One of the big attractions to futures trading for many people is the low start-up cost involved in funding their accounts to day trade.  Unlike equities, where you have to come up with about $30K to open a day trading account, you can open a futures account with about $5K and control futures contracts worth hundreds of thousands of dollars.

Trading a small account requires extreme discipline and risk management to guard against unexpected and large losses.  Simply put, there is no cushion for big mistakes at this level.

Another drawback to a small account is that you are limited to the type of trading strategy you can use and the number of contracts you can trade, unlike a larger account without these restrictions.  For example, if you wanted to buy three contracts and scale out of them, and take profits at different levels as the price moved your way, you would be restricted in doing this with a small account.

The most important part of trading a small account is the added psychological stress that is endured.  As if trading is not mentally challenging enough, try trading with a small account knowing you “have” to win just so you can trade again after a few inevitable small losses.  Once most traders get to this level, their mindset is that they will just try and take a tick or two out of the market to build their account back up. 

First off, this is not part of their usual trading plan and they are trading by the seat of their pants trying to get their money back.  In this situation, most traders will have upside down risk/reward ratios trying to accomplish this task.  Their target is 1 or 2 ticks but they are letting losses run for 6 or 7 ticks against them because now their ego will not let them take a loss, but the ego will be the first voice you hear when you have that small profit saying, “Get out now, it's a profit. You can’t go broke taking a profit,” etc.  The ego has many voices that can play in your head and they are usually all wrong.  If you are lucky and string a handful of these 1 or 2 tick profits together, you start feeling pretty good about yourself.  Then, that one trade comes and a whole week’s worth of profit is gone with one trade because of the upside down risk/reward you are trading with.

Obviously, we would all like to have unlimited funds to trade with.  Unfortunately for most of us, we have a finite amount of funds we can trade before we have to stop trading if it is lost.  Then the real challenge comes when we have to go get a “JOB” to replenish our account if we desire to continue trading at a later date.  Let’s discuss some ways of helping you build your small account and not lose all your money too fast.

While teaching classes, I try to tell students that a good, general rule of thumb for trading futures is one contract for every $10k in your account.  Now, I know some of you are saying that is too much money and not enough contracts.  If you treat your trading like a business, and I hope you are, then you should try to think of what other business you could possibly start for less than $10K and be successful? 

This is an excerpt from June 2009 issue of Trader's Journal.