The highest level of leverage for the retail trader. The futures market. Here we go. $5,000 is the minimum at TradeStation. I had an equities account, so they let me move that money and open one with a little less. I can buy up to 3 e-mini S&P futures contracts. Do I want to do that?
Well, I'd prefer to only risk $3,500 and check out if I get to $1,500, so I'm going to base my risk management with that in mind. I'd like to risk around 5% per day. I figure if I make 5 bad trades in a row it's not my day and that allows for randomness of a coin flip. That means I should risk $3,500 times .05 per day, which comes to $165 per day and that means risk should be at $165 times .20 per trade, which comes to $35 per trade. Since the e-mini trades at $12.50 per 0.25, then I should risk 0.75 or $37.50 per trade, which is close the max. The other option would be 0.50 or $25 but that wouldn't give price enough room to move to stay in a trade.
The round-trip cost is $5 per trade. Therefore, I need to make at least one point to cover my costs.
There are things I can do with the extra contracts to increase my earnings and the law of large numbers on trade picking success. Sometimes, it is possible to scale into a trade. You pick a price you like for your first purchase. It goes a little past and you happen to get filled just ahead of your stop for your other trade. If price doesn't go down any further, you have twice your size. If it does, you exit the first half of your position for the originally planned stop. Now, you are still in the trade and have a few more ticks to see if it works. You are essentially making two trades. As such, this method should only be applied to trades that you really like that are occurring in above average volatile markets, so that you are not "shaken" out of a trade.
In summary, to have a daily stop loss of $165, $35 is the max that should be risked in a trade.
For $5,000, the numbers would be $5,000 times 0.05, or $250, per day, and $250 times 0.20, or $50, per trade. $50 per trade is 1 point.
The key to my endeavor into short-term trading the futures market is my ability to stay in trades given the tight per trade risk parameters. If I'm not able to "stay in" trades through the back and forth wiggle of the market's indecision, then I can't make any money. If that starts to happen, then I may have to trade the e-mini Nasdaq or e-mini Dow and focus more on timing.
