If anybody has watched the Suze Orman show on late night CNBC you have heard the phrase “show me the money!” She takes audience phone calls and people ask her if they can afford to buy a particular object. She either approves or declines their request based on the financial information they have submitted. Perhaps we need a Suze Orman show for beginning Futures traders. With so much leverage in the Futures markets it is very easy for inexperienced and undisciplined traders to lose all of their starting capital.
We have all heard of the stories of somebody’s distant uncle who lost all his money trading Commodity Futures some 40 years ago. While I have no way of knowing exactly how that happens I have some pretty good ideas how it turned out that way:
No trading education or experience
Undercapitalized
No Risk management rules
Most likely did not have a written trading plan to follow and was winging it
From the above list of “Wanna Be Traders” mistakes I would like to focus on how much capital you may need in your trading account to have a fair chance of surviving in the Commodity Futures arena. The following should be taken as guidelines only and not hard and fast rules. As we have heard of traders losing all of their money we have also heard of traders turning small sums of capital into large size accounts. Unfortunately these stories are not as abundant as the trader losing all of their trading capital.
Keep in mind that anytime you enter the investment business that you should only use risk capital you can afford to lose. Trying to trade for a living with capital that is needed to pay living expenses will cause you to trade with too much emotion. Emotion leads to fear and fear leads to losses. Once the losses start traders become revenge traders and this can lead to losing all of their trading capital.
Depending on your brokerage firm most Futures brokers will let you open an account for as little as $5,000. Compare that to opening an Equity day trading account for $25,000! A big advantage to trading Futures as opposed to Equities is that you do not have to maintain that $5,000 balance. An Equity account cannot drop below $25,000 or you lose your direct access order routing and day trading privileges. A Futures account can drop down to as low as the minimal day trade margin needed to trade a Futures contract and you still maintain your trading privileges just like a trader with much more capital. In some cases this day trade margin is only $500. So if you lose $4,300 through a series of trades and your account balance is only $700 you can still trade. Margin is good faith… Continue Reading
