Beginning Traders Take Note
01/25/2013 8:00 am EST
Thirty-year veteran trader John Person shares some insightful tips on what new traders should expect and how much money they need to trade.
I am here with John Person. John, traders all over the world try to trade for a living from home and it is one of the most difficult things that people can do. Do you have any advice to traders that are just starting out? What are some common mistakes or things that they need to do right away?
First off, I think people are under-capitalized when they trade. I think their expectations of what they are going to make might be unrealistic to the working capital that they have to use so, first off, I would have to say what your expectations are on a percent return annualized out. Some people expect to make, you know, large sums.
30%, 40%, 50%.
Yeah, so the average, at least in the futures, I think the average sized trading account was $10,000 to $12,000 average.
Is that enough?
Maybe to take a small position, if you figure, like the S&P futures, the margin requirement is just under $4,000 so if you, pretty much on a $10,000 account, did two contracts and held them overnight, you are using 100% of your capital for a small position in S&P futures. You’d trade a gold contract, which a full sized contract of gold is over $9,000 more or less, and of course margin requirements are subject to change, but in essence, when you are using that kind of leverage with limited resources, it is tough to be able to ride or withstand countertrend loop so I think the biggest common mistake is that small retail traders are definitely underfunded when they get into the industry.
Can a trader take a smaller position size than that or is that the minimum, this $9,000 margin requirement for gold? That is pretty much it, isn’t it?
Well, that’s the large contract, and yes, he absolutely can reduce that. They have mini gold, they have a micro gold even, which is one-tenth the size but if one is expecting on a $10,000 account to make $2,000 or $3,000 per month, I mean if you think about it, you are looking at 20% to 30% return per month. I mean on a leveraged investment vehicle, such as a futures, you have to realize how many contracts do you have to be in and how often do you have to be right, so muting those expectations of trading for a living, I think people need to realize that being in the market all the time, while consistency is a good thing, but being exposed in the market all the time also exposes you to adverse risk all the time. Being selective and, I think the best advice I would say is when you are setting up for a trade, not day trading, but maybe swing or position trading, is waiting for the trade to come to you, waiting for the right setup, and then having the right position on. If the trade idea is worthy, then you will be rewarded but what is that reward? That is what we, as traders; never know what the outcome is going to be.