Even when trading conservatively and slowly there is a tremendous amount of money to be made in commodities. Most new traders try to rush it and swing for the fences. You can often control $100,000 worth of commodities with only $10,000 of margin money in your account. (5%-10% leverage) Here's how to take advantage of this leverage and why those who abuse it lose their shirts.
Here’s what I would call a good example of trading within your means, and planning for survival. This is fantasy, but bear with me. Let’s take the E-mini (the S&P 500 stock index) futures contract for day-trading. One point equals $50. A reasonable stop loss is three points = $150 loss a trade. I recommend $5,000 in account equity for each E-mini futures contract traded. You might ask, “but the day-trading futures margin is only about $500!” That right. But what if you have ten losers in a row? That’s a $1500 loss. (3 points X 10 trades X $50)
Ten losses in a row means the account is worth $3500. You can still take another ten losers in a row and have $2,000 left to trade! Ten additional losers leaves $500. That's thirty losers in a row! (We haven’t added in commissions. At discount rates it would add another $450 or so to the loss.) How many trading plans have you come across that let you have twenty losers in a row and are still able to take ten MORE? Survival is what we are talking about! Now, here’s the best part….
I’m sure the next thought will be, “but how can you make any REAL money trading only ONE E-mini futures contract?" And the commodity brokers are wondering the same about commissions. Well, the objective is to survive and make money, right? And let's not forget that some traders are just looking for action, like going to the casino. Whatever your goal, this plan will give what you're looking for. If you like pure action and don’t care much about making money, you can possibly squeeze out thirty losers in a row before you are wiped out, using three point stops. If you make some winners, the ride lasts longer. That's a lot of action.
But, let’s take a positive example. Let’s say you’re a gifted commodity futures trader. Trading the E-mini, you pull three points on average out of the market every day. Starting with $5,000, after 33 days, your account is up to $10,000. Now you can conservatively trade two E-minis future contracts. In two more weeks your accounts hits $15,000 and you begin trading three E-minis. And so on. After one year, (about 260 trading days) taking three points a day and trading one E-mini future contract for each $5,000, you would have over one million dollars!
So, don’t think you can’t make serious money conservatively trading one E-mini per $5,000. And this was doing it with total money management, risking only 3% on each trade, for the whole year. Again, this is fantasy, but not impossible. My point is, if you can trade well, you don’t have to take crazy, out-of-control risks to make money.
Part Four of Four - Next!
There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.
