Trading For Income - Or Capital Gain?
I day trade grain futures for a living.
I have done it for a while and am successful at it.
My methods evolved after years of experimentation with different instruments and trading techniques.
It can take a long time to find the particular style that fits your personality and needs.
(In my case, I discovered I need quick feedback and consistent gains.
) Having come into this business later in life, I had capital behind me.
My need was to earn income from a portion of that capital to supplement my lifestyle.
I target a minimum of 10% return on my money each month.
Of course, monthly trading income is variable.
It is never like a consistent salary, but I find it pays to reduce volatility as much as possible, even if it means you make a slightly lower (theoretical) return than you would if you tolerated greater volatility.
The core of my method lies in the way I identify potential trades, enter and manage trades, and decide on the placement of target and stop loss levels.
But of greater importance to my overall profitability is money management and my decision to limit over-trading.
My comfort zone in these markets is to open the month with $30K in the account.
(The wheat margin is currently $3375, so I am looking at being able to trade a maximum of about eight contracts.
) I never risk more than 1.
5% of my capital on a trade and I never trade more than once per day.
My wins are roughly twice the size of my losses, and I aim to win slightly over half the trades entered.
At the end of each month I withdraw profits and reset the capital to $30K.
That is the basic approach that has worked for me for some time.
It is a revenue generating approach.
However, many aspiring traders who contact me have different needs.
While they ultimately wish to trade for revenue, their first need is to grow a small account into a respectable capital base.
These traders are under capitalized, and need to forsake any thoughts of revenue for the time being.
Profits have to be ploughed back into the account to build it up as quickly as possible.
A few months ago, I decided to try and do this myself, as a project and a challenge.
I failed.
In just three months, my starting equity of A$10K reduced to less than A$6K.
(At the time $A10K was roughly US$6K, which is a very small account in these markets.
) These three months were nothing out of the ordinary.
Trading my normal revenue generating approach would have yielded reasonable results each month.
So what went wrong? The fundamental issue was the size of risk:
The resulting volatility in the account led me into the deadly error of tinkering with the system.
I began trying to make small system adjustments aimed at protecting the equity, but of course they had the opposite effect.
I very much wanted this project to succeed, so was trying to use my experience to make things up on the run.
However, when you cease trading your plan to the letter, you are no longer trading a plan at all.
Risking 1.
5% per trade allows me to ride through losing streaks with equanimity.
I do not panic and I maintain the steady application of my system.
It is the consistent application of the system, which has a winning edge, that yields the profits.
Risking 5% caused stress when I encountered a few losing trades.
Stress led to poor system discipline and, ultimately, failure.
Unfortunately, as shown above, the small account has to take greater risk if it is to trade at all.
Whereas I once thought 5% was the maximum acceptable risk, I would now modify that figure to 3%.
Even then, the risk of blowing up the account is much greater than with the 1.
5% figure, so the new trader needs to understand that success is far from guaranteed.
Trading a small account for capital gain is indeed a more challenging endeavour than trading a larger account for revenue.
Other factors, which I will cover in afuture article, add further to the problem.
Nevertheless, with proper planning and discipline, it is possible.
(I have restarted the project and will display the trading records on my web site.
)
I have done it for a while and am successful at it.
My methods evolved after years of experimentation with different instruments and trading techniques.
It can take a long time to find the particular style that fits your personality and needs.
(In my case, I discovered I need quick feedback and consistent gains.
) Having come into this business later in life, I had capital behind me.
My need was to earn income from a portion of that capital to supplement my lifestyle.
I target a minimum of 10% return on my money each month.
Of course, monthly trading income is variable.
It is never like a consistent salary, but I find it pays to reduce volatility as much as possible, even if it means you make a slightly lower (theoretical) return than you would if you tolerated greater volatility.
The core of my method lies in the way I identify potential trades, enter and manage trades, and decide on the placement of target and stop loss levels.
But of greater importance to my overall profitability is money management and my decision to limit over-trading.
My comfort zone in these markets is to open the month with $30K in the account.
(The wheat margin is currently $3375, so I am looking at being able to trade a maximum of about eight contracts.
) I never risk more than 1.
5% of my capital on a trade and I never trade more than once per day.
My wins are roughly twice the size of my losses, and I aim to win slightly over half the trades entered.
At the end of each month I withdraw profits and reset the capital to $30K.
That is the basic approach that has worked for me for some time.
It is a revenue generating approach.
However, many aspiring traders who contact me have different needs.
While they ultimately wish to trade for revenue, their first need is to grow a small account into a respectable capital base.
These traders are under capitalized, and need to forsake any thoughts of revenue for the time being.
Profits have to be ploughed back into the account to build it up as quickly as possible.
A few months ago, I decided to try and do this myself, as a project and a challenge.
I failed.
In just three months, my starting equity of A$10K reduced to less than A$6K.
(At the time $A10K was roughly US$6K, which is a very small account in these markets.
) These three months were nothing out of the ordinary.
Trading my normal revenue generating approach would have yielded reasonable results each month.
So what went wrong? The fundamental issue was the size of risk:
- Instead of confining risk to 1.
5% per trade, I expanded this figure to 5%.
- This is forced upon the small account because otherwise most potential trades have to be ignored.
- For example, suppose the projected risk in the trade you are contemplating is $175.
With a $30K account, risking 1.
5% equates to a maximum risk of $450, which means you can afford to trade 2 contracts.
- But with a $6K account, the 1.
5% figure equates to a maximum permissible risk of $90.
Since this is less than the trade risk ($175), the trade would be passed.
- Increasing the risk up to 5% per trade means that in this example the maximum dollar risk on a $6K account becomes $300, meaning 1 contract can be traded.
The resulting volatility in the account led me into the deadly error of tinkering with the system.
I began trying to make small system adjustments aimed at protecting the equity, but of course they had the opposite effect.
I very much wanted this project to succeed, so was trying to use my experience to make things up on the run.
However, when you cease trading your plan to the letter, you are no longer trading a plan at all.
Risking 1.
5% per trade allows me to ride through losing streaks with equanimity.
I do not panic and I maintain the steady application of my system.
It is the consistent application of the system, which has a winning edge, that yields the profits.
Risking 5% caused stress when I encountered a few losing trades.
Stress led to poor system discipline and, ultimately, failure.
Unfortunately, as shown above, the small account has to take greater risk if it is to trade at all.
Whereas I once thought 5% was the maximum acceptable risk, I would now modify that figure to 3%.
Even then, the risk of blowing up the account is much greater than with the 1.
5% figure, so the new trader needs to understand that success is far from guaranteed.
Trading a small account for capital gain is indeed a more challenging endeavour than trading a larger account for revenue.
Other factors, which I will cover in afuture article, add further to the problem.
Nevertheless, with proper planning and discipline, it is possible.
(I have restarted the project and will display the trading records on my web site.
)
Source...