Although many will suggest that you can trade with the minimum

margin requirement we do not necessarily recommend it.

Let's say that you are about to start trading an S&P 500

futures daytrading system. Let's say that the exchange minimum

margin requirement is $25,000 and the system drawdown is

$25,000.

Let us further assume that you want to get started using the

absolute minimum account size. Since we are talking about a

daytrading system, many of you may be able to trade for half of

the required margin or $12,500.

The lure of starting with the smallest amount of capital

possible is obvious. We feel that we are getting more bang for

our buck. If the system makes $100,000 profit by the end of the

year we feel great because we made 800% on our initial

investment of $12,500.

If we initially funded our account with $50,000 we would have

made 200% on our initial investment of $50,000. Although we

made the same amount of net profit we may feel better about

using the smaller amount because the return on investment is

greater.

In reality trading these two examples can look quite a bit

different. If we fund an account with $12,500 and immediately

go into a $10,000 drawdown we will not be able to trade the

system any more until sufficient funds are added.

In many cases funds are not added and the trader is left with a

loss in his account and the words in his mouth, "This system

doesn't work". If we initially fund our account with, say,

$50,000 we can withstand a $10,000 or even a $25,000 drawdown

and still have sufficient funds in the account to trade another

day.

Properly funding an account is similar to using stops. We use

stops because we do not know if our next trade will be a winner

or loser. We properly fund an account because we don't know if a

trading system will enter a drawdown period 2 days, 2 months, or

2 years from now. In both cases it makes sense to control our

risk.

In some respects a trading system is similar to an automobile.

It needs sufficient fuel in order to continue to move forward.

If you knew exactly how much gas you needed to put in your car

to make a typical 200 mile highway trip would you put only that

much in? What happens to you if there is 10 miles of backed-up

construction traffic and you find yourself inching along and

burning more fuel than expected?

Properly funding your account puts you on the road to

successful trading.

Good Trading and Good Life,

Tony Spann

SP Strategies