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Dear Mr. Covel,
I have been a huge fan of your books “Trend Following”, “The Complete Turtle Trader”, and all the podcasts you’ve done with the famous traders like Jerry Parker, Salem Abraham, Eric Crittenden, etc. I would re-read the books you’ve written and re-listen the podcasts you’ve done. Thank you for all the great works you’ve put into building the trend following community. If it wasn’t for you, I’m sure the whole TF ecosystem wouldn’t be what it is today. I myself wouldn’t be where I am today if I hadn’t came across your books 7 years ago. Your work opened my eyes to the world of trend following and completely changed my life.
I have a general question regarding the realistic amount of money necessary to start an incubator hedge fund. I’m an aspiring trader who’s just curious, after listening to the podcast you did with Donald Wieczorek of Purple Valley Capital. After checking PVC’s track record of asset under management, I can see that he started out with around $100,000 USD, and this figure matches the amount mentioned in your podcast with Donald in episode 294 and 958.
I’ve looked at the Chicago Mercantile Exchange (CME) contract size specification for products like SP500, Gold, Coffee, et cetera, and can see that with $100,000 USD, it is too small to trade even the mini micro sized SP500. To set up a realistic stop loss that’s far enough away from the current price level, and having that loss equating close to 0.5% (a conservative amount) of the equity as risk budget, having only $100,000 USD doesn’t seem enough. The CME contract sizes are simply way too big for an account of $100,000. Even adjusting for inflation, $100,000 back in 2008 would be worth about $150,000, which in my opinion is still too small to trade CME contracts.
I know that Donald did it and can see clearly that he’s having a successful career. However if he was to endure a string of losses in the very beginning of his career, the initial account size he had simply could not withstand the risk involved with trading contracts on the CME. A string of losses due to bad luck is very probable, for example during 2015 ~ 2019, the 5 years when the entire commodity sector lacked any profitable trends, most CTAs like Mulvaney Capital, Purple Valley Capital, Chesapeake Capital were going through some difficult times.
My current account size based on closed equity amount (realized equity), is somewhat similar to Donald’s initial account size. I myself currently trade commodity using CFD (contract for difference) brokers like “Pepperstone”, “Capital.com”, because CFDs are much smaller in terms of size, hence better for risk management for a small account size that I have. However, the problem with trading CFD is that I cannot establish a track record. I’ve taken a look at several hedge fund incubator programs and all of them suggest the need to trade CME contracts in order to build a track record.
In your opinion, would you say that my current thoughts on proper account size to trade CME contracts, is correct? If I’m correct, what would you say is the minimal amount of fund necessary to start an incubator hedge fund for building track record?
Thanks for reading my email.
Codey D.
Thank you for the nice note. However, there is no one answer I can promise. Things are done different ways. More here. I also help clients through my training.
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