Are low margins the way to riches or blowup?

Discussion in 'Index Futures' started by kxvid, Jun 3, 2009.

  1. kxvid


    What do you think of $500 margin retain accounts? If someone has a positive track record trading index futures intraday, is it advisable to lever up?

    Take a person that normally trades the NQ on $6000 margin per contract, and is profitable. Now this person decides to start trading $1000 margin per contract. What do you think would happen to this person's account? Most likely blowup, but if they keep their cool and string together a good week or two they might be very glad they did.

    Obviously, there are some very large disadvantages to trading on such low margin. Some are:
    >Inability to hold positions overnight if so desired (intraday margins only)
    >A couple losing days and they are out of the game for good. Versus trading on 6k margin a string of losing days sucks, but is entirely recoverable from.
    >Nervousness/emotional problems could be a big problem trading such large lot sizes

    >Maximized profit potential, potential to make big money on a small account
    >Be a big lot trader (atleast for your first trade lol)
    >You only live once

  2. $ 1000 as margin is equivalent to leverage 47.
    If the ES looses 2% in a few seconds because of political news or war, you're wiped out.
    Leverage 5 is more than enough, you could still loose 10% of your account in exceptionnal circumstances.
  3. bkoo869


    I've tried both full margin (well, $3000 or so for the ES) and low margins ($500 per contract). I switched to low margins because I was thinking, like everyone else, hey, I can get richer faster!

    However, my conclusion is that, for a beginner, full margins are definitely better. That's because of the danger of overtrading.

    I used to trade 1 or 2 contracts with the full margins, but immediately on the lower margins (and just a $5,000 minimum to open account), I got desperate/crazy, and traded 7 contracts, losing of course. I lost $2,000 that day, or 40%. Just the other week, I traded 4 contracts on $2,000 margin, and barely pulled a small profit out of my ass on that one. And that's with 2 years of brutal experience. I can barely imagine the nightmare if I had had that kind of leverage as a rank beginner.

    It's way too easy to overtrade when you have the margin. The smart thing is to reduce contracts when you lose, but you think "I'll double up on the next one to make up my loss," and then you lose again, losing 3x, instead of 2x. Then, of course, you think, "I'll double up on the next one," and you lose 7x, instead of 3x. And you know it's wrong, but you still do it, simply because you can. Incidentally, that's called the martingale betting strategy, and it's a proven loser, because eventually you will hit an amazing string of losers that will wipe you out.

    You think it won't happen in the cold light of day, but in the heat of the moment, believe me, it happens. Lower margins offer the illusion of lower risk, but it's just an illusion - because you have to win to take advantage of them. The loss is the same dollar amount whether the margin is high or low.

    The only advantage to low margins is when you are winning (you can scale up faster), but paradoxically, low margins tend to reduce the odds that you will actually win. And, more paradoxically, if you ARE consistently winning, you won't really need the low margins in the first place (you'll be rich).

    And if you have so little money that you can't afford the higher margins, I suggest you not trade at all. It took me two years of trading every single day, and TENS of THOUSANDS of dollars in losses, to reach consistent profitability, and I would say that my experience is better than average.

    On the other hand, if you are already consistently profitable, and have rock-solid risk control, then yes, low margins would enable you to make money faster. But don't count on it, if you have no experience in futures.

    Instead, I would suggest that the beginner futures trader look for low commissions (I recommend MB Trading, or IB), because you'll still lose, but at least you'll save on commissions while you're paying your dues. And yes, you will lose.
  4. Nattdog


    I would not trust a brokerage that let customers trade eminis on $500 margin.
    Too many things can go wrong to try to cut it that closely.
  5. bkoo869


    Oh, and one last thing...look up "risk management" in Wikipedia or any good investing/gambling website. Yes, on a winning streak, you will make money faster with low margins. BUT, if you keep increasing the contracts, eventually you will have a major losing day, and that day will be when you have the most contracts - and will low margins, that day may likely wipe you out.

    From personal experience, I had a winning streak last year of a full month, on the ES, making 46 points in that month per contract (I was up to 3 contracts by the last week). I thought I had mastered the ES, so I naturally moved up to 4 contracts, planning to hit 10-20 contracts in the next month.

    I promptly lost 22 points that day, and because I had increased contracts, I lost more that day than I had made in the previous month.

    The next day, I moved up to 5 contracts, thinking, "You have to trade bigger to make it back." I lost 32 points that day. It was a nightmare - $8,000 gone in 1 day!

    So it goes. Be careful out there. Don't be tempted by low margins into overtrading. And don't be fooled by a few good days (or even weeks). Futures are a harsh bitch.