Futures returns math and how you might be taking too much risk.

Futures is one of the last business opportunities where the good are rewarded more than the bad are punished.  This is because of leverage and how much discipline is required.

I was talking to trader who trades 1’s and 2’s.  They were not happy with making $200 a day. First, I think it is important to look at % return when looking at risk but in the end you do have make enough to survive. I understand there is a paradox. If you are trading the e-mini S&P and intra day margin is about $500 a contract and you made $200 trading two lots. Than you returned 20% on that risk.  As a trader I am looking for the opportunities to really crush it.  Those may happen 3 times a day or week or sometimes a month. Those moments give me a chance to return unlimited % return. That is why we are trade, for the unlimited upside.  These might not present themselves.

If your goal is to continue to grow as a trader, you need to have muted dollar amount expectations while trading 1’s and 2’s.  This is the learning phase. You build a foundation from that.  Yes, we all want to make money but it is significantly harder to keep up that pace of 10% to 20% a day with 1’s and 2’s without having a couple 100%+ days.  The unlimited upside is limited and of course you are going to take some bumps along the way.

You can’t move on until you are ready.  I have seen people move up too fast and give back in days what took them weeks or months to build.

Worse, I have seen people who do not realize that the reason to trade smaller is to learn and so they waste all of that time and never get to the next level.  Once again, nothing wrong with making money.  You should not be trying to lose it but the idea is to be able to deploy more capital when the foundation is built.  The cliche is let your winners run and get out of losers.  Our philosophy is to let your winners be your largest trade and who cares how long it runs.  We are constantly looking for situations to get our max position on.  When that happens we look for bigger % returns.  When it doesn’t, 10% to 20% a day is great.

Until you can trade more than 1’s and 2’s you should look at it in terms of percentage.  When you can trade larger than you can talk in terms of cash.  If you look at it in reverse it is easy to forget that this is a learning process.

I am not saying you can not make money trading 1’s and 2’s it is just you have to take on a lot of risk and be really good.  It is easier, for those that have built a foundation, to make money trading larger.  There is extra responsibility in trading larger as it will punish you quickly.

Note: You should not be risking your whole account or be fully margined intra-day.

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