a target of 1% profit/month. I wonder, if Bill Gates had set himself a profit target of $1 Billion whether we would all still be using DOS 6

[MadMarketScientist 11]

Yes to answer the question above with a 10K account it IS insane to trade 4 ES contracts.

 

I always say just because your broker will let you doesn't mean you should.

 

Their business and it's totally fine that it is this way is to make their money on commissions. They know most will blow up so I understand that they will try to maximize what they get out of you in the process of you blowing up.

 

However, make it tougher on them -- and really better on you and them by being a surviving trader and avoid crazy leverage/risk. $10K account? 1 maybe 2 contracts.

 

MMS

[wits7yle 10]

For some reason, I find that Svensa has more of a grasp of trading successfully than JohnnySDG...I'm just sayin... and I agree, Svensa's inference is apparent to me and I understand this: that the key to profitability in Trading really is 1) Risk management (sharesizing, leverage) and 2) Psychology (knowing yourself, trading your own style and preserving mental capital when things are not going your way)

 

I'm not saying that commissions are a concern but it is definitely lower on the totem pole of concerns of trading when you fully understand this business.

[MadMarketScientist 11]

Agreed commissions usually aren't the make or break for most people - sure it would be nice not to have them but these days they are small enough that they won't be a difference maker.

 

Slippage issues would probably be bigger than commissions....

 

MMS

[estrader 10]

Yes to answer the question above with a 10K account it IS insane to trade 4 ES contracts.

 

I always say just because your broker will let you doesn't mean you should.

 

Their business and it's totally fine that it is this way is to make their money on commissions. They know most will blow up so I understand that they will try to maximize what they get out of you in the process of you blowing up.

 

However, make it tougher on them -- and really better on you and them by being a surviving trader and avoid crazy leverage/risk. $10K account? 1 maybe 2 contracts.

 

MMS

 

I would doubt that anyone who claims that their broker 'lets' them trade more than 1 contract with only $10K is actually a real trader. The margins are set by the exchange and for very good reasons. The exchange increased the initial margin around 2007-08 when the markets became extremely volatile and this would have been a pointless exercise if brokers could arbitrarily determine the margin requirements for their clients.

 

Before we get to discussing whether or not it is insane we should first consider if it is even possible to trade more than 1 contract with only $10k. I say that it is impossible. If anyone says it is possible then please provide the name and contact number of your broker so that I can confirm it for myself.

[MightyMouse 12]

I would doubt that anyone who claims that their broker 'lets' them trade more than 1 contract with only $10K is actually a real trader. The margins are set by the exchange and for very good reasons. The exchange increased the initial margin around 2007-08 when the markets became extremely volatile and this would have been a pointless exercise if brokers could arbitrarily determine the margin requirements for their clients.

 

Before we get to discussing whether or not it is insane we should first consider if it is even possible to trade more than 1 contract with only $10k. I say that it is impossible. If anyone says it is possible then please provide the name and contact number of your broker so that I can confirm it for myself.

 

Mirus Futures

Infinity Futures

Tradestation

IB

Amp Futures

 

You can find the phone numbers on the web. Each has a different margin requirement to daytrade, but none, as far as I know are over $1000. You cannot hold the contract overnight. And, I believe that if you do try to hold the contract beyond some terminal time, that they will close you out. That is, for instance, if you try to hold 4 contracts for one session to the other with only 10k in your account.

 

MM

[Head2k 10]

Each has a different margin requirement to daytrade, but none, as far as I know are over $1000.MM

Actually, IB are quite conservative and they have higher margin requirements. For the ES, the intraday initial margin is $2813 and the initial overnight margin is $5625.

Source: http://www.interactivebrokers.com/en/p.php?f=margin

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For estrader:

Margin requirements are indeed set by the exchange, but you, as a retail trader, do not interact directly with the exchange. Your broker places your orders on your behalf. Therefore, I'd say that in fact it is the broker who must meet the requirements set by the exchange. And the broker can have different, usually softer, requirements for his clients, while he must bear the risk resulting from the difference. If the client wids up with negative account ballance, the broker clears the debt with the exchange and then demands the money on the client.

Therefore, the margin requirements set by the exchange are only very loosely related to the margins required by the brokers. They serve merely as reference. Some brokers have initial intraday margin for the ES as low as $500.

[MightyMouse 12]

Actually, IB are quite conservative and they have higher margin requirements. For the ES, the intraday initial margin is $2813 and the initial overnight margin is $5625.

Source: http://www.interactivebrokers.com/en/p.php?f=margin

-------

For estrader:

Margin requirements are indeed set by the exchange, but you, as a retail trader, do not interact directly with the exchange. Your broker places your orders on your behalf. Therefore, I'd say that in fact it is the broker who must meet the requirements set by the exchange. And the broker can have different, usually softer, requirements for his clients, while he must bear the risk resulting from the difference. If the client wids up with negative account ballance, the broker clears the debt with the exchange and then demands the money on the client.

Therefore, the margin requirements set by the exchange are only very loosely related to the margins required by the brokers. They serve merely as reference. Some brokers have initial intraday margin for the ES as low as $500.

 

Now that I think about it, I think TS is more than 1000 too.

[estrader 10]

Actually, IB are quite conservative and they have higher margin requirements. For the ES, the intraday initial margin is $2813 and the initial overnight margin is $5625.

Source: http://www.interactivebrokers.com/en/p.php?f=margin

-------

For estrader:

Margin requirements are indeed set by the exchange, but you, as a retail trader, do not interact directly with the exchange. Your broker places your orders on your behalf. Therefore, I'd say that in fact it is the broker who must meet the requirements set by the exchange. And the broker can have different, usually softer, requirements for his clients, while he must bear the risk resulting from the difference. If the client wids up with negative account ballance, the broker clears the debt with the exchange and then demands the money on the client.

Therefore, the margin requirements set by the exchange are only very loosely related to the margins required by the brokers. They serve merely as reference. Some brokers have initial intraday margin for the ES as low as $500.

 

You could be right, but I find it too hard to believe that any broker would take on the risk of initial margin requirements on behalf of their client. If my broker did that I would trade with another broker because they will become insolvent in no time. My broker has a $500 day trading margin but I cannot open a contract unless I have the minimum initial margin set by the exchange- $5650.

 

From the I.B Website:

 

Futures margin requirements are determined by each exchange and can change frequently. All margin requirements are expressed in the currency of the traded product.

 

Performance Bond/Margin Rates

 

The CME which is the exchange that the ES is listed on quotes an initial margin of $5,625

 

The CME may have an 'Intra-day' margin of $2813 but I can't find it on their site even though I.B lists it. However, it is clear even from I.B that it is the Exchange which sets the Initial Margin.

[MightyMouse 12]

You could be right, but I find it too hard to believe that any broker would take on the risk of initial margin requirements on behalf of their client. If my broker did that I would trade with another broker because they will become insolvent in no time. My broker has a $500 day trading margin but I cannot open a contract unless I have the minimum initial margin set by the exchange- $5650.

 

From the I.B Website:

 

 

 

Performance Bond/Margin Rates

 

The CME which is the exchange that the ES is listed on quotes an initial margin of $5,625

 

The CME may have an 'Intra-day' margin of $2813 but I can't find it on their site even though I.B lists it. However, it is clear even from I.B that it is the Exchange which sets the Initial Margin.

 

I am pretty sure they have controls in place to try to close you out so that they do not begin to risk their own capital. They make you responsible for your losses, but they ultimately answer to the clearing firm. Brokers do take losses.