You probably wonder just how big your account needs to be to
start momentum trading today. Well, there is good news. Due to some
recent innovations in the markets, it's possible for small accounts to
trade as if you had a multi-million dollar account.
These new innovations make it easier than it's ever been to be a successful investor. The resources available are extremely useful - and many of them didn't exist (or really work) just a few years ago.
Here are the 4 New Innovations that really help small accounts. (Actually - they help even mid-sized accounts just as much - I'll explain in each section.)
CME Micro Futures Contracts
These small sized contracts are perfect for accounts with less than $20,000 - the contracts let people take reasonable risk even with a beginner sized account.
The huge increase in commodity prices have pushed the risk of the "big" CME contracts to massive levels. For example, I don't think it's reasonable to trade even a single big sized crude oil contract unless you have $150,000 in your account.
It's just way too much risk.
These micro contracts slice the risk to a fraction of the risk of a big contract. And how do they help mid-sized accounts?
They allow a mid sized account to risk the proper amount. A mid-sized account can't trade 1.4 big contracts - but it could trade 1 big contract and 2 micro contracts to get the same effect.
Better Computer Power, Better Trading Programs
Let's face it - what used to be impossible on computers is now easy.
So if you want to do incredible back testing or easily track your positions and orders, you now have the power at your finger tips.
The programs available today are excellent. I use something called Trading Blox to do my testing and portfolio management. There are a few other programs out there you can use as well, but I use Trading Blox. (I don't have a financial relationship with Trading Blox either, I just think it's a good product.)
Liquid Commodity and Sector ETFs
Exchange Traded Funds (ETFs) on commodities are a recent innovation. Just a few years ago, they didn't exist.
Today they are liquid and more are being added everyday. New ETFs and ETNs (Exchange Traded Notes) are being added all the time, and they make it reasonable to be a trend trader with a stock account only. ETFs give you the power of a mini-fund; you get the diversity of an entire index and the power to trade it whenever you want (instead of waiting until market close.)
These also make it easier for Mid-sized accounts to trade - you can trade ETFs in odd lots and get properly sized risk.
Cheap, Easy to Use Data
Getting data today is way cheaper and easier than it used to be. Thanks Internet!
But it's not just the internet. The programs to download the data are more reliable, easier to use, and easier to find.
Pulling it all Together
These 4 innovations make it so much easier for smaller accounts to grow without risking too much. That is always the problem with small accounts---many investors risk too much per trade and their accounts can't handle the losses that a larger account or fund, can.
My personal rule of thumb is to not risk more than 2% per trade. On a rough level, here are the minimum account sizes necessary to trade the different micro contracts and keep your risk under control:
Micro Currencies: $5,000-$10,000
Micro Grains: $5,000-$10,000
Micro Gold: $15,000-$20,000
Micro Crude Oil: $70,000-$80,000
It looks like the micro Natural Gas will soon have enough liquidity to be tradable. Then there will be enough diversification to grow your small account with the Micro Contracts.
Copyright (c) 2012 Trend Following 101
These new innovations make it easier than it's ever been to be a successful investor. The resources available are extremely useful - and many of them didn't exist (or really work) just a few years ago.
Here are the 4 New Innovations that really help small accounts. (Actually - they help even mid-sized accounts just as much - I'll explain in each section.)
CME Micro Futures Contracts
These small sized contracts are perfect for accounts with less than $20,000 - the contracts let people take reasonable risk even with a beginner sized account.
The huge increase in commodity prices have pushed the risk of the "big" CME contracts to massive levels. For example, I don't think it's reasonable to trade even a single big sized crude oil contract unless you have $150,000 in your account.
It's just way too much risk.
These micro contracts slice the risk to a fraction of the risk of a big contract. And how do they help mid-sized accounts?
They allow a mid sized account to risk the proper amount. A mid-sized account can't trade 1.4 big contracts - but it could trade 1 big contract and 2 micro contracts to get the same effect.
Better Computer Power, Better Trading Programs
Let's face it - what used to be impossible on computers is now easy.
So if you want to do incredible back testing or easily track your positions and orders, you now have the power at your finger tips.
The programs available today are excellent. I use something called Trading Blox to do my testing and portfolio management. There are a few other programs out there you can use as well, but I use Trading Blox. (I don't have a financial relationship with Trading Blox either, I just think it's a good product.)
Liquid Commodity and Sector ETFs
Exchange Traded Funds (ETFs) on commodities are a recent innovation. Just a few years ago, they didn't exist.
Today they are liquid and more are being added everyday. New ETFs and ETNs (Exchange Traded Notes) are being added all the time, and they make it reasonable to be a trend trader with a stock account only. ETFs give you the power of a mini-fund; you get the diversity of an entire index and the power to trade it whenever you want (instead of waiting until market close.)
These also make it easier for Mid-sized accounts to trade - you can trade ETFs in odd lots and get properly sized risk.
Cheap, Easy to Use Data
Getting data today is way cheaper and easier than it used to be. Thanks Internet!
But it's not just the internet. The programs to download the data are more reliable, easier to use, and easier to find.
Pulling it all Together
These 4 innovations make it so much easier for smaller accounts to grow without risking too much. That is always the problem with small accounts---many investors risk too much per trade and their accounts can't handle the losses that a larger account or fund, can.
My personal rule of thumb is to not risk more than 2% per trade. On a rough level, here are the minimum account sizes necessary to trade the different micro contracts and keep your risk under control:
Micro Currencies: $5,000-$10,000
Micro Grains: $5,000-$10,000
Micro Gold: $15,000-$20,000
Micro Crude Oil: $70,000-$80,000
It looks like the micro Natural Gas will soon have enough liquidity to be tradable. Then there will be enough diversification to grow your small account with the Micro Contracts.
Copyright (c) 2012 Trend Following 101
Michael Sankowski lives in Oak Park, IL and when not playing the
guitar, has been a professional trader for 20 years. He's traded
billions of dollars on four continents and is a well-known financial
writer. He's a CFA, CAIA, and is a featured author for Seeking Alpha and
Absolute Wealth. Find more of his writing at ETF Momentum Trader and TF 101.
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http://EzineArticles.com/?expert=Michael_Sankowski
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