It seems the more I trade the more I realize that sound money management and risk principals are essential for successful traders. I'm curious as to what rules the pros apply to themselves. I've heard it argued that one should only trade with a certain percentage of their capital to leave the bulk free to defend potential positions. I've heard some argue that one should risk no more that 1 to 3 % on any given trade. A broker friend recently informed me that most retail accounts blow out after three weeks. This isn't surprising as most are trying to day trade the e-mini with 5 k in capital. On these ag boards traders appear to have much more longevity and wisdom. To those wise traders who make a living doing this would you be kind enough to share your theories on money management?
As Warren Buffet said, "Your life should be exciting not your investing." Thanks for the response Shaqi. Any rules you'd like to share though in terms of your own successful trading or lessons learned in the past regarding % risk on each trade?
1) The "math" should be the same for any market you trade. 2) Ag markets can adhere to their fundamentals much better than financials can. 3) Ag markets can have much more reliable seasonal behavior compared to financials. 4) Ag markets don't have as much "hot money" as financials, for the time being, which can make it easier to hold onto a position. 5) Ag markets have a shorter "pit session" which can shorten your workday, if you don't want to be sitting in front of the screen for 20 hours per day. 6) Ag markets don't have as many news releases as financials. 7) Put those advantages" to work for you.
The bottom line is there is no formulae that beats the market. Forget about Goldman Sachs trading profits becuase they trade on inside information. The guys there dont have any superior trading knowledge or mystic powers, its their contacts that make the money. For retail traders each individual will have to find their own methodology that suits your loss pain threshhold, capitalisation and ability to ride or toss winners. It took me 3 years to know what to do not to lose money and another 2 years to know what to do to make money and develop the mindset to win and accept losses that come along the way. Its not easy to trade real money for 5 years with a wife wanting to know where the money has gone to. What works for me may not work for you. Its like beauty they say its in the eyes of the beholder. But as far as capitalisation is concerned, you can start with $50K and if you dont know what they are doing you will blow it all. I blew up 5 No à $5K accounts in a row before I knew what to do not to lose money. Those were cheap lessons because when I knew what to do to make money only $3k account equity proved to be plenty.
I'm curious as to how frequent an occurrence it is for new traders to blow out a few accounts as they begin. Seems like everyone who is still in this trading for a living business has blown out an account or two in the past.
To be successful its not a requirement for a newbie to blow an account. There are some who have done well without blowing accounts but these are rare and usually its cases were a newbie is under direct instruction from someone who knows the business. However for the majority who actually start out on their own trading real money believe its rare not to blow an account or two. The problem is most newbies spend too much time with a sim account. Thats their downfall. No matter how good the results a trading system in sim mode when its put to the test with real money on the line by a newbie I will bet the farm that newbie will lose money with a good robust winning system. Why? because sim trading does nothing to prepare you for the pyschological stress of having consecutive trade losses then consecutive losing days/months up to a point were you start doubting the system and waking up at night with cold sweats wondering what the market will do to you the next session?
I have never blown an account since I started trading futures, even at the beginning. Got from 9 K to 12 to 6 and then never looked back... That's called ... well... just luck.
When I say I blew account - I don't mean I took on too much risk piking big contract numbers. It was a succession of small losses that turned out to be a big loss over time and up to a point where I had no minimum $2K required by my broker to open a futures trade. Back then there were no $500 emini nintendo margins.
However to answer the OP's question, if you have only 3k/5k equity to use a maximum trade loss of 1% equity is guaranteed failure - The fluctuations will eat up your stops even if trade direction is correct. $50/$100 stop I did it consistently and those tight stops blew up my equity time after time. Unless you are very good I don't its possible to be win using 1% loss on a 5k account. You have accept a higher % loss even up to 10% per trade to have any chance. Ofcourse somone with 20K/30K can use 1% loss with a better probability of success