Underfunding and MM

Discussion in 'Professional Trading' started by tradebanzai, Jan 30, 2007.

  1. Hi all!

    1. Could you please explain to me more about underfunding.
    Let's suppose we have $15000 and going to daytrade stocks (let's forget for a while about $25000 restriction).
    Could you please explain, if this funds are enough, or not and why.
    My idea is you need to use your funds for MM (let's say, loss per trade). So, if you have, for example, $15000, so you can have a loss $150 per trade. Hence you plan your day. You will need to have 30 "-" trades IN A ROW to lose $4500. Where am I wrong? Just trying to understand it clearly before entering the real market.

    2. I hear sometime traders say "I used 30% (50%, whatever) of my capital for this trade" (or they say "I risked ...% of my cap", meaning the full amount of money in a trade). Is it so important what % of cap is used for each trade, if we use the loss limit (hence we won't be able to use more cap than is allowed by rules for each trade).

    Appreciate any help.
  2. (1) Trade futures instead of stocks. Regarding your defined loss level of $150 per trade, maybe you're not taking into account the likely possibility of the market gapping against you AND "fast" market conditions from time to time that can bring about larger losses than you expect. If you're going to adhere to a 1% stop-loss level, the dollar level of the stop-loss will fluctuate as your account fluctuates. The $150 level wouldn't be proper if your account goes to $10,000 or $20,000. Limit your total annual losses to $3,000 instead of $4,500 in order to simplify your taxes. (2) Focus more on your percentage-risk-per-trade. This is what you're willing to lose. This will protect you from huge losses.