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Your trading account balance matters much more as you advance in your trading skill than when you’re beginning, yet in order to advance and learn you must risk real money, which in the early-days can be risky and lead to significant damage to your account. Seems like some type of “cruel” paradox, right?
What good is it to be a skilled and accurate chart technician if you have lost all your risk capital along the way? You see, in the early days of your trading career, it’s not enough to just be focused on learning to trade, you also must be focused on preserving and (ideally) slowly building your bankroll (money in your account) so that as you progress and learn you have sufficient funds to properly take advantage of your trading abilities in the future.
All too often, I see traders blowing out their accounts in the early days and they end up years later with a very keen eye for predicting price action movements, with little to no money to trade with.
This lesson aims to open your eyes to the significance of the capital in your trading account and how you can protect it, keeping you in the game long enough to reach your goals of becoming a consistent and profitable trader.
Can you and your bankroll survive long enough?
If you spend enough time analyzing and watching the price action on the charts, eventually things will really start making sense, you will start seeing the market as a professional trader does. However, as you may have gathered from the title of this lesson, all the experience / screen time and education in the world won’t mean a thing if you don’t still have your bankroll intact by the time you reach the point of trading mastery.
If a person decides to go solo skydiving for the for the first time and jumps out of the plane without first getting any training, instruction or practice from experienced skydivers, it would be potential suicide. The same holds true for a trader who jumps into the market head-first, trading real money without any formal training, it’s financial suicide. Yet, everyday, droves of retail traders do it.
For some reason, most traders don’t seem to connect the dots that in order to survive in trading and produce long-term profits, they have to have money to trade with! So, I want to help YOU, the aspiring trader, truly understand both the importance of protecting the capital in your trading account and just as importantly, HOW to go about doing so.
Capital is the price of admission, without a ticket, you can’t play.
Ever hear the saying “You’ve got to pay to play”? Well, that is pretty much true for everything, especially trading. If you don’t have any money, you can’t make any money.
Think of your trading account balance as the price of admission to the markets; a daily ticket to watch, learn and improve. If you run out of money, you can’t buy a ticket, and your learning journey and career are all but over.
Obviously, many traders run out of actual money to trade with and then do stupid things like fund their trading accounts on credit, this is simply lunacy and will dig you a financial grave faster than you can imagine. Don’t ever do this.
This leads me into my next point…
What should you be risking?
I’m not going to tell you how much to risk per trade, or what % of your account to trade, because it’s not my place do so due to the many complicated factors involved. However, I will say, in the early days of your trading career, be sure you can survive losing 50 or 100 trades and still have a very large amount of your account left. Remember, you need to survive, that is the only goal here, not profits (yet), but capital preservation at all costs. You are trying to preserve your trading capital as much as possible for as long as you can so that as you learn and grow as a trader you still have money left to trade with, to take advantage of your improving skills.
I am also going to ask you to look at your overall net worth. Look at your income vs. your monthly bills and decide how much money you actually have right now to risk, as well as how much you will invest each year from your disposable income/savings to continue your trading pursuits and learning journey.
Once you have figured out your financial situation, budget accordingly and stick to that plan and don’t deviate on a whim like a gambler. Think about what’s in your account today and what you might put in your account each month/year, if you don’t, you’re going to go broke and destroy your chances of making it. The investment into trading has to be methodical and disciplined, stick to your capital plan each month/year. Most importantly, do not commit funds to trading that you can’t afford to lose or that if lost will impact your way of life significantly, never do this, especially when you don’t totally know what you’re doing yet.
Don’t run out of bullets. Plan for the battle to last a long time.
It’s no secret that I love military metaphors to teach traders the type of mindset they need. Those of you who follow my blog know I am a fan of the sniper trading approach, which is essentially a low-frequency, higher conviction trading style. Trading is a war against your opponent that lasts decades, so you need to take inventory, prepare and plan, and dig in for the long-term. When you have money in your account, you have ammunition to go into battle but if you are out of ammunition you obviously cannot win the battle.
