Of all the important skills in trading, survival is number one. For unless we make it through the inevitable bad times, we won't be around to capitalize on the good. I've laid out some trading account guidelines that specify the account size required to conduct various commodity futures and option trading activities. Stick within these guidelines and you will have an edge on most of the commodity trading public.
$10,000 ACCOUNT:
Risk no more than 7.5% maximum a trade ($750)
A $10,000 account is probably the minimum commodity amount to begin trading with. Remember that a bigger account is NOT for buying more futures contracts or commodity options, but being able to easily split it into fifteen to twenty different parts. We want to have enough money to support each new position, for many tries, until we hit the great trades that make up for all the losses, expenses and turn a profit.
Probability allows us to have times when we do everything right and have a good run of winners. But the outcome of INDIVIDUAL trades is impossible to predict. Only by doing things right over the long run will probability favor us over the commodity trader who is reckless and random.
The reckless trader will have times when he does very well. But in the end the odds will take him out and give his money to the ones who maintain control. We don’t have to trade perfectly - just better than most.
OPTIONS:
With a $10,000 account you can now buy a “better quality” commodity option that has lots of time and is closer to the money. This may not be possible if the “cat is out of the bag”. This is a market that is already running strong and the option premium is inflated.
You want to purchase commodity options before the crowd starts chasing the futures market. We use our Timeline program for timing as well as commercial option analysis software to signal high probability trades that have undervalued options and room for the premiums to expand. The bottom line is you can risk $500 (5%) or perhaps even $750 (7.5%). But for a $10,000 account, a $1,000 option is high risk and done only if the trade looks exceptional and it permits you to purchase a great option value. In this case you would look to salvage some premium if wrong, rather than let it expire worthless.
FUTURES:
A $10,000 commodity account gives you more margin money, thus the ability to hold two to three different positions at one time. Remember that we don’t know which "high probability" trade will work out, if any, so this is one place where diversification may help.
I’ve seen many times in the past where an account was too small to safely take advantage of four good trade opportunities at once. As sometimes happens, the trades that were picked did not work out, while the ones let go were stellar performers. Remember to risk no more than $750 per trade to stay within the risk parameters of 7.5%.
OPTION WRITING:
With a $10,000 commodity account, we are just beginning to get a small amount of flexibility. Very often when the TimeLine or Option Writing program signals an option CALL write, it may later signal a PUT write before the initial call is covered. We will then have two positions. This requires two margins instead of one.
We may even get the opportunity to average in a second lot if the options are far out-of-the-money. And we also have the money to do an “adjustment”. This is taking a small loss and then immediately selling a new option farther away to possibly recoup the loss and make a profit.
As you can see, the advantage of a larger account is survivability - that is, being able to risk a smaller percentage of the total account. In addition, it permits more flexible strategies that involve multiple option writes and more complex positions. A larger account ($10,000) is NOT for taking on larger quantities of the same position. In other words, don't treat it like two $5,000 accounts.
Part Five of Six Parts- 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.
