Does Trading Account Size Matter?

One of the big attractions to a futures trading business is the low start-up cost involved with funding their accounts to day trade. Unlike equities, where you have to come up with approximately $30K to open a day trading account, you can open a futures account with roughly $5K and control contracts worth hundreds of thousands of dollars. Where else can you open a business with so little capital?  

New traders are attracted to the futures markets, thinking it will be easy to turn their small accounts into substantially bigger ones overnight. Many futures brokers will let you day trade with margins, good faith money you deposit per contract to trade for as little as $500. Traders instantly look at the day trading margin of $500 per contract and figure out the maximum number of contracts they can trade with their new $5K account. Almost immediately, they are over-leveraged and lose all or most of their initial $5K deposit. Few traders survive when they start with this account and dream of instant wealth.

Trading a small account requires extreme discipline and well-researched risk management rules to guard against unexpected significant losses. There must be a cushion for big mistakes while trading this account size. 

Another drawback to small accounts is that you are limited in the type of trading strategy you can use and the number of contracts you can trade. For example, if you wanted to buy three contracts and scale out of them, taking profits at different price levels as the market moved your way, you would be restricted in trading multiple contracts with a small account. A larger trading account removes such restrictions.

The Illusion of Scalping Markets for a Living 

Another issue of trading a small account is the added psychological stress traders will endure. As if trading is not mentally challenging enough, try trading with a small account, knowing you "have" to win so that you can trade again after a few inevitable small losses. 

Traders with smaller accounts think they can scalp the market for a tick or two to build up their account size. First, there are better trading strategies than this. Second, scalping-style traders are competing against super-fast computer algorithms. Humans cannot compete with computers over the long term. Third, traders will have upside-down risk/reward ratios trying to accomplish this task. With targets of 1 or 2 ticks, their stops must be further away due to market volatility, in some cases 5-6 ticks away. Poor risk/reward ratios are the result. If you are lucky and string a handful of these 1-2 tick profits together, you start feeling pretty good about yourself. Then all of a sudden, one trade comes along, and a whole series of profits are gone with one trade loss because of the upside-down risk/reward you are trading. Traders would need a strategy that wins nearly 100% of the time to be profitable.

Learning to Trade Versus Trading for a Living 

While learning to trade a small trading account can be beneficial. You probably didn't have much money when you were going to school. But, you worked part-time to have some form of income. During this time, you were attending classes and learning a new career. And with any luck, building your checking account size. During this learning time, you could support yourself without too much stress about where your next meal is coming from. 

New traders should do something similar when learning to trade. Have some form of income coming in. As you learn your new craft, you can focus on the markets and not stress about money. 

New traders starting with a smaller account size are forced to follow their trading plan more diligently and have the patience to wait for the set-up before placing the trade. Otherwise, too many random trades, and you could lose all your trading capital quickly. Once an account balance is below margin levels, trading accounts are suspended until more money is deposited.   

Trading for a living requires much more money in your account than while learning to trade. Trading for a living requires being able to pay your monthly expenses regardless if you made money or not that month. All traders should realize there could be daily, weekly, monthly, or even yearly drawdowns from losses in trading accounts. If you need proof that accounts can suffer yearly drawdowns, look at the year-end trading results of hedge funds, and other managed money firms. 

Growing a trading account will require increasing the number of contracts or open positions you may have. Both of these will need more money to be in the account. Each month you will withdraw your living expenses from your account, which will need to be replenished the following month. Starting the next month, your account balance will be automatically lower. Now imagine last month was a losing trading month. You have the trading losses and the expenses to make up to get back to your prior month's starting balance. 

From this example, you should see that even a $25k account balance would put too much mental pressure on a trader after a bad month of trading and paying expenses. Resulting in a smaller account balance, conversely lowering the number of contracts and open positions you can now trade. 

You may think that trading micro-futures contracts would reduce your risk and allow for more contracts or positions to be traded. The lower risk is correct, but the profits are also reduced. Reducing your living expenses would be an excellent start to reducing the capital needed to trade professionally. 

Knowing how much capital is needed to be a professional trader depends on each trader's lifestyle. But, the old saying "It takes money to make money" surely applies to being a professional trader. 

Techniques for Increasing Trading Account Size 

We would all like to have unlimited funds to trade. Unfortunately, we have a finite amount of funds to trade before we stop trading if we lose it. Then the real challenge comes when we have to get a "JOB" to replenish our account if we desire to continue trading later. Let's discuss some ways of helping you build your small account and not lose all your money too fast.

1. We only increase our trading size when we are mentally and financially ready. Some of the best traders trade with small contract sizes because they have tried to increase their size, but their minds are only comfortable with so much risk. You, too, will one day find out what your maximum contract size is that your mind can handle. Remember, the brain is a muscle, and just like lifting weights at the gym, you must gradually increase the weight (risk), so the muscle will adapt to this change and not become injured. Remember that professional traders do not make their living hitting home runs. If you ask any of them, you will find they have been doing this for a long time and have ground out the slow, consistent profits to make it as a professional trader.
2. Risk management with any account size needs to be emphasized, much less a small account. Here are a couple of ideas to help you with this area of trading:

• Maximum dollar loss for the day, week, or month. 
• Risking no more than 1-2% of account size on any one trade

By setting a fixed dollar or percentage of your account (small accounts, I would not risk more than 2-3% per day) as a maximum loss for the day, week, or month, you will be around for a long time trading.

Here are just a few reasons why the maximum loss rule could save you some money and possibly your account:

• Your losses may be attributable to your mental state that day. The odds are pretty good that the afternoon won't be much better if you are not thinking clearly in the morning. 
• Your strategy may not be conducive to the markets on that particular day if you are a trend follower and the markets are in a trading range, for example.

Keep in mind that trading is a probability business. Ensure you do not lose more than 1-2% of your account on any trade, especially when starting. Using these percentages, you would have to be wrong approximately 50 – 100 times in a row to wipe out your account. With each trade, you will learn something that can help you in the future. That is the advantage of using this type of risk management; it allows you to be around to enjoy trading after you have learned a few things to be profitable. The goal is to keep your money long enough to enjoy trading after you have had some screen time and learned more about making market profits.

Summary

Trading small accounts can be done with the correct risk management and discipline while learning to trade. But, when traders want to trade for a living, they must first consider their trading capital size and living expenses. Remember, even the biggest fish in the sea were once small. These small accounts can be more difficult to trade successfully, but it is possible. 

You will have to be on top of your psychological game, too. Even with small accounts, we must follow the trading plan process. The saying goes, "Perfect the execution, not the results." 

Please focus on something other than growing your account (profits); follow your trading plan, and the profits will take care of themselves. 

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