subject: E-Mini Trading: Overleveraging Yourself out of the Business [print this page] E-Mini Trading: Overleveraging Yourself out of the Business
I had a new e-mini trader in my trading room last week and he had funded an account with $5000. According to his broker's calculations, this gave him the right to trade up to 5 e-mini contracts, if he or she chose to do so. Of course, with this newfound flexibility and trading freedom, he promptly began trading 5 ES e-mini contracts and parted with $2000 in about three hours. It's not hard to do. Needless to say, this turn of events was a frustrating experience and he sought out my counsel. Of course, I was shocked that he decided to trade 5 contracts with such a small account. It is the recipe for disaster.
How many contracts should you trade?
I don't recommend anyone risk more than 3% of their futures account value on a single e-mini trade. For example, the trader referenced above should have been trading 1 e-mini contract, or 2 contracts at the very most. I'm not convinced that lower day trading margins have served e-mini traders, especially new traders, and a positive way. Low day trading margins give a new trader a tremendous amount of control over a large amount of money, more money than he or she is probably ready to trade. This problem is compounded by the tendency of new traders to take too many trades during the course of the day. The answer is to learn sound money management practices and never deviate from the practices you have established.
Many new traders who are fresh off reading their new trading system book and excited about entering a market do not fully understand the treacherous arena in which they have entered. Since futures trading is a zero sum game, the goal of every trader is to make money at your expense. For every contract, there is a winner and a loser. Someone parts with their hard-earned money, and the other individual puts that money in his or her pocket. This is an important concept to understand when trading; trading is a zero sum game, there are only winners and losers.
What can you do as a trader?
As I mentioned above, limit yourself to trading a small portion of your futures account, say 3%. This will keep you from realizing catastrophic losses on any given day. One of the most difficult concepts to teach new e-mini traders is that there are only so many good trade setups every day. Learn not to trade every set up that looks like it might be good; take the trades that are well known in your experience and high probability in nature. For me, this means taking about 3 to 5 trades on an average day. I also have a profit target for my daily trading, and when I reach that target I generally stop trading. Again, I realize that losing trades are part and parcel in the trading business. I like to bank my gains once I have reached my profit target.
In summary, I have stated that because your broker allows you to trade a large number of contracts that does not mean you are obliged to do so. Don't risk more than 3% of your futures account balance on any given e-mini trade and remember that not every set up is going to be a winner. Focus on taking high probability trades, and don't over trade. Finally, set a profit target for each day and when you reach that target Stop.
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