Hope you’re doing well. Hope you had a great week and you got fun plans set up for the weekend. Kind of chill. So while I was away, even though I wasn’t away, I guess I took a trip, but say December and January, I get a lot of a, if you just scroll through any of the social media stuff, now you see everyone’s got a funding account. Everyone wants to help you pass the challenge and this and that, as they call it. As far as how the business works, right? There were a few questions of how does it work? How can they guarantee you money? How can they give you your share of the profits? Do you trust the system, this and that? There’s probably a two hour episode on funding accounts. This is not going to be it but I think what happens is with these funding accounts is they do have a line of credit or capital somewhere, and what they do is they bring in cash and they promise you a share of the profits.

Now, the rules are oftentimes they’re very clear, they’re not convoluted, but the rules that they want you to go through in order to pass the hurdle of actually getting to the point where you can trade what they would consider real capital, even if it’s not real capital, real capital though, meaning you trade it, you make money, they’re going to give you a share of the profits. Maybe those profits are funded by everybody else who’s paying a monthly number to get approved. So to me, that wouldn’t be a Ponzi scheme. It would just be saying, here’s revenue from one area that’s going to pay off other people. And everybody knows the score. So everyone knows that coming into the situation. So that’s interesting as a business model because I don’t know if there’s actually any risk being taken in the markets. Everything is basically a form of paper trading and then people sign up for these monthly tiers.

You get a $100 K up to $500 K. Every company is different. Some of them are trading American markets, other are trading the binary options overseas or foreign exchange interbank. So there’s lots of different platforms. Do your due diligence and then realize whatever the rules are. If they lay out the rules very strictly, here’s what you need to do and the minute you breach one of those rules, you kind of have to start over. Which means for a small fee or maybe even a monthly renewal, you have to come back and pay that number again.

I’m not saying that that’s what they’re betting on, but I can intuit because trading is so difficult that that’s likely what’s happening is that a lot of folks are saying, I could spend a $100 a month, get access to $250 K in a paper trading account, and if I do strike it and get lucky, I will go through an evaluation period and maybe they’ll actually give me real money to trade to make some money. So I add basically, I don’t know, a little bit more than a cable bill to my monthly expenses in my household in order to get access to these trading platforms. So I know a few people who are really good at it, and I’ll probably bring them on to help everybody out. They’re kind of tricky. As I mentioned in one of the shorts, is that for folks like myself who grew up trading around positions we would add and add and add and add and add as the thing was going up. And you might have a situation where 40, 50, 60% of your account is tied up in margin for one particular instrument, not on day one, but over time.

And so even though margin to equity ratio is not a great risk management tool when you have bigger positions on and larger unrealized gains and there’s a pullback, it might be greater than what these funding companies are looking for. So an example might be, say you have a $100 K account and by the grace of God you find yourself up $30 K on any one particular day. And the way the rules are written is to say you need to make, I’m making these numbers up, but they’re kind of like in relation from what I’ve read, you might need to make or show that you can make 9% or $9,000 but not have more than a $3,000 drawdown from any equity peak, right? So say you strike it and you do very, very well. You’re up $20, $30 K in the account. You have to always remember that whatever that peak was on your equity is starts where the drawdown is.

We talked about drawdown and going on tilt this week. Excuse me, by as far as the funding is concerned, you might have the emotional constitution that says, I’m up $30 K, I’m going to risk $5,000 of my $30 K in unrealized gains. I’ll stop myself out at, I’ll reinvest my gains into my stop and get taken. At plus $25 K, which is still a great trade, it becomes a question of how much of your capital are you willing, how much of your unrealized gains are you willing to risk in order to stay in that trade with the same position? The answer is different for everybody. For me, it’s typically the whole thing. Because I’m not trading for 10%. So the thing is, that type of model that I’m already comfortable with emotionally in my own body after 30 years or plus of experience, that wouldn’t work for funding these funding models because if I was up $9K, the $3,000 is one third of that.

