Don't Waste Your Time Trading a Small Account

[TimRacette 11]

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.

[MightyMouse 12]

If you are expecting that curve to ever materialize, don't waste your time trading.

[TimRacette 11]

Can you elaborate? The gist of it is it's not a game of knowledge it's a game of execution.

[MightyMouse 12]

Tim,

 

The graph looks like the more trading knowledge you have, the higher the profits. At some point your profits increase geometrically compared to the additions of knowledge.

 

If, as trading knowledge, you are including inside information, I will agree; otherwise, acquisition of profits won't be as attractive as the chart makes it appear.

 

I am more likely to agree that trading success has more to do with your ability to execute than trading knowledge. But, execution alone won't do it. You can execute your account away if you have a poor plan.

 

MM

[TimRacette 11]

The way I read the graph is that you learn and learn and learn about the markets, but really don't see much results in terms of profits. It's not until you learn about yourself and can detach yourself from the money and can objectively manage your trades the same way each and every time that the profits begin to roll in. This is that last bit of learning that comes on the spectrum.

[Tams 20]

good post...

but some people will not read it in time to be of use.

[Tams 20]

  TimRacette said:

...

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.

....

 

 

.......... that's generous.

[eqsys 10]

  TimRacette said:

The way I read the graph is that you learn and learn and learn about the markets, but really don't see much results in terms of profits. It's not until you learn about yourself and can detach yourself from the money and can objectively manage your trades the same way each and every time that the profits begin to roll in. This is that last bit of learning that comes on the spectrum.

 

I don't think it's possible for anyone to "detach yourself from the money".

 

When my accounts were smaller I didn't mind experiencing 20-30% drawdown, but now I always know my max backtested intra-day drawdown and make sure if that happens again I will be down net overall less than 10%.

 

The max drawdown may only happen once every year or two, but half that amount can and does happen frequently - just look at your daily equity runs.

 

If you aren't backtesting your strategies over at least one year of data, and don't know the max intra-day drawdown that happened over that test period, so will absolutely run into a series of bad trades that will cause you to do something "stupid" - like selling out at the bottom, doubling down, making the wrong trade by mistake, bailing on your system just when it's about to get profitable again, etc. The list of mistakes is endless...

 

What I sense, by reading posts from novice traders, is they think this is easier than it actually is. The problem with trading is in the drawdown - whether it be the losing trades, or the down days, or the maddening wild market swings that make absolutely no sense.

[Predictor 11]

@Tim

 

I've only read a few of your posts but I can see you've learned a great deal about this game. Detaching from the money is important but only relevant if one knows the "proper action" and even then too much detachment is not a good thing because one needs to consider "global" factors, i.e max amount at risk.

 

  TimRacette said:

The way I read the graph is that you learn and learn and learn about the markets, but really don't see much results in terms of profits. It's not until you learn about yourself and can detach yourself from the money and can objectively manage your trades the same way each and every time that the profits begin to roll in. This is that last bit of learning that comes on the spectrum.

[horsesense 10]

Learn to live with your emotions when trading. There is no "on-off" switch. Mistakes are a great teacher. Unfortunately, the tuition can be costly.

[TimRacette 11]

  Quote

that will cause you to do something "stupid" - like selling out at the bottom, doubling down, making the wrong trade by mistake, bailing on your system just when it's about to get profitable again, etc. The list of mistakes is endless...

 

But the market doesn't MAKE you do anything. You are in complete control of your trades and most importantly how much loss you take. Things like doubling down and trading too big for your account size will most certainly cause you to blow up your account.

 

The ability to detach yourself from emotions of winning and losing money are the result of finding that dollar amount that does not eat away at your gut when you place a trade because you're hoping that you won't be stopped out. It should 'feel' as though you just bought a cup of coffee, indifferent.

[eqsys 10]

  TimRacette said:

But the market doesn't MAKE you do anything. You are in complete control of your trades and most importantly how much loss you take. Things like doubling down and trading too big for your account size will most certainly cause you to blow up your account.

 

The ability to detach yourself from emotions of winning and losing money are the result of finding that dollar amount that does not eat away at your gut when you place a trade because you're hoping that you won't be stopped out. It should 'feel' as though you just bought a cup of coffee, indifferent.

 

 

 

On one level we ARE in "compete control" of our trades. However, I have found that on a "gut" level we may not be. I have been in situations where my brain said "hold, do nothing" and my hand just clicked on the "sell" button and I was out of my position.

 

This is really a question for philosophers or psychologists. Is the brain in control or does the brain just do what the emotions tell it to do?

 

If one keeps position size low enough, the emotions won't kick in and one can stay "indifferent". The position size that creates fear varies from person to person. Some people are more risk tolerant than other. One never knows what the appropriate level of leverage is until, one day, the "fear factor" kicks in.

