hi all, This is something I have been thinking alot about lately as a rather new trader(18 months) and really started thinking about it after reading the thread "throwing in the fkin towel". I have read all the books, i made 30% on a 5k account last year trading silver and gold stocks. Finally have come up with a system, but have not back tested it yet. I very much made sure to concentrate on risk management, have read "trade your way to financial freedom" and "trading in the zone" several times. Never risk more than 2% a trade, 3:1 rations, scale in and out...ect, ect... Now here is the rub to me though, at my current rate i wouldnt even have a day trading status account for 7 years, and that is assuming a good return. I have noticed that almost all the great traders blow themselves up starting out. I dont see myself blowing up because of my tight risk management, but at the same time i have almost no chance of "blowing up" my account in a positive/to the upside way because of risk management. I guess what i'm asking is has any thought about how to quantify the risk management on an ammount of capital that can be easily made back working for a few months if you blow up? There seems to a lack of theory in this area, risk management theory seems to be all aimed at sums of capital that would be a disaster to lose in that it would take forever to get back. Is anyone else this situation? I suspect most traders come in trying to make a killing and blow up. The ones who are successfull keep trying until they hit the home run, lose it all, then hit the home run again and start using "proper" risk management. Should i up the risk past traditional risk management parameters? I plan on working another 10 years to build the account, it just feels like i should try to hit a home run in gold futures or something of that sort. My friend that runs a small fund thinks im nuts to even think that, but he has 100 times the capital and actually is making real money, where as i will only be making a good % gain if i'm good for a long long time.
Yuo might be interested in Ryan Jones' The Trading Game. He uses a money managemnt scheme that supposedly helps people's accounts grow faster. I'm just reading it now, and have no opinion one way or the other at this point on how valid his approach might be, but it sounds like it addresses the ideas yuo have.
If you've been around here a while, you've probably read a few of the more successful posters talk about one of the big reasons that traders fail : undercapitalization. It sounds like that is where you are sitting right now. If you try to hit homeruns with large risk, you are doomed to join the legion of blowouts. If I were you, I would keep the risk where it is and work on building your account as slowly as necessary the way you are currently doing it. I would also be looking for other ways to get at more capital. The best way I've found, and the way that most people are too lazy to do, is to bust your tail WORKING and save up money to go into your trading account. This is the path I am on. I know this sounds dreadful to most, as they'd rather sit at home and study charts all day in their grundies. There are other options, such as borrowing from friends and family (I would NOT recommend this personally) or going Prop.
thanks for the The Trading Game mention, I will check that out certainly. As far as undercapitalization, do you really think that comes into play with trading stocks? I could see how that could be a serious problem with futures as far as staying power. With stocks I like to think of my undercapitalization as a pure liquidity advantage As far as a professional trading, i have put myself on a 10 year plan. I just started back to school and hope to become a money manager/advisor in 3 years and throw it all into my account for 7 years. What was bad about family/friends OPM? I have two family members that just got into trading, one had a settlement from a law suit and is virtually throwing darts on stock picks on a 50k brokerage account that i hope to convince him to let me handle. That should be no problem once he takes a frying pan to the face on his money
actually one more thing, this whole post i think is just to convince myself not to go this stupid route of homeruns since i'm already on the right path. thanks guys
I have also taken a small account and made a large % gain. For example suppose you had a 5k account and made 50% on it in a few months. Each trade had a maximum risk of 10%. I would not be able to trade the same strategy using a 50k account. Just due to the fact that with a 10% max risk per trade a string of losers could kill the account very quickly. I could handle killing a 5k account but not killing a 50k account. It is annoying to know that one could have really made big money quickly but you never know when the mkt is not going to do what you think it is going to do.
Don't forget, If you don't have a lot of capital, Options are the way to go....and with the recent change in the margin requirements for SELLING options, it's even better now. Previously, even doing credit spreads was very capital intensive. Finally, the margin reqs will soon be coming down to a much more reasonable level. Check it out: http://cboe.com/AboutCBOE/ShowDocument.aspx?DIR=ACNews&FILE=20061213.doc FOR IMMEDIATE RELEASE SEC APPROVES CBOE'S NEW PORTFOLIO MARGINING RULES TO BENEFIT CUSTOMER ACCOUNTS CHICAGO, December 13, 2006 - The Chicago Board Options Exchange (CBOE) announced today that the Securities and Exchange Commission (SEC) approved amendments to CBOE rules that allow for expanded portfolio margining for customer accounts.The effective date of the amendments is April 2, 2007.
I think undercapitalization is a problem because losses are more psychologically damaging. A $500 loss is a 10% hit against your account. After taking several hits in a row, will you really have the discipline to trade the same setup and risk the same amount? Until your account is larger, you can always slow down your trading to avoid excess commissions/slippage. You can also adopt a swing trading style that buys support and sells resistance allowing for tighter stops. I agree with syswizard in that margin can help overcome the undercapitalization issue. However, you should be very consistent, experienced, and disciplined before leveraging your positions. Mark
I assume your 30 % made on the 5 K acct was without much daytrading ? did you make money on the downside as well as you did on the upside in the mining stocks you traded ? what is the most amount and least amount of positions you ever had on at anyone time ? were the stock (s) penny stocks or big caps? futures is a totally different animal unless you reall know what drives the market you are in and have some edge there you will have the odds stacked against you due to the leverage involved for one thing
thanks for all the replys, this board rocks. I essentially read books and researched for a year before making any real money bets. I mostly have swing traded gold/silver stocks. I have been really consistent but i have been trying to use textbook risk management(Van Tharp has been my bible), i mean i end up trading 30 shares of a 10 dollar stock so even when i win commisions take alot of the profit. This has been fine until now, i have considered it tuition cost. I was quite aggressive as far as swing trading both ways, i dont have day trader status to get more short term than that. I would have made more money just buying and holding, but like i said i have considered commisions tuition cost as far as learning to trade. I have started working on strategies though and have sold out everything in my scottrade account and hope to move to trade station in the next few weeks to do backtesting. "I agree with syswizard in that margin can help overcome the undercapitalization issue. However, you should be very consistent, experienced, and disciplined before leveraging your positions." this is really where i feel i am almost at. i feel i have made enough trades now to remove the emotion from trading at my current level. when do you take it to the next level though? i have not learned the lessons of leverage yet and i know that will present another pyschological lesson. would you guys agree thats the next logical step to take once i find a backtested "edge"? i have zero interest in options, i despise the entire concept of theta.