The trading world is littered with educators telling us that they’re making thousands of pounds on each trade, but only risking 2% of their trading fund at any time.
And telling you that you can do the same.
That’s all well and good if you’ve a trading account with tens of thousands in it.
But the reality is that most traders come to the market with a few thousand, or even a few hundred pounds in their pockets.
And they are keen to grow that account so they can start taking the kind of profits out of the market that will make a difference to their lives.
What would be the point in making £10 here and £15 there? Most people turn to trading because they want to see sums of money that will make a real difference.
The result is that they focus on how much money they want to make … and work backwards from that.
This means staking too much …
This means over trading …
And, all too often, it ends up wiping out your bank.
Your most valuable asset
The thing to remember about a small trading fund is that, chances are, it’s just as valuable to its owner as a large trading fund is to the next man.
Your trading fund is your ticket out.
Whether it’s big or small – it’s extremely valuable.
That’s why you should guard these funds ferociously. No matter how small your fund is, if you view it as “play money” that you can afford to lose – that’s exactly what will happen to it.
So, what do you need to do if you want to see that small fund grow into a large one?
Find a suitable strategy
If you have a small bank, there will be some trading strategies that you simply cannot use. No matter how tempting they look … or how great the returns are … or how far you reduce your stake size … they are not going to be practical or safe for a small fund.
Most spread-betting firms will ask for a minimum stake of £1, although some are less than this.
If your distance to the stop loss is, say 30 points, and you’re staking £1 per point. In order to be risking 2% of your pot on a trade, you’ll need to have a minimum of £1,500 in your account.
Other trading strategies, like those investing in individual stocks and shares, in order for the portfolio to be properly balanced, will require that you are trading several markets at the same time. Having two trades open at the same time requires (in general) twice the buying power. If you want lots of trades open at the same time – you could find yourself with a margin call from broker if your funds aren’t substantial enough.
Instead look for strategies that will allow you to only open one or two trades at a time, and look for systems that don’t expose you to large levels of risk, which could make a nasty dent in your fund. Another option is binary betting, which is an excellent choice for anyone with a small fund (more on this next Friday).
Consider the success rate and the risk/reward ratio
Some of the most powerful money-making systems have very low success rates. This means that they lose a lot of their trades, but when they win, they win big.
This is great if you have deep pockets and a strong nerve – you can sit back and watch loss after loss after loss hit your trading account, waiting for that big winner to come.
However, if you’ve a small trading fund, you simply can’t afford to suffer that many set-backs. While these systems might look like the Holy Grail – they aren’t suitable for all.
At the other end of the spectrum, there are trading strategies that take lots of small winners, and suffer the occasional big loss – again, if you’ve a small fund these aren’t ideal for you. If a few of these big losers come bunched together, they could decimate your fund, and it can take a long time to build it up again.
If you’ve a small fund, you’re looking for the middle ground – a good success rate, and a moderate risk/reward ratio (around the 1:1 mark).
Have realistic expectations
Sure, the reason we trade is because we want to make a substantial difference to our financial well-being.
We don’t trade because we’d like an extra tenner in our pockets at the end of the week …
We don’t trade so that we can afford to treat ourselves to a slap-up meal twice a year …
We trade because we want financial security … or the luxuries that money can buy … or a better future for our families … or all of these.
So, when we’re setting out with a small fund … trading at 50p per point … the paltry profit that our trades turn in can make us wonder whether it’s worthwhile.
I’m surprised and horrified in equal measure by the number of people who ask me questions like: “How much do I need to stake in order to make £1,000 a week?”
It’s back-to-front thinking.
And it’s exactly this kind of thinking that’s encouraged by “gurus” who tell us about the thousands they’re bringing in each week.
Instead we ought to stake with a sensible amount so that we’re only risking 2% of our fund.
Even if your profits seem low, keep with the program.
Trading isn’t some quick-fix solution, but the markets have an immense power to make money, so we have to trust in that power, plus the power of compound investing.
Another comment I hear is along the lines: “I’ll just start off risking 10% of my pot, until it’s big enough to risk 2%.”
We should also remember that the markets have immense power to take money from us.
This is the kind of logic that wipes out funds. Say you’ve £1,000 in your account, you get 5 losing trades in a row – you’re £500 down. In order to rebuild your fund to its starting point, you’ve got to make a 100% profit! That could take you years – although chances are, you’ll have lost faith before that ever happens.
There is absolutely no reason that a small fund cannot grow into a very large one. Sure, it’ll take a little longer, but traders who’ve worked up this way tend to be wiser and more skillful investors.
There are more than enough traders will huge funds who are losing money, week in, week out.
So, if your small fund is pulling in £50 a week … £25 a week … or even £10 a week … you should feel very proud. These are exactly the kind of funds that grow into huge oak trees.