Friday, September 28, 2007

Surviving The Commodity Markets, PART 5 - Trading Guidelines For Different Account Sizes

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.

$20,000 ACCOUNT
(Risk no more than 5% max ($1000)

A $20,000 account is a where you can begin to manage your money like a pro. Risking $1,000 a trade is usually prudent for many commodity markets. My philosophy is if you cannot enter a normal market for less than $1000 risk per futures contract or option, you do not have a low risk, high probability trade in the first place. Wait for a better entry point.

The same basic rules apply for $20,000 as for the $10,000 account, except you now have even more flexibility. Remember that EACH trading idea can have no more than $1,000 (5%) associated with it. This leaves out pyramiding on profits or adding to commodity positions at all. Ive found over time that adding to positions after a good low risk entry is a formula for messing up a would-be good trade. Just put on your initial position and let the market run.

When you let your average price creep up when averaging up, (pyramiding) its as if you staggered in at a higher price in the first place. The first sharp correction will many times put you in average loss territory. Forget the romantic stories about traders starting with $1,000 and pyramiding it to $1 million. This stuff is fantasy and the cause of $billions in losses by the public over the years. Yes, it is possible, but so is winning the $100 million lottery. Commodity gambling is where most of the money comes from to pay the disciplined, realistic, winning traders...the type of trader you are striving to be.

Your best method of surviving and making money in the long run is to find a low-risk, high-probability trade, put on whatever position your risk management dictates and let it run. Then wait for the next DIFFERENT low risk, high probability trade and repeat. This will more safely and methodically spread the risk and probabilities in your favor.

$50,000 ACCOUNT

Risk no more than 5% max ($2500)

Heres where you can begin doing two of everything if you wish. You can now risk two futures contracts, two commodity options, etc. (per trade) Some very conservative traders may even stay with one futures contract to reduce the risk to 2.5% ($1250). I like that idea best. Just think how long you could survive if you could be wrong forty times in a row before being carried out? Just think about how much money you can make if you are around to eventually catch your big string of winning trades? Most traders don't hang around long enough to get their share.

Even trading conservatively, you can make serious money when you are right. Remember that the commodity markets are leveraged at 5-10% margin down. For every $1000 in margin money you may control $10,000- $20,000 of commodity futures. If you are right on a string of big trades, you can can do very well. By having forty chances to perform this is what its all about. A $50,000 account holding two contracts in four markets (good risk management) can control between $500K to $1 million in commodities. (depending on markets) A 10% move in the futures means a $50,000 - $100,000 move.

If you do well and double your account, you can then double your risk and go from there. Its all about having a conservative plan and staying that way through the entire trading cycle. Most commodity traders start out with high hopes and good intentions, make some money and then think they are invincible. When you lose control, the commodity market doesnt take the money away you give it away.

Part Six 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.

Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his TimeLine Trading market predictions and get his complete, free 44+ lesson, "Thomas Commodity Trading Course".

Main site: