To crystallize my point... once you pass the threshold based on instrument volatility and loss management extra account size does not help... As an example.. If for NQ your decent system dictates a 5point stop based on current volatility and you factor in a 10 trade losing streak as 5% of your account you have 20k as a reasonable account size per unit. Having 250k may simply encourage you to try 10points stops "needlessly"... using more rope.. Now if Volatility doubles next week then you will need a larger account OR a different instrument to trade. So in the end, volatility a more determinant for the ideal account size.
Rashid. in my opinion, this is a rather silly idea that most professionals would not share, i.e this is a retailer concept. Similar to the idea of "burning through accounts" which I feel is, also, completely untrue. Compared to other professions, it would be comparable to the idea of a doctor having to kill a few of his patients to get good. I'd rather go to a doctor who hadn't killed his patients. Or it would be the idea that a pilot has to be involved in a "few crashes" to learn to fly: I'd rather fly with a pilot who didn't crash. Any methods I know of will have a given return for a given drawdown and this can be given by a figure known as CALMAR or more simply reward/risk. From my research using several different sources of data, a reward/risk ratio of 1:1 is very good and 4:1 is excellent and beyond 4:1 is dubious. I think we can agree there is uncertainty in any trading method or style so that one never knows truly if they have a method that is 4:1 or 3:1. In fact the uncertainty is really significant. What does this mean? Let's assume you think you have a 2:1 method which is excellent. In other words, net/net you should return 2x your greatest risk. This could be a 100% return/50% drawdown or a 30% return and 15% drawdown or any combination thereof depending on the leverage you use. Lets take the example where I have a 200k account and need to make 100k. In other words, if I want to make 100k then I'll be prepared for a drawdown of about 50k (and hope for something better), and I'd have plenty of reserve capital if my estimates were overoptimistic. At my worst point, I'd be down only about 25%. If I have a 100k account and want to make that same 100k then I'll have to be prepared to risk 50% of my account, and I would be in serious trouble if my estimates were over optimistic. In fact, a 50% drawdown is really steep, and I'll surely be "hoping" that I don't get the worst of it. There are a lot more reasons why having a larger account is important. Any money that I have over my needs will go to savings and so that can add up really fast if I can cover my cost of living. The second reason is that trading costs. If I have $12,000 in trading costs per year and trade a 100k account then I need to make 12% to break even. Of course, that drops the larger my account grows. If I have a 500k account then that would drop to less then a percent. With a 25k account then I need to make 50% to break even! There are fixed and variable cost with any business. While it is possible if one is extremely diligent to keep the cost down, those expense figures are not uncommon with very active day trading methods. This is why that proprietary firms that promise you big money by offering millions in leverage provided you put up your measly 25k are dubious. Let's say you don't want to risk more then 50% of your account "normally" then that means you've 12k and with a 4:1 return your expected return would be 48k BEFORE expenses. Most can't do a 4:1 return and most of these firms also take a split. Let's say they take a 20% split then that leaves you 38k and now let's deducted your expenses which we'll say you kept to only $500 per month and you ended up making 32k or roughly somewhere between not enough to barely enough to live on trading at world class level. If you traded only at a good level then you would be out-of-business.
Good post. Account equity is certainly important, but if you don`t know how to trade it does not matter and can even make matters worse. One perfect example here from Norway is a self-made billionaire and early retiree, who got bored of the good life and decided to become an active speculator in the financial markets. Not only did he lose all of his fortune in a short period of time, but he managed to rack up a fair amount of debt as well.