New traders have the confluence of trying to trade a diverse set of commodity contracts from a low capital base due to their newness. This poses a thorny problem because some of the contracts tie up a lot of cash because of the initial margin requirements. How can you take a position in one, but forsake the other because you don’t have enough margin available?
The CME Group is launching 3 more E-Micro Currency Pairs for traders that will be approximately 1/10th the size of the big daddies. The new pairs are: CAD/USD, CHF/USD, and the JPY/USD. There are several existing E-Micro Forex futures contracts: EUR/USD, USD/JPY, GBP/USD, USD/CAD, AUD/USD, and USD/CHF. If you haven’t looked at these yet, and you’re struggling with the volatility in your portfolio, it’s time you did.
Your goal as a trader or as an emerging CTA (Commodity Trading Advisor) is to manage risk. The larger currency contracts can tie up a lot of cash in margin. Although margin management is not the same as risk management, you must be aware of what is called your “margin to equity” ratio (M/E). Professional CTAs have M/E ratios that can be as low as 5% and as high as 12%. The latter would be considered aggressive. Your management of risk says a lot about you.
That means, for each $100,000 in equity you have, only $5,000 to $12,000 would be allocated to margin. That doesn’t seem like a lot — and it’s not. That’s where these E-Micro babies come into play. You can further expand the types of contracts you trade, and not go too far afoul of your margin management. Your goal for your first 3 years is to trade well and keep your losses small. One big blowup month, and you’re going to find it very hard to raise capital from the allocators.
Allocators (hedge funds and Commodity Pool Operators) will be asking about your M/E ratio during the interview process. High M/E % will raise eyebrows.