Q: I have been studying the commodities markets for mostly my own edification for over 8 years with a brief attempt at trading a few contracts three years ago before realizing I needed more formal training if I wanted to trade successfully. To make a long story short, after reading approx. 20 books, purchasing a software program (“Mechanica”), end-of-day data feed and taking one on-line course prior to yours, I am getting ready to start testing a system of mine with a paper trading account through an on-line broker. My question – I have saved up 20k with which to trade. I tend to gravitate toward short term trend following, mechanical systems. From what I can gather from the recent course, most trend following strategies are not very compatible with an account less than 100k. I am not opposed to day trading strategies (i.e. swing trading, etc) but I currently work all day and need to make my decisions early in the morning (I live on the west coast) or evening. Do you have any recommendations for me with regards to types of systems I can test that might be more compatible with my current living situation?
A: You need to think about your risk and at first make sure that your risk is no more than 1% per position, perhaps ½% when you start trading. There are some futures contracts that you can probably trade with $20,000 but it depends upon where your system says to put your stops.
Let’s say you trade a corn contract and that corn is currently trading at $6.00. Your 5000 bushels of corn will cost you $30K which you can easily do on margin with a $20K account. But where is your stop. Let’s say it is 10 cents away at $5.90. Your risk is 10 cents time 5000 bushels or $500.00. You’d be risking 2.5% on your one corn contract. Thus, you can’t even trade corn unless you want to use a 2-3 cent stop and your system probably isn’t that tight.
So what you are looking at is finding instruments that you can trade where you risk is no more than $200 per position. You could buy a $20 stock with a stop $5 away. That would give you $5 risk per share. And if don’t want more than $200 in total risk, then you could simply purchase 40 shares. That’s how you would decide what you can trade and your position sizing.
1) Determine what you system says your stop would be.
2) Knowing that your risk should not be more than 1% of your account or $200, divide your risk per unit into 200 and see what you position sizing is.
3) If you can do that amount, then you can trade that instrument.