This article is the Opinion of Optimus Futures. The conditions and scenarios relating to a futures account below may or may not apply to your future or past experience.
When it comes to learning and mastering the skill of trading, it seems almost intuitive for new traders to start trading with a small futures account that they can afford to lose, akin to an “admission fee” for entry into the highly leveraged world of futures. However, there is an alternative school of thought that labels this conservative approach as a likely reason that may potentially be compromising their progress.
The Small Futures Account Mentality
Many traders starting out their trading career often fail to treat it like one. Trading in the financial markets is a demanding long-term profession that rewards those with a relentless thirst for knowledge as well as adequate capitalization. Just as one cannot go out investing in real estate with pocket change, a tiny futures account with a broker will not necessarily help their chances much either.
This is because success in trading perilously hinges on the ability to control emotions, and the magnitude of those emotions are directly correlated with the capital that is on the line. Just as there is a world of difference between paper trading (futures trading demo account) and live trading, there is also a massive difference between trading a large account and trading a small account.
Let’s look at these differences and how they can potentially affect one’s trading performance.
Busting the Mindset Myth
One of the best arguments put forward in favor of small futures account trading is; Practice! This applies more to beginner traders who are not comfortable going all in and want to get the feel of trading with live money without putting much on the line. They will often give themselves a timeline or a profit target before they commit going in with their full capital.
Unfortunately, this serves as a poor launchpad for traders still on a learning curve. As stated above, trading successfully has a lot to do with controlling and using emotions in a conscious and disciplined manner. Psychologists confirm that the pain of losing money is felt by the same part of the brain that feels actual physical pain. The emotions of hitting a profitable trade versus a losing one will never be the same on different sized accounts. In other words, the “pain” associated with a loss is not equal to the feeling of happiness from a gain. The loss has a much more significant impact psychologically and could present a hurdle for progress or serve as a deterrent from further education and in some cases, trading in general.
It becomes evident that trading with a small account simply for ‘practice’ doesn’t yield the ideal utility in terms of the time spent, the mistakes made and lessons learned from them.
A better approach instead, is to open an account with adequate capital appropriate for the asset class of Futures. This may allow one to potentially refine risk management skills to ensure that a futures trading account does not go into a drawdown that forces you to stop trading altogether. Further, instead of putting a small percentage of RISK capital into a trading account with the inherent belief that one might lose this account as he/she learns, consider placing a higher percentage of your RISK capital. This will allow the Futures trader to scale up the risk per trade, so a few accumulated losses will not substantially deplete the equity in the account.
Not only does more considerable capital give you more realistic environment for ‘practice, but’ it also potentially hones your risk management skills right from the first trade. Futures trading is volatile and leveraged, and as such, requires a specific utilization of risk and cash management.
It is also important to remember that just because one’s futures account is larger does not mean that a trader should necessarily take more risks by increasing the futures contract size. A futures trader could and should trade the same size on the big account as he/she would have on a small account until they feel comfortable with their progress. Neither should they trade more frequently in hopes of recovering losses that have already occurred.
You need to decide what is your risk capital. There is a substantial risk of loss in futures trading.
The Dilemma of Dollars over Numbers
We discussed above that making or losing money on a small futures account is never reflective of the emotions you would feel for the same trades on a larger account. This has also been our experience at Optimus Futures when discussing P&L analysis with traders.
This dilemma in itself carries enough might to bring down your trading performance. Once again, it is human psychology at play here.
Imagine you risked 2% of your account on a setup as per your trading strategy. A $25,000 account would have risked $500 versus $100 on a $5,000 account. Theoretically speaking, you can place your stop-orders wherever you want, but a larger Futures account can potentially allow your trades some “breathing room” within certain volatility and fluctuations.
Stop-Loss Disclaimer: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders. The high degree of leverage that is often obtainable in commodity interest trading can work against you as well as for you.
It can be ridiculously hard to train your mind not to translate your trading decisions into actual dollar terms. How much we make or lose will ultimately drive our feelings and emotions about our trading progress. Even though past performance is NEVER indicative future results in terms of trading, the same cannot be said for your emotions, especially for new traders. And this is where larger account traders may have an edge. If for example, you have one running trade accounting for half of your account balance, you are bound to be heavily burned by trading psychology. The outcome of that one trade will most certainly impact your next one. On the other hand, when even strong trades – or for that matter losses – don’t mean much to your real-time equity, you can potentially be more casual about your trading decisions, conduct a thorough analysis and consider a chain of trades rather than have a “make it or break it” feeling about any one particular trade.
Over time the dollars over numbers phenomena can also start affecting the trading frequency rhythm. Where larger account traders can ‘afford’ to patiently wait for better trade setups simply because of the higher dollar yield a smart trade would serve, small account traders are often found to be more anxious to trade and build the account faster. They often want to be more involved and want a higher number of winning trades in an effort to force the equity curve to tick higher. This tendency can result in increased frequency of trades, often at the expense of the quality of trade setups.
Advice for Traders with Low Capital to Start With
So what about traders that aren’t starting off with a small futures account as a precaution, but rather as the only option they have? Unfortunately, there are no shortcuts.
Under-capitalized traders have a steep climb if they choose to fall into the potential trap of wanting to grow their futures account overnight. This is because not only do they face the above-mentioned perils of trading with smaller accounts, they also carry with them the fear of having to lose that money. Note that fear is something cautionary traders don’t have to deal with. In fact, having to avoid the disturbing thought of losing their full capital is precisely why overly cautious traders sometimes end up trading a futures small account in the first place!
Professional traders often advise aspiring traders with limited trading capital to transition to full-time trading slowly over time rather than try their luck at growing a small account into a larger one. This means that they focus on their career, while at the same time learning the markets in order to potentially make better trading decisions in the future. As they accumulate more risk capital, they can potentially put it to work in the Futures market.
You stand a comparatively better chance of succeeding in this business if you walk in with adequate capital. You may find that accumulating capital in other avenues, such as your career or other ventures may bring the good traits you earned from your current field into the trading world. The key here is discipline, which in our opinion is a trait that is priceless in the world of trading.
Closing Thoughts
Traders starting with small futures accounts reflects a risk-averse and a careful approach to a trading career. And while it is an instinctive approach taken by many beginner traders, quite often it is rather challenging from a psychological perspective and even harder to implement into a healthy long-term strategy owing to the leverage and volatility in the Futures market.
However, before we wrap up, it is important to note that while we highlight the difficulties and the potential problems traders can face when they trade small accounts, we do not claim that growing a small account is impossible nor do we discourage anyone from opening one. We are simply pointing out the realities you should be prepared to face if you decide to step into the world of futures.