[TimRacette 11]

  eqsys said:

If one keeps position size low enough, the emotions won't kick in and one can stay "indifferent".

 

And that's undoubtedly the answer to achieving objectively in your trading and being able to follow your setups the same way every time.

[Tradewinds 12]

If the account size is large, (whatever that means to anyone) the trader might feel "safer". Now the question is, if the trader feels safe, but isn't, then they may loose a lot of money. I'd rather blow out a $5,000 dollar account than a $50,000 dollar account. So there are possible multiple aspects to account size. Even if a trader had lots of money, they could intentionally keep the balance under a certain size as a matter of discipline. This is what you are allowed to work with, and "that's it". A small account might provide a framework of boundaries to work within. Let's say I had $100,000 dollars. I trade and loose $5,000 dollars. I say to myself, oh well, I still have plenty of money left. But if I took 5 of the 100, and put it in it's separate account, and blew that account up, then I might say, Hold On! Wait a minute, something isn't right here. Maybe I don't know what I'm doing.

[SIUYA 11]

  Tradewinds said:

If the account size is large, (whatever that means to anyone) the trader might feel "safer". Now the question is, if the trader feels safe, but isn't, then they may loose a lot of money. I'd rather blow out a $5,000 dollar account than a $50,000 dollar account. So there are possible multiple aspects to account size. Even if a trader had lots of money, they could intentionally keep the balance under a certain size as a matter of discipline. This is what you are allowed to work with, and "that's it". A small account might provide a framework of boundaries to work within. Let's say I had $100,000 dollars. I trade and loose $5,000 dollars. I say to myself, oh well, I still have plenty of money left. But if I took 5 of the 100, and put it in it's separate account, and blew that account up, then I might say, Hold On! Wait a minute, something isn't right here. Maybe I don't know what I'm doing.

 

that why you should view everything in terms of percentages

[eqsys 10]

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.

[Tradewinds 12]

  eqsys said:

I think of trading as a journey -- the destination is profit, the vehicle is your system or method,

 

I like the mental picture of your system being the vehicle. If the system works, it will carry you to your destination.

[eqsys 10]

  Tradewinds said:

I like the mental picture of your system being the vehicle. If the system works, it will carry you to your destination.

 

Mr. Toad's wild ride eventually got to the destination as well, but not without some serious flying around and dodging obstacles along the way.

 

Some people love roller coasters and screaming...I prefer a smooth ride.

[Tradewinds 12]

  eqsys said:

Some people love roller coasters and screaming...I prefer a smooth ride.

 

No way! Roller coasters and screaming are the way to go! :rofl: (There's good screaming and bad screaming)

[phantom 16]

  eqsys said:

Some people love roller coasters and screaming...I prefer a smooth ride.

 

Smooth ride???

 

Better keep your day job.

 

 

Phantom

[eqsys 10]

  phantom said:

Smooth ride???

 

Better keep your day job.

 

My system development testing looks for maximum gain, minimum drawdown, and consistency over time and various market conditions. A "smooth ride" is never entirely possible, but I don't want to get thrown out of the vehicle on the journey.

[Tradewinds 12]

  eqsys said:

A "smooth ride" is never entirely possible, but I don't want to get thrown out of the vehicle on the journey.

 

Good analogy. I've thought of trading as driving a vehicle, and suddenly all the traffic turns and starts going the other direction against you. Then you have a choice to make, are you going to play "Chicken" and see if they turn back before there is a head on collision, or are you going to turn and go in the direction everyone else is going.

[eqsys 10]

  Tradewinds said:

Good analogy. I've thought of trading as driving a vehicle, and suddenly all the traffic turns and starts going the other direction against you. Then you have a choice to make, are you going to play "Chicken" and see if they turn back before there is a head on collision, or are you going to turn and go in the direction everyone else is going.

 

Excellent...

 

I call this the "decision delay dilemma". By the time you, or your system, is "sure" that the trend has reversed, you've missed a significant part of it.

 

Of course, you could always trade what I call an "anti-trend" system and try to sell highs and buy lows, and this technique does work, until it doesn't work - then it can really lose a lot of money on a breakout against you.

 

Back to basics: maximize gains, minimize losses, control leverage, keep it simple

[phantom 16]

  eqsys said:

 

Back to basics: maximize gains, minimize losses, control leverage, keep it simple

 

Quite a bit easier said, than done...

[phantom 16]

  Tradewinds said:

Good analogy. I've thought of trading as driving a vehicle, and suddenly all the traffic turns and starts going the other direction against you. Then you have a choice to make, are you going to play "Chicken" and see if they turn back before there is a head on collision, or are you going to turn and go in the direction everyone else is going.

 

More like driving in a foreign city with a map in one language that you speak fluently and the actual street signs in another language that you don't speak at all...