Money Management  |  MAY 1999

Sizing A Futures Trading Account by Jay Kaeppel

Sizing A Futures Trading Account by Jay Kaeppel While most traders start out working on a trading system, they forget that the amount of starting capital is equally important. Here are some guidelines to consider. Novice traders focus their attention on developing a system for entering and exiting the markets. In fact, an entire industry has been spawned to facilitate trading system development. The age-old quest for the Holy Grail fuels the simplistic attitude among new traders that if their timing is good enough, everything will work out. Only after a trader has become seasoned and taken some hits does his or her attention become more focused on money management. While money management is a broad subject, one crucial topic — sizing an account — is key. Before a trader can start trading a portfolio of different contracts, he or she should determine how much capital is needed. Unfortunately, topics such as sizing an account tend to be an afterthought for most new traders — until, that is, they suffer a drawdown of frightening or ruinous proportions. THREEFOLD DANGER The dangers in failing to size an account properly are three-fold: The first and greatest danger is that you might tap out (that is, lose all your money). Consider the naive trader who opens an account with $20,000 and begins trading a group of markets using the trading system he spent hundreds of hours developing. While the trader has total confidence in the buy and sell signals generated by the system, he fails to do enough homework regarding expected equity swings. He doesn’t know that the portfolio/system combination routinely experiences equity swings of $15,000. Of course, he could get lucky, start making money right off the bat, and then be able to sit through a subsequent $15,000 drawdown. It’s more likely, however, he will suffer a $15,000 drawdown at some point and stop trading altogether because he was not prepared financially for the huge percentage swings in equity.

by Jay Kaeppel