Q&A: Trading Account Size

Question:
Hi Guy
I have read the book Three Little Spreads Went to Market. Very informative thanks. I have been looking for an alternative to shares that doesn’t have the extreme risk of some other derivative products.

Just a quick question: do you see a specific amount in an account to make this type of trade viable? Is it $5,000 or closer to say $50,000? And what is the margin for these contracts? I see in your performance section an allocation could be $20,000. What would a margin be for this?
Thanks, B

Answer:
Re finding the right thing to trade, what I do is a niche within a niche. Not just futures, but futures spreads. It scares some people off since it appears it has that extra level of complexity. The reality is different. This stuff is far easier to learn than options for example. Regarding risk, it’s always there, but I cannot remember ever seeing anyone get into a major problem with a futures spread.

Regarding how much to start trading with, I think that’s another age old question. Margin is normally a small fraction of the allocation level. In fact it is more often an insignificant issue. Take for instance, a Eurodollar spread entered this week. Allocation was 1 contract per $25,000, but margin is just a few hundred dollars.

The allocations posted on in my newsletter are guidelines. I’ve always taken the approach people should do what makes them comfortable, (or as close to comfortable as possible). I recently had a conversation with another trader on a blog where he has recommended trading one spread per $1,000. I honestly thought it was a typo and he meant $10,000, but he really meant $1,000. I think $1,000 is far too risky, but $10,000 or $20,000 might be fine, as long as you ensure you have enough margin coverage and stop loss breathing space, as well as not taking on too much risk.

Regards,
GB