How Much Capital Will You Commit to Futures Trading
If anyone asks you "what is the easiest way to make a million dollars trading futures," the answer is "start with two million." All kidding aside this is unquestionably a true statement. The more capital you can afford to lose without adversely affecting your lifestyle, the greater the likelihood that you will be successful. More initial capital affords you greater flexibility and more cushion when the inevitable bad periods occur. This is so simply because having more capital that you can afford to lose reduces your emotional attachment to the money.
Emotional attachment to money is deadly. Ask successful traders about the money in their trading account and almost always they will say "I don't think of it as money." Actually, thinking of it as money is not the worst thing. The worst situation is when a trader looks at the money in his trading account not as money, but as all of the things he could buy with that money. If you find yourself after a winning trade saying "well now I can buy this or that," or after a losing trade saying "well now I can't buy this or I can't buy that," you are in grave danger.
After you make the decision to trade futures the next step is to decide how much money you can realistically afford to risk. If you are going to open and trade your own account it is recommended that the absolute bare minimum account you should open is $10,000. A common suggestion to traders is that you should always try to limit your risk on a single trade to an absolute maximum of 5 % of your trading capital (and ideally a lot less). If you open a $10,000 account this means that you can only risk $500 per trade. In most futures markets this would be considered a fairly "tight stop." So if your timing is not exactly right you will likely get stopped out on a fairly regular basis. This is another reason why "more is better" when it comes to starting capital.
Whatever amount you decide to commit, you should place the entire amount into your brokerage account. For accounts greater than $10,000 you can buy T-Bills with a portion of your capital in order to earn interest. If you decide to commit $25,000 then you should place the entire $25,000 into your brokerage account. You may also decide that if you lose say 50% of your capital, you will stop trading. This may lead some traders to say "well if I'm only going to risk $12,500 I'll just put that amount into my account." This is a mistake. In the worst case scenario it is a very different situation to be trading a $15,000 account that started out as a $25,000 account than to be trading a $2,500 account that started out as a $12,500 account. Once your account dips under a certain level your flexibility is so limited that it is essentially like piloting a plane in a death spiral. You are at the controls but you are no longer in control. One of the truest maxims in trading is "if you absolutely, positively cannot afford to lose any more money, you absolutely, positively will lose more money." Don't doubt this one for a second. Think seriously about how much you can truly afford to commit and then commit the entire amount.
Categories in Trading Mistakes
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Lack of Discipline
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