Hi guy's, been interested in topstep ever since I heard about it, but thinking about it a bit more has made me realize the problem with the whole thing.
(I was advised to post it here, since I had best chance of getting honest opinions from elitetrader rather that other forums.)
Hi guys, I wanted to get some feedback to help me try to understand something a little bit better.
A funded account has a maximum draw down limit. If you hit that draw down, you lose the account.
10,000 account, maximum drawdown is $1,000
30,000 account, maximum drawdown is $1,500
50,000 account, maximum drawdown is $2,000
100,000 account, maximum drawdown is $3,000
150,000 account, maximum drawdown is $4,500
It uses a trailing stop style feature where if you build up your account, you can create some cushion. In otherwords, if you generate $10,000 in the account, you can lose that $10,000 and still stay funded. You just cannot bring under the certain amount (example, 50k account has 2k draw-down limit. If you ever get under $48,000, you will lose the account)
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The Rub
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Ok, so now lets discuss something. We all know the rule that we should risk a maximum of 1-2% of our equity on any trade idea.
Lets take the $50,000 account provided by topsteptrader for example.
1% of $50,000 = $500.
But TopStep only allows you a maximum draw down of $2,000. So if you risk 1% of 50,000 you will lose the account if you make 4 wrong trades. So its like you are risking 25% of your account. To avoid this, one would want to reduce this risk back down to the 1%-2% level.
So logically
what this actually means, is that the 1% rule should be applied not to the total account size, but to the maximum draw-down that they allow you.
So 1% of $2000 = $20
One contract on the ES is ($12.50). Add another $4-5 for the transaction fees and your looking at $16.50-17.50 lost every trade you put on. Add a little bit more because of
slippage and you can basically round it off to $20 per round turn. So you cannot even trade 1% of your max drawdown, because you lose 1% every trade you take with 1 contract. So you have to trade at least 2%.
So my question boils down to this. What is the point of working so hard to get "funded" with places like topsteptrader or any propshops that let you trade their money, when in reality you don't have access to the full capital. You only have access to your maximum drawdown.
Granted one can argue that the maximum drawdown is a trailing one. But that doesn't really change much in the grand scheme of things.
If you make $25,000 on your $50,000 account, you have made 50% (which might seem achievable)
However to make that $25,000 using good money management (ie risking 1-2% of your max-drawdown because that is the size of your account in reality), you would need to make 1150% ($2000 + 1050% = 25,000)
When you look at it like that, it no longer seems realistic.
So my question is what is the point of even trying to get a "funded account" with topsteptrader? When you factor in the restrictive rules (eg you cant swing trade because you cannot hold through closes), and the fact that the equity-partner is taking 20% of the profits you make, wouldn't it be more logical to simply open your own tiny account and trade with leverage?
So instead of going through all the hastle of trying to get "funded", just open your own tiny account. You would be able to trade a $2,000 futures account with the same money management rules as you would for a 50,000 "funded" account, because the funded account's true value is simply its maximum drawdown.
But the more I think about it, the less sense it makes. What am I missing here? I don't think people quite realize that if you plan on trading with realistic money management, these funded accounts are nothing more than tiny undercapitalized trading accounts where someone else takes 20% of the profits.
Is there something I am missing here?
Simply put, for all intents and purposes, the topsteptrader "funded" accounts should be advertised as a $500, $1000, $1500, $3000, and $4500 accounts, since that is all you can realistically trade (ie your drawdown limits).
If you try to exceed those amounts, you enter the realm of blowing up, regardless of edge. (and blowing up your funded account means getting below drawdown limit and having the account pulled).
Simply put, we think of places like topsteptrader as finally giving us a chance to be well funded so we can actually trade and make a living. But in reality it is the exact same as the guy who throws 2 or 3 grand into an account and hopes to "build it up" and live off it. Literally ZERO diffence.
In fact the guy who throws 2 or 3 grand into the account is in a better position (he can keep the full 100% of profits, rather than 80%, and he can trade any way he wants to be profitable. Example he can swingtrade and hold overnight etc)
