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The Challenges of Trading Small Futures Accounts


Trading a small account requires discipline, as no buffer exists when mistakes occur.

Many traders have a hard time taking a loss and will let their losses run, or have too big of a stop for their account size. If a trader will use the 1% or 2% rule for risk management, they will be trading for a long time. If you use this rule, you will have to lose almost 100 times in a row for the 1% rule, or 50 times in a row for the 2% rule, before they wipe out their accounts. This is also another reason to have a trading plan because it makes you trade consistently. If you follow your plan, it is highly unlikely you will have 100 losses in a row. Most traders who do suffer these types of losses are the ones who change their trading style after every loss and lack consistency. Once your account begins to grow using these 1% & 2% loss rules, keep on using them regardless of the size of your account. By following them, you will have a much better chance of surviving futures trading.

For the number of contracts to trade, there are a couple of general rules you can use.
  • $10,000 per contract you trade
  • (Account balance * risk (.02) ) / largest loss = number of contracts to trade
If you use $10,000 per contract, then you will not be overleveraged trading. Once you can turn your first $10,000 into, say, $17,000, then you are ready to add another contract. Do not expect to double your account in the first year of trading. Many traders feel they should be able to do this. In all reality, you should be about break-even at the end of your first year. If you can do this, you will have a good chance of becoming a successful trader. Most new traders start out making money in their first few trades because they wait for their setups and then take the trade. Then after a few profits, they become impatient and trade every time a market moves. In trading, it is not how much you make; it is how much you keep that is important.

The formula above is the one I prefer because this will allow you to increase contract size as you become a better trader, and decrease it when you start to have drawdowns.

Let's review what each of the terms mean in the formula:
  • Account balance = Trader's cash balance in their account.
  • Risk = This should be either 1% or 2% of your entire account balance.
  • Largest loss = Whatever your protective stop dollar value will be for this trade.
  • Number of contracts to trade = You may have to round this number up or down.

$25,000 * .02 divided by $125 = 4 contracts to trade

Keep in mind that this is your maximum number of contracts to trade and you do not have to trade this amount on every trade. If you are not feeling well, have computer problems, are distracted, or just not on your "A" game, then just trade a minimum number of contracts until you find a trade that justifies using your maximum contract size.

Do not be afraid to trade with a small trading account, but respect the rules we just discussed, build your account incrementally, and don't look for home runs or lottery ticket wins.

A word of advice: You must work very hard on keeping your emotions under control with these smaller accounts. Make sure you have a well-written trading plan, and that you have confidence in your strategy and in yourself. Plan on this taking some time and do not expect overnight success.

Editor's note: This story by Don Dawson originally appeared on Online Trading Academy.

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