How Much Money To Use In Trading

This article elaborates on the one dated August 7, 2006 entitled “The Ideal Trading System”.

Today’s article is about the “equity requirements” feature.

How much money do you have for trading? How much do you want to use on each trade?

You can trade eMini’s for as little as $1,000 per contract if you daytrade. That means the leverage is about 30 to 1. Fantastic! So if you have very little money, you might have to daytrade because you’ll have to put up about $4,000 per contract if you hold for more than a day.

In the same category is consideration about what percentage of your equity to use each time you open a new position. It would be folly to put all of your money on a single position. Yet that is often how traders blow up their accounts. They put all of their money in a single position (or a number of positions all at the same time) with a system that is 99% accurate. Naturally, the one time they try the system, they get a trade that is part of the 1% chance of being a loser!

That’s sort of what happened to Long Term Capital. LTC was a fund organized and operated by a bunch of genius Ph.D.’s. One of them had won the Nobel Prize for his theory about pricing options, the Black-Scholes Model. Their model had a very low chance of being wrong. So they put all their cash into their trades, all at the same time. Naturally, they got the trades that there was ALMOST no way of being losers and thereby went out of business.

At my commercial website, LeisurelyCashFlow.com, we always ladder into position. That is, after identifying whether to go long or short, we start off with a position using not more than one-third of our cash. If prices move adversely while our trading algorithm indicates that our direction is still valid, we add another position, again using not more than one-third of our cash.

Using one-third of your cash is quite aggressive. You might be more comfortable using far less. Or you might be more comfortable using a bit more. The point is that “equity requirement” is an aspect of your trading system that requires some thought before using real money. Even geniuses forget to do that (e.g. Long Term Capital).

We'll chat again soon ...

Copyright 2006 Raymond T. Lee. All rights reserved.
Leisurely e-Mini Futures Trading
eMail me Comments