How to manage small accounts

Posted by: Alejandro Diaz Hernandez

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Good morning.

For a person with a small account, $2000 or $5000.
When trading on the Micro Emini (future), do you recommend to have a defined SL, in which you always bet for example 3% of the total account per trade, or for being such a small account, do you recommend that regardless of the position we always use 1 Micro Emini.

For example:

-Trade with 15pts SL = $75 with one Micro Emini
-Trade with 15pts SL = 150$ with 2 Micro (almost 3% of 5000).

-Trade with 5pts SL = $25 with one Micro
-Trade with 5pts SL = 150$ with 6 Micro ( almost 3% of 5000)

The doubt comes because if we use a fixed % per trade and we have a 50-50 balance (in case of looking for RR 1:1) we will be the same as at the beginning. But if we use only 1 Micro always, regardless of the SL is 5pts or 15pts, the balance will be a complete mess.

Any advice to manage small accounts?

Thank you

 

Sorry the example wasnt right. Its now fixed.

Hi Alejandro,

The default (safe) answer will always be to use the smallest size possible until you establish yourself to be a profitable trader. 

Once profitable you can make use of your stats of winrate, average drawdowns, max consecutive losses etc (but only once consistently profitable otherwise these stats don't matter since will fluctuate too much while learning trading).

With your good stats you can then consider looking into the "Risk of Ruin" concept (Google search gives lots of info and charts) to decide how best to approach sizing given your style of trading. Because depending on whether you mostly swing or scalp, scale in or not, it will affect how much it's ok to increase risk before too much chance of blowing account. There is also the Kelly Formula for sizing bets. It can get pretty mathematical.

There are also philosophical differences for big and small accounts such as: big accounts often don't need to risk much. They can use 1% always and have a very comfortable living because even 1% in big accounts is a lot of profit. But small accounts, like small startup companies need to risk more to grow faster and get established, so maybe they push to 3% or 5% or even 10% on rare occasions. I'm not advising on 10% of course, it all depends on whether a trader is already profitable and fully understands how much their account swings up and down. 

Also want to warn about dangers of small accounts: undercapitalization. When an account is so tiny but trading in a relatively expensive market for it, it may bias the trader to go for tight stops. But tight stops are often low probability. Highest probability trades are during BOs but those create big bars and wide risk. So a trader unable to afford better setups will stick to mostly low probability setups and their account dies by a thousand papercuts. Sometimes you need money to make money so it's a good idea to save up more and open with a bigger account anyways.

Hope that helped,
CH
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Thanks for your answer Mr.Carpet

I will keep that in mind, I know this is more personal but then do you think that aiming for highest probability trades are better in general? ( I think I could have the papercut syndrome )

Example: 

  1-wait for clear BO with FT

  2-buy the market with SL at the low of the BO or the Swing Low

  3-scalp ( I think its about 4pts nowadays )

OR in TR BLSHS with room for scaling in 1 time

Taking low[er] probability swing setups such as reversals is fine since will eventually get huge wins (if able to hold) that offset a few small losses or small wins that balance out to 0 anyways. So a trader can be profitable that way over time.

A breakout that looks high probability may actually be bad if it's an exhaustive climax after an extended trend. 

So everything depends on context and how a trade is managed. I don't think it's possible to call any setup good or bad without knowing the full plan and location.

For the profit targets such as 4pts (even though Al mentions this number occasionally), the minimum scalp of the day fluctuates day to day. Sometimes it's 2pts, sometimes it's 10pts. It may even change drastically intraday. Al suggests to use 1/2 size of average bars sizes or 5% of average day's range. Whatever number you pick it needs to make sense with respect to the Trader's Equation. 

Some very good recommendations!

The most important aspect is consistency - -> taking the same actions in the same places which means reading the context and also becoming aware of how your personality functions.  There are a couple of elements to this:

1.  Finding suitable trades first.  The probability aspect and what you need to see, and measuring your results.  40% and 60% are not the same.  Have the patience in the beginning to determine best setups for you.  Note, Al has a good section of this within the course and books.  Example, some of the highest probability is 2E [L,S] at the EMA during a trend [60%].  MTRs are 40% in many cases until experience comes.

2. With consistency in action then there comes another part.  Consistency in various market environments.  The market changes "flavors" a couple times a year oftentimes as it moves through high volatility, low volatility (often august summers), etc.  Consistency through these changes come next, and recognizing the changes.  Is this a 1-2 day market thingy or more of a market adjustment (which often can last 2+ weeks to much longer)?

Then having become comfortable with the different situations, your performance, and environment changes, it becomes possible to model outputs a little better.  Using "too little data" to make estimates is an issue when modeling these aspects, especially with a market "mood change".  Note your worst potential trade is always ahead of you until you can manage "self".

Monte Carlo simulation and estimates provide some good feedback with probability, draw down and statistics.  They key is data though.

Note, you may want to evaluate scalp vs runners differently if you allow for that separation.  This falls again under how one manages trades.

Consider this a journey.  Note that if you trade the ES, your size will not outgrow this market.

Hopefully helpful and good trades to you!

Thank you both for your answers.

At this moment I really dont know if I have one strategy or specific setup like you said, I am trying to read the price like Al teaches us, If its a trend I just buy the market, if its a broad channel I try to buy at the trend line for example and exit when I think the PB is going to come, and in TR I try to BLSHS and scale in.

One of my biggest problems its the TP, sometimes I think in hitting the MM and forget everything, but in the other hand, cause of that I lost a lot of profits some times, so now I am trying to read the market better and only exit if I see a real reason to exit the trade not only because the MM even if that means more BE.

I still have A LOT to learn, and thats why I thought in do trading with only 1 Micro Emini and try to trade the best way I can, but I am also thinking, if I only trade with 1 Micro, and some times the SL is 5pts, and others is 15pts will be almost impossible to have some control in the profits or losses. But after all, maybe the only thing that I need to keep in mind its do good trades and forget everything else...My mind keeps thinking in $.

The journey is long