But as your account grows, you’re up $20, $30,000. That $3,000 pullback is now just 10%. So that to me is not as material. So you might say, I’m at, I started with a $100K, you’re at $130K, but now whether it’s intraday one day or several days, you have $3,000 to play with basically despite having hit your mark and made the $9,000 to pass that part of the test. Now comes the tricky part. If you read the fine print on a lot of these things, they want you to trade. Some of them I think want you to trade every day, or they want, and you look at the calendar month, they want you to trade a minimum of 10 days out of all the days that you could possibly trade over that rolling month, depending on when you started.

So now you’re at a spot where you’ve made money. You only have $3 K to play with, but now you got to be careful because if you have still seven days, six days left, that you have to actually trade and put on risk. You have to do, so knowing that you only have $3,000 to give. So then you’re like, okay, if I was trading the big, if I was trading like the ES or the NQ’s or the big natural gas, whatever it might be, now you have to think about trading smaller the minis or the micros, right? Because on some level you kind of have to play poker with your track record in order to pass the evaluation. You’ve made your $9K, you’ve eclipsed that, but now you can’t lose more than $3,000 and you still have six days where you have to trade. So if you trade the same contracts, that, excuse me, made you money.

So to me that’s the tricky part is that you might be more in your own emotional constitution, be willing to risk more dollars right out of those unrealized gains in order to stay in the winning trade. But because the trading rules are set up in such a way, you have to alter your behavior. So that to me is trickier to do for the folks who’ve been around longer and kind of have their system and their way of doing things all lined up. So that might be something to just be aware of is that you might have to act more conservatively so that you pass the evaluation period of time after which the rules change. Again, some of them have like you just need to stay a $100 profitable above a previous mark. The rules are all over the place, but nonetheless, I think they do generally give you, because they’re clear and the terms are written out in black and white that it’s a fair scenario.

I don’t necessarily know that that makes for good trading, but I do feel like there’s a way for you to kind of modify your own behavior in the short run just to get through the evaluation period of time so that you can get to trade the capital. But just remember that it seems to be three to one. If you look closely, you know, might have to make $9,000 on paper with no more than a $3,000 drawdown. And I think as you go up to higher levels of capital, you can trade more contracts for sure but then also the dollar profitability as well as whatever that drawdown is also increase. So I would start small. I would not trade the full, whatever they say, the maximum amount of contracts that you can trade, I wouldn’t go anywhere near that because even if you haven’t made any money, you have a drawdown from your starting capital.

So if you start with a $100 K, you hit $97K and you have to reset. If you go to $110K and you go to $107K, you have to reset. So you have to be super conscious of where that drawdown is and then how you’re going to break up that capital. So say you’re up $30 K and you still have six days to trade, so now you have $3,000 to risk and you have to break it up over X amount of days because there’s a day requirement, there’s a number of days that you trade requirement, I guess, in order for that model to work. So now you might not find in your own way of trading that those are barriers or constraints that you would put on yourself. So that’s what makes it a little bit of Jacqueline Hyde is that you might have to become a different person in order to pass these trading challenges, so to speak, in order to get funded to where you’re actually trading and making the money.

I don’t think that the rules are unfair. Again, they’re written out, they’re clear, everyone knows what they are ahead of time and so that makes it fair because you have the right to not participate. I would like to learn more. I don’t have all the answers, but from what I can see from the outside looking in, it seems to be working. I know a few people who have gone through that process and I’ll share with you what they did to succeed, how they did it, and then maybe to some extent if I can get them to be here, I’ll get ’em on the show to walk through what steps they took in order to be profitable. Anyway, it’s been a good week. I hope you enjoy the new format. If you’re still on Spotify and Apple Podcasts will still be there.

We’re going to definitely beef out the YouTube channel going forward and as always, if you have any thoughts or concerns or things that you’d like me to chat about could reach out to me on MartinKronicle, I’ll do that.

Subscribe to the show

Click here to get your free copy of The Inner Voice of Trading audiobook.

This is an automated transcript

The post Getting funded and passing the challenge appeared first on MartinKronicle.