Trade A Smaller Positions In The Early Days
Whatever lot size you’re trading now, even if it feels comfortable, you may want to think about reducing it by 50% or even 75% and take a step back and start doing some math…
If you lost 10 trades in a row risking what you currently are, where will you be? Will you survive, or will you nosedive? Do you have enough ammunition on reserve to make it through? Think logically here and don’t believe that you’re somehow going to be the lucky one who never experiences a drawdown, because they can and will happen to you at some point.
As discussed in my recent article on why you need wider stop losses; you can trade wide stops or tight stops, and still risk the same amount of money, it just comes down to position size. Change the contracts / lots traded and the dollar risk changes, it’s that simple.
It’s wise for any newer trader to start out risking a very small amount relative to their overall capital and then gradually increase risk over the years as their skill, confidence and trading account grows.
Trade Smarter In General
Play your ‘strong hands’ (poker metaphor) by picking the best price action pattern that you understand and have a knack of picking up on charts and trading successfully, stick with it and master it over time. Know your strength and don’t deviate from it just because you can; apply discipline.
Be on the defense not always on the offensive; play the long-game and grind it out. Don’t think there’s a shortcut (because there’s not!); you need to always be thinking of your risks and not just the rewards.
Don’t be fooled by your subconscious
So, you had a run of winning trades. Great job! But, ease up buddy, slow down and take a breath, it isn’t going to stay this easy and you better believe it. You need to prepare for that string of winners to revert to normality and don’t over expose yourself just because you’re feeling confident. View strings of winners as a “blessing” and remember that there’s a random distribution of trade results for any given trading edge (so a string of losers could be around the corner)!
Remember, the trades that seem the easiest to spot and that you have the most confidence in are the ones you need to be worried about. Often, the market is ‘setting you up’ to fail, so don’t bet big on a trade that’s giving you that over-confident feeling because those are the most dangerous ones.
I’m not saying you should over-think and over-analyze potential trades, I still want you to play the best and most obvious setups. However, I am saying that you should not double-up on those obvious looking ones just because you “feel good” about them, because remember that any trade can fail and it only takes one misplaced card to bring down the house.
Stick to your pre-defined risk parameters and when you see a quality trade setup that meets your trading plan, enter it with conviction.
Only Pick Trades Offering Sound Risk Reward.
If you want to preserve your bankroll, you need to only pick trades that offer a sound risk:reward ratio. If you aren’t sure what risk reward ratio means, check out my article on risk reward and money management.
Ideally, you will only take trades that offer a decent risk reward of 1 to 1.5 or 1 to 2 or greater, nothing less. When you start taking trades with risk rewards of 1:1 or less, it becomes incredibly hard to impossible to make money over the long-run and preserve / build your bankroll.
Don’t Risk Money On “Hero Trades”. Warning: You Will be Tempted.
There’s FAR more money to be made trading with the trend when everyone else thinks “The market can’t possibly keep moving in that direction” than there is trying to pick tops and bottoms.
Remember this: markets can go further than you think and they often will. These big moves take time to play out and many, many amateur traders will be betting against that trend the whole way up or down, thinking it will end at every swing. Hence, sometimes being contrarian is actually going with the ‘herd’ because everybody else is betting against them!
Next time you want to waste a bullet from your trading account trying to be a hero and pick the next big reversal in a one-way market, take a step back and think about if it’s worth it in the longer-term scheme of things. Your aim is to survive monetarily, not boost your ego.
When it comes to long-term trading success there is one contributing factor that stands head and shoulders above the rest: Capital preservation. Many traders end up blowing through so much money in their early days that by the time they know what they’re doing they are all out of trading capital to properly take advantage of their ability. Blowing through money in the early days of trading also leads many traders to simply give up citing “trading is too hard” or “impossible” before they actually know what they’re doing.
Any way you slice it, when you first start out trading real money, you need to be extra careful because the emotions are high, your hopes are high and your expectations may not be in-line with reality. You have two choices: don’t listen to the insight I’ve shared with you in today’s lesson and that I expand upon in my professional trading courses, or listen to it and implement it. There really is no in between. At the end of the day, only YOU know how much money you can afford to lose both financially and mentally and still be in the trading game long-term. Hence, it’s up to you to make the call and do what needs to be done because no one can stop you from blowing out your trading account, except you.